In light of increasing tensions with China and to bolster economic ties with Taiwan's chip manufacturers, the United States Congress is moving forward to adopt a treaty-like agreement with Taiwan to provide relief from double taxation for businesses engaged in cross-border activities. The legislation, released on July 12, aims to reduce withholding taxes on certain US source payments received by or paid to residents of Taiwan and apply permanent establishment rules to determine tax liabilities. To qualify for the benefits of the legislation, foreign persons must meet specific criteria as "qualified residents of Taiwan." The provisions would only come into effect after Taiwan reciprocates the benefits to US persons.
Reduction of Withholding Taxes
The legislation seeks to reduce the current 30% statutory rate of US federal income tax on specific US source payments (e.g., interest, dividends, and royalties) received by or paid to residents of Taiwan.
Under the proposed legislation, the reduced rates would be 10% for interest and royalty payments, and 15% for dividends. Dividends may be further reduced to 10% (excluding dividends paid by Regulated Investment Companies) if certain conditions are met. These conditions include being a qualified resident of Taiwan and holding at least 10% of the relevant stock directly for 12 months prior to the ex-dividend date.
Currently, US federal income tax law taxes income that is "effectively connected" with a foreign person's trade or business within the United States at regular income tax rates. The legislation proposes substituting the term "a United States permanent establishment of a qualified resident of Taiwan" for "a trade or business within the United States" in determining tax liabilities.
The term "permanent establishment" may be established through a fixed place of business or through agents authorized to conclude binding contracts in the United States on behalf of the qualified resident of Taiwan.
Qualified Residents of Taiwan
To be eligible for the benefits of the legislation, foreign persons must qualify as "qualified residents of Taiwan." A person is considered a "qualified resident of Taiwan" if they are subject to tax in Taiwan based on factors such as domicile, residence, place of management, place of incorporation, or similar criteria. The person must not be a US person, and corporations must meet specific tests resembling the 2016 US Model Treaty's Limitation on Benefits (LOB) article.
The provisions of the legislation will take effect upon enactment, applicable to amounts paid during relevant periods. The benefits will only apply after the US Treasury Secretary confirms that Taiwan has granted reciprocal benefits to US persons.