Setting up an R & D Center in Taiwan – from a Taiwan Corporate Law and Tax Perspective

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Taiwanese engineers are famous world-wide for being brilliant, hard-working, responsible, and cost effective and many multinational corporations (‘MNC’) are considering setting up an R & D center in Taiwan. However, it is necessary to ask which legal entity is most suitable for an R & D center. Also, the difference between a representative office, a branch, and a subsidiary company in Taiwan needs to be made clear. The aim of this article is to examine these considerations.

1. Representative Office – Corporate Law Perspective

Generally speaking, a representative office is for foreign companies which “have no intention to conduct business” and is only intended to “designate a representative for the performance of juristic acts” in Taiwan. More specifically, the definition of ‘conducting business’ and ‘performance of juristic acts’ is described in related rulings below:

    • ’Conducting Business’ means regularly repeated business activities, and
    • ’Performance of juristic acts’ includes “contract-signing, biding, proposal, purchase, and bargaining”

Generally, hiring engineers for research is more likely to be regarded as constituting a regularly repeated business activity rather than being a “performance of juristic acts”. Therefore, we would not consider this to be advisable.

2. Subsidiary Company

(1) Corporate Law Perspective

A subsidiary company is an independent and competent legal entity and is permitted to conduct business in Taiwan.

(2) Corporate Income Tax Perspective

In this business model, the Taiwan subsidiary company provides an ‘R & D service’ to the foreign parent company and charges based on cost-plus method – usually leading to the following issues:

  • Transfer pricing
    The transaction between a parent company and a subsidiary company belongs to ‘related-party transaction’ in the Tax Law. The Taiwan tax authorities will evaluate the reasonableness of the cost-plus level compared with other arms-length transactions, in order to prevent MNC from avoiding Taiwan tax by allocating profits outside Taiwan.
  • Reduction of Expenditures for R & D
    It is necessary to ask whether the expenditures of the Taiwan subsidiary R & D center can apply the tax incentive of reduction of expenditures for R & D. This is almost not possible, as this tax incentive is intended to encourage companies to invest in important research with high risk and high uncertainty. However, the R & D subsidiary can be fully reimbursed by the parent company and no significant risks need to be taken. Therefore, most cases are denied when applying this tax incentive.
  • Dividend Distribution
    Since the parent company and subsidiary are both independent legal entities, the dividend distributed by the Taiwan subsidiary to the foreign parent company is subject to a 20% withholding tax.6
(3) Value-added Tax Perspective

For services provided in Taiwan but used in a foreign country, the value-added tax rate is zero. Therefore, whether the R&D applies the zero tax rate depends on where the patent will be used. For example, if a foreign parent company will license the patent developed by the Taiwan R & D center to Taiwanese manufacturers, the zero tax rate will NOT apply. On the contrary, if the foreign parent company uses the patent by itself or provides a license to another foreign company, the zero tax rate will be applicable.

3. Branch

(1) Corporate Law Perspective

A foreign company may conduct its business operations in Taiwan by applying for recognition to the competent Taiwanese authority. However, a branch cannot make its own decisions. In other words, it is required to follow the instructions of its foreign HQ and is not a legitimate legal entity in Taiwan. A foreign HQ is required to take full responsibility for the Taiwanese branch, which is regarded as a part of the foreign company.

(2) Corporate Income Tax Perspective

Different from a subsidiary company,

  • Reduction of Expenditures for R & D: Since a branch is not a competent legal entity, it is not qualified to apply for a reduction of expenditure for R & D from the Taiwan tax authority.
  • Dividend Distribution:There will be no withholding of tax on the profits distributed to the foreign HQ because the Taiwan branch is regarded as a part of the foreign company.

As for the transfer pricing issue, a branch is similar to a subsidiary company.

(3) Value-added Tax Perspective

Similar to a subsidiary company, whether the zero tax rate applies depends on where the patent will be used.

Conclusion & Suggestions

1. Generally speaking, using a branch is more advisable

First of all, we can consider the activities that a Taiwan R & D center will conduct and conclude that it is likely to be regarded as a frequently repeated business activity. As a result, we would rule out establishing a representative office.

Secondly, we need to consider the importance of tax issues when deciding between a branch and a subsidiary company:

  • Value-added tax and transfer pricing issues: not much difference
  • Reduction of expenditures for R & D: Although only the subsidiary company is qualified to apply, there is a considerable possibility of there being a challenge from the tax authority due to the R & D center’s stable income and full reimbursement. As a result, this may not make difference compared with a branch.
  • Dividend distribution: a branch is more advisable because of the exemption of 20% withholding tax compared to a subsidiary company.

Based on the above considerations, a branch is usually the preferred choice.

2. It is important not to forget about tax treaties if the foreign HQ is registered in one of Taiwan’s treaty partners

In addition to the domestic tax regulations mentioned above, the provisions of tax treaties may be applied. Taiwan is currently a partner of 25 countries including Britain, France, and Germany and the treaties can reduce the foreign HQ’s tax burden in Taiwan if the foreign HQ is incorporated into the treaty partner countries.

3. The original purpose setoff setting up the R & D center in Taiwan

Generally speaking, we do not encourage foreign companies to invest in Taiwan just because of the tax incentives, since the purely tax incentive oriented transaction arrangements involve a high risk of ‘tax-manipulation’ in Taiwan.

Taking the R & D center as an example, foreign investors choose Taiwan because of the presence of intelligent, hard-working and cost effective Taiwan engineers rather than the tax incentives available. In order to attract and keep the most brilliant engineers, foreign investors may consider issue stock options. If this is the case, a subsidiary company is the only plausible option rather than a branch, even if a branch can save 20% withholding tax when distributing dividends.

Image Credit: StarCraft II

****Disclaimer****

Our advice, comments, or analysis was made based on the relevant laws, regulations, and rulings are in effect and public available as of the date of this review and the facts and assumption given by the Client. The authorities are subject to change, which may be retroactive in their effect. We undertake no obligation to advise the Client of any changes or the developments that may affect our advice, comments, or analysis in the review or any matters set forth herein. Any changes to the authorities subsequent to the date of this review may affect the validity of the comments.

james, Chang

執業會計師,踏上創業之旅的冒險家;
不斷思考如何在這個傳統的行業創新,也喜歡協助新創事業解決傳統問題;
深信知識是兼顧環境保護與經濟發展的答案;
正在尋找並肩突破台灣當前困境的夥伴!

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