Newsletter
NO TAX EXEMPTION FOR TECHNOLOGY NOT USED BY LICENSEE ITSELF
After licensing technologies from foreign enterprises, Taiwanese manufacturing enterprises often transfer such technologies to be used by their manufacturing subsidiaries or affiliates in Mainland China. In view of this practice, on 6 July 2007 the Ministry of Finance made amendments to its Rules Governing the Applications for Exemption from Income Tax on Royalty and Technical Service Fees Collected by Foreign Profit-Seeking Enterprises from Manufacturing Industries, Technical Service Industries and Power-Generating Industry. The Rules provide that when, by way of technical cooperation, a foreign enterprise licenses to a Taiwanese manufacturing enterprise or related technical services enterprise the right to practice a patent granted to the foreign enterprise by the Intellectual Property Office, then within the granted patent term the royalties that the foreign enterprise receives under the arrangement are exempt from income tax under Article 4 Paragraph 1 Subparagraph 21 of the Income Tax Act, on condition that the arrangement is registered with the IPO, and has been individually reviewed by the Industrial Development Bureau of the Ministry of Economic Affairs to confirm that there is a substantive introduction of technology. But the Rules also limit eligibility for the tax exemption to patented or specialized technology that is licensed to a Taiwanese enterprise "for its own use."
In a judgment dated 15 July 2008, the Taipei High Administrative Court dismissed an action over the above tax exemption brought by Hon Hai Precision Industry Co., Ltd. (Hon Hai) against the National Tax Administration (NTA). In its suit, Hon Hai argued that "use" as referred to in Article 4 of the Income Tax Act should not be narrowly interpreted. With the current trends in economic development toward diversification and internationalization, all enterprises directed great efforts toward internal division of labor in order to reduce costs. As a result, an economic model in which orders were taken and products were sold by the parent company, while production was undertaken by subsidiaries, was very widespread. To equate "use" with "production" or "manufacture" was not only to apply an extremely narrow interpretation to the wording of the Act, but would also be detrimental to overall industrial development, and would thus run counter to the legislative purpose of the Act. Furthermore, it was Hon Hai that took orders for the products in which the licensed technology was used, and sold these products, whereas its Mainland Chinese subsidiary merely carried out production under contract, and was not the entity to which the benefit of applying the licensed technology accrued. By making "production" the only criterion for identifying the "user" of the licensed technology, the NTA had manifestly misapplied the law.
However, the court did not address Hon Hai's arguments, but simply rejected the suit on the grounds that the licensed technology in question was in fact used by a third party, Hong Fu Jin Precision Industry (Shen Zhen) Co. Ltd., and not by Hon Hai itself, so that the royalties paid by Hon Hai could not be held to meet the criteria for tax exemption under the Income Tax Act.