Beneficial Ownership Rules in Taiwan Clarified by New Tax Laws

Introduction

The Taiwanese government has introduced new laws to clarify the beneficial ownership rules in Taiwan, aiming to prevent tax evasion and ensure compliance with international standards. The new regulations, which came into effect on April 1, 2024, provide clearer guidelines for determining beneficial ownership status for foreign investors claiming tax treaty benefits.

Determining Beneficial Ownership Status

Under the new laws, foreign investors must demonstrate that they have a direct or indirect interest in at least 100% of the equity in the Taiwanese company receiving the income. This includes government bodies, listed companies, and individuals who are direct recipients of Taiwanese-sourced dividends. The recipient must also have owned the shares of the Taiwanese enterprise for at least 12 months before receiving the dividend income.

Same Jurisdiction Rule

The new regulations introduce a “same jurisdiction rule” which allows foreign investors to claim tax treaty benefits if they meet certain conditions. If the immediate recipient of the Taiwanese-sourced dividend income does not qualify as a beneficial owner, it can still qualify for treaty benefits provided that:

The investor who directly or indirectly holds 100% of the equity interest in the immediate recipient of the dividend is itself a qualified beneficial owner; or
That investor is tax resident in either the same jurisdiction as the immediate recipient of the dividend or in another jurisdiction that has a tax treaty with Taiwan providing the same or more favorable treatment.

Amendments to Seven Negative Factors

The laws also make amendments to the “seven negative factors” under previous regulations. The first negative factor now considers whether the investor has an obligation to pay or distribute more than 50% of the dividend to a person who is resident in a third country within 12 months after receiving the Taiwanese-sourced dividend.

Tax Residency Certificate Requirements

The new laws require specific requirements for Tax Residency Certificates (TRCs) for claiming tax treaty benefits. Under the extended safe harbor rules, Hong Kong DTA relief claimants and their ultimate and intermediate shareholders must provide a Hong Kong TRC. Under the “same jurisdiction rule,” both the Hong Kong DTA relief claimant and the shareholder that qualifies as the beneficial owner need to provide a Hong Kong TRC.

KPMG Observations

The new laws aim to provide foreign investors with more flexibility in obtaining tax treaty benefits on their Taiwanese-sourced dividend income. However, foreign investors should ensure that any holding companies are not established for the primary or sole purpose of claiming tax treaty benefits under the Taiwan-Hong Kong DTA, as there is a risk that general anti-avoidance rules (GAAR) or the DTA principal purpose test (PPT) could be invoked to prevent treaty abuse.

It remains to be seen whether the Inland Revenue Department will adopt a pragmatic approach in issuing TRCs to comply with the new regulations. Investment funds may also benefit from the substantial business activity requirement, but challenges are likely to remain.

Next Steps

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