2010 GUIDELINES GOVERNING APPLICATION OF DOUBLE TAX AGREEMENTS

03/01/2010

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The Guidelines for the Application of Double Taxation Agreements were first introduced by the Ministry of Finance (MOF) in 2001 (the "2001 Guidelines"). However, as Taiwan has signed a number of double tax agreements ("DTAs") with other countries since 2001 and more international rules have been developed in recent years, on 7 January 2010 the MOF promulgated the Guidelines Governing the Application of Double Tax Agreements (the "2010 Guidelines") to replace the 2001 Guidelines. The 2010 Guidelines are based on the OECD Model Convention Commentaries, the UN Model Convention Commentaries, the Tax Reform Committee's recommendations and relevant laws in Taiwan.
In addition to adopting part of the 2001 Guidelines relating to the definition of resident, tie-breaker rules, tax exemption, maximum tax rates on dividend, interest, royalty and technical service income and refund of over-paid tax, the 2010 Guidelines have adopted several tax directives. The key points of the 2010 Guidelines are as follows:
l	Application basis and principles
	The investigation and assessment of applications for treatment under DTAs will be subject to the relevant DTAs; for matters not stipulated in the applicable DTAs, the Tax Collection Act, the Income Tax Act (ITA), the Income Basic Tax Act, the 2010 Guidelines, and other relevant laws/regulations will govern. However, where the provisions in the ITA or other laws that reduce or exempt a taxpayer's income tax liability are more favorable than those in the applicable DTA, the more favorable provisions will prevail. Moreover, during the investigation or assessment of applications for treatment under DTAs, the tax authorities should look at the actual economic facts and relationships, and the actual beneficiaries of the economic benefits arising from such facts and relationships.
l	Definition of permanent establishment ("PE")
	The 2010 Guidelines clearly define a PE, a construction PE, a deemed PE because of rendering services for over a period of time, and an agent PE.
	Under the 2010 Guidelines, a PE is defined as "a fixed place of business through which an enterprise carries on business in whole or in part". The criteria for determining whether an enterprise in the other Contracting State has a PE in Taiwan, are mirrored from the commentaries on Article 5 of the OECD Model Convention 2008, namely, permanency, continuity and controllership. Accordingly, an enterprise of the other Contracting State will be deemed to have a PE in Taiwan if it: (a) has a fixed place of business in Taiwan (permanency); (b) carries on business at such fixed place of business for six months or more, or regularly carries on business at such fixed place of business (continuity); and (c) uses or controls such fixed place of business (controllership).
	Also, the 2010 Guidelines provide clear standards for calculating the operational period for determining a construction PE and a deemed PE because of rendering services for over a period of time. The term of a construction begins from the time a contractor commences work and ends on the day the work is completed or permanently terminated. If the work is subcontracted to another company, the time spent by that other company should be included in the calculation of the term. A deemed PE because of rendering services for over a period of time is determined by the total number of days of the actual presence and service provision of its employees, other employed personnel or other related people in Taiwan. The period of presence will start from the day following the relevant persons' entry into Taiwan and end on the day of their departure; if more than one person renders services in Taiwan at the same time, the overlapping portion of their periods of presence will be counted once only.
	With respect to an agent PE, the 2010 Guidelines stipulate that a person who has and habitually exercises authority to conclude contracts in Taiwan in the name of an enterprise of the other Contracting State refers to any individual, corporation or organization that is often authorized to conclude contracts or other binding documents, or to negotiate the terms and conditions of a contract on behalf of the enterprise of the other Contracting State. However, an agent carrying out preparatory or auxiliary activities only or is acting as an agent of an independent status (an agent who performs work in the ordinary course of business while acting on behalf of an enterprise of the other Contracting State) is excluded.
l	Application procedures for income tax exemption and reduction
	In general, the 2010 Guidelines follow the 2001 Guidelines regarding the application procedures for income tax exemption or reduction for income of all kinds. For applications for business profit tax exemption/reduction, the 2010 Guidelines require the submission of documents that can evidence the non-existence of a PE in Taiwan or demonstrate that the relevant business is not carried on through a PE. If a foreign enterprise has a fixed place of business or business agent in Taiwan, the foreign enterprise can, instead of applying for prior approval for business profit tax exemption/reduction, ask its fixed place of business or business agent in Taiwan to apply for such tax exemption/reduction on its behalf when filing an income tax return.
l	Calculation of taxable income
	The 2010 Guidelines stipulate the methods for calculating the taxable income of business profits, income from provision of professional services, and remuneration from employment. For the calculation of the taxable income of business profits of a foreign enterprise that are attributable to the foreign enterprise's PE, such PE should be deemed an independent enterprise undertaking activities identical or similar to those of the enterprise in identical or similar conditions, and operating independently when doing business with the foreign enterprise. Moreover, the amount of the business profits attributable to the PE should be calculated in accordance with the Transfer Pricing Audit Rules whereby transfer pricing supporting documents should be made available for the tax authorities' examination.
	With respect to the provision of professional services, if any professional services are rendered outside the territory of the ROC, and documents including the relevant contract and the calculation of taxable income can be provided upon request, the professional providing such services can apply to the local tax office in the jurisdiction where the payer is located to pay income tax for the income derived from the services performed within the ROC only.
	As to the remuneration from employment that is deemed ROC-sourced income and subject to Taiwan income tax, it should be based on the amount of remuneration that an employee has received during his/her employment, multiplied by the ratio arrived at by dividing the actual number of days that the employee has stayed in Taiwan over the total number of days of his/her employment. However, if the percentage of contribution attributable to the services performed in Taiwan exceeds the aforementioned ratio, the percentage of contribution should apply in calculating the employee's ROC-sourced remuneration.
l	Taxation on foreign entity with a PE that is not a fixed place of business or business agent
	The 2010 Guidelines provide that, where an enterprise of the other Contracting State has a PE in Taiwan that is not a fixed place of business or business agent under the ITA, and receives income subject to withholding tax under Article 88 of the ITA, the income payer should, upon payment, withhold income tax; the enterprise may later appoint an ROC individual or business entity as its agent to file an income tax return on its behalf with the local tax office in the jurisdiction where the income payer is located, and apply the withholding tax as tax credit against any income tax payable, and apply for a refund of the tax over-withheld.