Taiwantax : Taiwan Tax reclaim opportunity for Foreign Institutional Investors

In response to the global economic downturn, investors in Taiwan, such as Foreign Institutional Investors ("FINIs," i.e. foreign parties approved to invest in the Taiwan securities market and that typically include individuals, mutual funds, security trading companies or pension funds), American Depository Receipt holders (ADRs) and other foreign investors are proactively seeking ways to reduce their worldwide tax burden. Using the provisions of applicable Taiwan tax treaties to obtain tax reclaims is one option that has been widely explored.

Taiwan-source income is generally subject to a 20% withholding tax if the taxpayer does not have a fixed place of business in Taiwan. The withholding tax on dividends, interest and royalty payments may be reduced under an applicable tax treaty if the recipient can demonstrate that it is a tax resident of the treaty partner country and the beneficial owner of the income.

In the past, it was difficult for FINIs and similar entities to obtain tax refunds under treaties because of a lack of clear regulations and guidance and conflicting positions taken by various Taiwan tax offices.

On 25 April 2007, the Ministry of Finance issued tax ruling No. 9604514330 (2007 Ruling) describing the Taiwan tax refund process to be followed by foreign mutual funds and FINIs. Following this ruling, there have been an increasing number of tax refunds issued to FINIs.


Process and documentation

The 2007 Ruling explains that, depending on the type of underlying investor that is registered as a foreign investor in Taiwan, tax benefits under a Taiwan tax treaty may be available if the investor can provide proper documentation.

Certain pooled investments (e.g. pension funds, mutual funds, security trading companies, etc.) have encountered difficulties in obtaining treaty benefits because the fund itself was not the beneficial owner of the Taiwan-source income. To mitigate this problem, the 2007 Ruling states that foreign investors comprised of underlying pooled investments can obtain tax treaty benefits if they provide the following documentation:
- A tax residence certificate issued by the tax authorities in the home country that shows the percentage of units or interests held by ultimate beneficial owners (that are also tax residents of that country) between the period from the preceding 31 December to the date the income is received; and
- A withholding tax statement issued by the Taiwan investee showing the offshore investor as the taxpayer, the amount of the gross dividend, the 20% withholding tax and the net dividend received by the investor.

A foreign investor (single entity or company) that uses its own capital to make a direct investment in Taiwan can obtain treaty benefits if the following documentation is provided:
- A tax residence certificate issued by the tax authorities in its home country; and
- Proof of beneficial ownership that shows the investor's percentage of owned capital that is notarized by a notary public in the investor's home country.


Challenges and opportunities

In the past it was often difficult to obtain a proper certificate of residence that evidences that the recipient of dividend or interest income was both a tax resident of the treaty partner country and the ultimate beneficial owner of the income. After negotiations, the U.K. tax authorities have announced that they are willing to provide proper tax residence certification information, which has expedited the application process for pension fund FINIs based in the U.K. The Dutch tax authorities also are willing to provide such information.

Pension funds have inquired whether the number of tax residents of the country should be based only on active participants of the pension fund or both active participants and beneficiaries of the fund, since active participants also receive a future benefit from the pension plan. The Taiwan National Tax Administration has stated that the residence certificate must include the percentage of units or interests held by both active participants and beneficiaries.

Even though the 2007 Ruling only specifically applies to mutual funds and FINIs, it is our understanding that ADRs may also follow the provisions of the ruling to apply for tax reclaims. Because there are more "layers" between the issuer company and the beneficial owner in an ADR structure (for example, a Depository Trust Company (DTC), a DTC Participant Company, a Depository Bank, a Custodian Bank and the Issuer), more documentation and analysis will be required to establish a connection between each of these entities, which may result in a lengthy application period.

The success of certain foreign investors and FINIs in obtaining tax refunds does not mean that challenges and difficulties will not arise during a tax reclaim application process, but it does demonstrate that, if the proper action is taken and documentation provided, there should be opportunities for taxpayers to receive refunds going forward.