Cross-Border Tax Risks, Compliance Obligations, and Incentive Analysis in Taiwan
ⓘ Overview of Cross-Border Tax Issues in International Transactions
Taiwan Taxes Can Be Tricky — But You Don’t Have to Navigate Alone.
Taiwan’s tax system can be complex for international companies and individuals engaged in cross-border activities. Transactions involving service fees, royalties, interest, dividends, licensing arrangements, construction projects, or cross-border sales often give rise to withholding tax exposure, reporting obligations, and compliance risks in Taiwan.
While tax incentives and treaty benefits may be available in certain circumstances, improper income classification or insufficient documentation may result in additional tax assessments, penalties, or denial of relief. A comprehensive assessment of tax risks and compliance obligations is therefore essential before considering any incentive application.
🏢 For International Businesses
If your company engages in transactions with Taiwanese clients or partners — including cross-border services, licensing, drop-shipment manufacturing, construction contracts, dividends or interest, or product sales — Taiwan tax exposure may arise even where payments are made offshore.
We assist international businesses by:
Assessing withholding tax exposure and source-of-income risks
Reviewing transaction structures and contractual arrangements
Analyzing applicability of Taiwan’s tax treaties (over 30 jurisdictions)
Evaluating domestic relief mechanisms, including Article 25 and Source Income Rule 15-1
Supporting feasibility analysis, documentation preparation, and refund or treaty benefit applications
Our focus is on practical, compliant solutions that reduce unnecessary tax exposure while managing audit and penalty risk.
🌍 For Individuals (Expats, Digital Nomads, and Foreign Professionals)
Individuals relocating to Taiwan, working remotely, or spending time across borders may face Taiwan tax obligations that are not immediately apparent, particularly in relation to tax residency status and worldwide income reporting.
We advise individuals on:
Taiwan tax residency determination and its implications
Worldwide income and foreign-sourced income considerations
Individual income tax filing and foreign tax credit utilization
Exit planning when preparing to leave Taiwan
Our guidance is tailored to each individual’s personal and professional circumstances, with an emphasis on clarity, compliance, and risk awareness.
⚠ Key Cross-Border Tax Risks in Taiwan
Withholding Tax Exposure on Cross-Border Payments
Payments for services, technical assistance, management fees, royalties, or interest may be subject to Taiwan withholding tax at a statutory rate of 20%, unless relief applies.
Failure to correctly assess withholding obligations may result in retroactive tax assessments and penalties.
Source of Income Determination and Misclassification Risks
Basically, Taiwan tax authorities place significant emphasis on where services are performed and where value is created.
Even if payments are made offshore, income may still be regarded as Taiwan-sourced if underlying activities occur in Taiwan.
Misclassification of income source is one of the most common issues identified during tax audits.
Permanent Establishment and Substance Considerations
In certain cases, repeated or substantial activities performed in Taiwan may raise permanent establishment (PE), Fixed place of business, Business Agent(BA) or substance-related concerns, which could trigger additional tax and compliance obligations beyond withholding tax.
✓ Cross-Border Tax Compliance Obligations
Withholding and Reporting Obligations
Depending on transaction nature, for withhold-able income, payers may be required to:
withhold tax at source
file withholding returns
issue relevant withholding tax certificates to recipients.
Non-compliance may expose both payers and recipients to tax risks.
Documentation and Audit Readiness
Adequate documentation typically includes:
Service agreements and scope descriptions
Evidence of offshore activities
Functional and value creation analysis
Such documentation is often critical when defending positions during tax authority reviews.
⚖ Tax Treaty (DTA) Benefits – Opportunities and Limitations
Treaty Eligibility and Risk of Denial
Treaty benefits are not automatic.
Eligibility depends on tax residency, beneficial ownership, substance, and consistency with treaty purpose.
Common Treaty Misuse Issues
Tax authorities frequently challenge:
Conduit structures (e.g. fund, trust investment or shell company)
Insufficient substance (e.g. lack of service evidence, payment flow is not persuasive, no further analysis regarding benchmark analysis of related party transaction)
Inconsistent contractual and operational arrangements
Tax Treaty application
When paying various types of remuneration or interest to foreign enterprises, the general rule is that, unless the income is not considered sourced from Taiwan, a withholding tax of approximately 20% is required. However, there is an opportunity to apply for tax benefits through the provisions of applicable tax treaties, such as:
- Tax exemption under Article 7: Business Profits;
- Reduced tax rate under Article 10: Dividends, Article 11: Interest, and Article 12: Royalties;
- Tax exemption under Article 13: Capital Gains (Alienation of Property).
🎯 Tax Incentives under Taiwan Tax Law
Article 25 – Reduced Effective Tax Burden
Article 25 may allow eligible foreign enterprises to apply a reduced effective tax rate, subject to approval and conditions.
Without an applicable tax treaty, as a foreign entity, if the remuneration you received from the Taiwan entity falls under international transportation, construction contracts, technical services, or machinery and equipment leasing, the effective tax rate can be reduced significantly from 20% to as low as 2% or 3% by applying a 10% or 15% profit margin.
Article 15-1 – Deem profit rate Tax Relief
Without an applicable tax treaty, as a foreign entity, if the remuneration you received from the Taiwan entity align with your primary business scope, Article 15-1 allows for reduced deem profit rates under industry standards, effectively lowering the tax burden.
❓ Frequently Asked Questions (FAQ)
💬 What types of cross-border payments may qualify for tax incentives in Taiwan?
✅ Payments such as service fees, royalties, interest, or other cross-border payments may qualify for tax incentives, subject to applicable tax treaties or domestic relief provisions.
Eligibility depends on the nature of the payment, source-of-income analysis, and the availability of proper supporting documentation.
💬 What is the difference between Article 25 and Article 15-1 relief?
✅ Article 25 of the Income Tax Act generally provides a reduced effective tax burden for qualifying foreign enterprises (including those have Taiwanese branch), while Article 15-1 allows a deem profit rate-based method to determine Taiwan-sourced income and only applies to foreign enterprises has NO fixed place of business nor business agent Taiwan.
The applicability of each mechanism depends on the specific transaction facts and income characteristics.
💬 Can tax treaty benefits and domestic tax incentives be applied at the same time?
⚠️ Not really. In practice, taxpayers must evaluate which mechanism is available and more appropriate based on the transaction structure and regulatory requirements.
Concurrent application of treaty benefits and domestic incentives is not automatically permitted and requires careful analysis.
💬 How does Taiwan determine whether income is Taiwan-sourced?
📍 Taiwan tax authorities focus on where services are performed and where value is created.
Even if payments are made offshore, income may still be considered Taiwan-sourced if underlying activities occur in Taiwan, which is a common audit focus.
💬 What are the main tax compliance risks in cross-border transactions involving Taiwan?
⚠️ Common risks include incorrect income classification, failure to withhold tax, insufficient documentation, and inconsistencies between contractual terms and actual operations.
These issues may result in additional tax assessments, penalties, or denial of relief.
💬 What documentation is commonly required to support tax positions or relief applications?
📄 Typical documentation may include tax residency certificates (where treaty relief is relevant), contracts, service descriptions, evidence of service performance, and supporting financial data.
Adequate documentation is critical for audit readiness.
💬 Should tax risks be reviewed before applying for tax incentives?
✅ Yes. A comprehensive review of tax risks and compliance obligations should be conducted before considering incentive applications.
Early risk assessment helps prevent disputes and improves the defensibility of any relief claimed.
Do you need assistance with cross-border withholding tax incentives or refunds? Concerned about potential tax exposures in your transactions?
Let’s explore opportunities and mitigate risks together!
