TAIWAN Law and Practice Contributed by: Lihuei Mao, Dennis Yu and David Tien, Lee and Li Attorneys-at-Law
9.5 Anti-Evasion Regimes Transfer Pricing
A low-tax jurisdiction is defined as a tax jurisdiction with a corporate income tax rate lower than 70% of the corporate income tax rate in Taiwan (ie, 20% of 70% = 14%). The CFC Rules do not apply if one of the following conditions is met: • the CFC carries out substantial operating activities; or • the current-year earnings of the CFC are no more than NTD7 million. Once the CFC rules are applied, CFC income should be included in the Taiwanese legal entity’s income tax return, and income tax should be levied thereon. 10. Employment and Labour 10.1 Employment and Labour Framework The Labour Standards Act (LSA) stipulates the mini - mum standards and requirements for all employ - ment relationships, including employee statutory entitlements, statutory causes for the termination of an employment contract, statutory requirements for implementing non-competition obligations, and fixed- term employees. Labour unions may negotiate and sign collective agreements with employers and may proceed to strike in labour disputes regarding rights. To form a labour union in a Taiwanese company, there must be at least 30 employees (members). Regardless of the number of employees, every busi - ness entity in Taiwan must establish a labour man - agement conference (LMC) to co-ordinate worker– employer relationships and relevant matters (if the company has a labour union, such tasks will alter - natively be handled by the labour union). By way of example, the implementation of overtime work mech - anisms and flexible-working-hour arrangements is subject to prior approval by the labour union or – in
Taiwan has transfer pricing rules that require transac - tions between related parties to be conducted on an arm’s-length basis. The transfer pricing rules regulate that the profit allocation under a business structuring must be in compliance with the arm’s-length princi - ple. Sometimes there are intercompany arrangements between a Taiwanese legal entity and its parent/affili - ate company abroad. If services (R&D services, maintenance services, etc) are provided within Taiwan, and the costs are borne by the Taiwanese entity and deducted from its taxable income while the benefits are enjoyed by foreign enti - ties, the costs would be deemed as potential tax eva - sion from a tax perspective. In such cases, the Taiwan entity would be expected to receive compensation with a reasonable mark-up rate for such arrangement. The reasonable range for the mark-up rate depends on the nature of the services provided by the Taiwan - ese entities. Normally, the mark-up rate should be 8% to 10% for general services. Nonetheless, the reason - able mark-up rate may be subject to challenge by the tax authority. Thin Capitalisation Rules A profit-seeking enterprise, such as a subsidiary or a Taiwan branch of a foreign company, is subject to thin capitalisation rules. Interest expense from related- party debt exceeding a 3:1 debt-to-equity ratio is not deductible for tax purposes. Companies in the finan - cial industry (eg, banks, financial holding companies, insurance companies, securities firms) are not subject to the thin capitalisation rules. Controlled Foreign Company (CFC) The CFC Rules came into effect from 1 January 2023. A CFC is defined in Taiwan as a foreign enterprise reg - istered in a low-tax jurisdiction, with more than 50% of its paid-in capital owned by a Taiwanese legal entity together with its related parties, either directly or indi - rectly. If the paid-in capital ownership percentage is less than 50% but the foreign enterprise is effectively controlled by a Taiwanese legal entity together with its related parties, either directly or indirectly, then the foreign enterprise will also be deemed to be a CFC.
the absence of a union – the LMC. 10.2 Employee Compensation Wages and Compensation
Employees are usually paid in cash on a monthly basis. Their wages must not fall below the basic wage
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