Royalties received by foreign profit-seeking enterprises shall not be eligible for Paragraph 1, Article 25 of the Income Tax Act.
The National Taxation Bureau of the Central Area (NTBCA), Ministry of Finance (MOF) stated that according to the provisions of Paragraph 1, Article 25 of the Income Tax Act (hereinafter referred to as “the Provisions”), any profit-seeking enterprise having its head office outside the territory of the Republic of China (ROC), and which is engaged in international transport, construction contracting, providing technical services, machinery and equipment leasing, etc. in the territory of the ROC, and whose cost and expenses are difficult to calculate may apply for approval from the MOF to consider 10% of its total business revenue for an enterprise engaged in international transport business, or 15% of its total business revenue for one engaged in any other businesses as its income derived within the territory of the ROC. For an enterprise having neither branch office nor business agent in the territory of the ROC, the tax shall be withheld by the payer at a 20% withholding rate and paid to the national treasury within 10 days from the withholding date. Also, the withholding statement shall be submitted to the tax collection authority.
The NTBCA further explained that in some application cases for providing technical services, the contract signed by the two parties contains licensing the use of software and other rights, and the relevant remuneration of this source belongs to royalties, not technical services revenues, and therefore shall not be eligible for the Provisions. The NTBCA indicates that royalties are usually received for authorizing the use of intangibles such as patents, trademarks, copyrights, secret methods, or software, without the need to provide labor services, which is different in nature from technical services; while technical services, including planning, design, installation, testing, maintenance, commissioning, consultation, auditing, supervision, training of certified personnel, etc., need to be paid for by personnel providing professional skills rather than authorization. Thus, in cases where the Provisions are applied, if the content of the contract involves the nature of authorization, the contract price should be divided into authorization revenues and non-authorization ones. For authorization revenues, the Provisions shall not be applied to calculate the income.
The NTBCA provided an example that a foreign profit-seeking enterprise A (Company A), having neither branch office nor business agent in the territory of the ROC, signed a software licensing and installation contract with a domestic enterprise B (Company B) for a contract value of $20 million, of which Company A received a $15 million royalty for the software licensing and charged $5 million for sending staff to Taiwan to provide technical services to assist in the installation, testing, training, and so forth. After review by the NTBCA, only the $5 million technical services revenue was eligible for the Provisions. Company B calculated the income from the $5 million technical services revenue using the aforesaid 15% rate according to the Provisions, and then used the 20% withholding rate to withhold the tax of $150,000 (= $5 million*15%*20%). As to the $15 million royalty, it was not eligible for the Provisions, that is, when Company B paid the $15 million royalty, it directly applied the 20% withholding rate to withhold the tax of $3 million (= $15 million*20%) and paid the withheld taxes to the national treasury within 10 days from the withholding date, and filed the withholding statements.
For questions or concerns, you are welcome to call our toll-free phone number 0800-000-321. The NTBCA will serve you with all sincerity.
(Contact: Mr. Pan, First Examination Division; Tel: 04-23051111 ext. 7120)
Reference URL：https://www.mof.gov.tw/Eng/singlehtml/f48d641f159a4866b1d31c0916fbcc71?cntId=c17004a4dac6491fa2b3265e8dcf18cd