Taxation Systems on Taiwan Outward Investment in China

Der-cherng Lo
Department of Public Finance
National Chengchi University
January 2008

Contents of presentation
I. Introduction
II. Current regulations on Taiwan outward investment in China
III. Taxation systems on Taiwan outward investment in China
IV. Double taxation issues
V. Conclusions

I.

Introduction
In order to promote domestic economic development and attract inward
investment from overseas Chinese and foreign nationals, the government of Taiwan
legislated two milestone statutes which were the "Statute for Investment by Foreign
Nationals" in 1954 and the "Statute for Investment by Overseas Chinese" in 1955.
From 1952 to 2006 approved overseas Chinese and foreign investment has been
accumulated to US$78.69 billion1. Accompanied with tax exemption legislations suchas "Statute for Prizes, Awards and Investments" in 1960 and "Statute for Upgrading
Industries "in 1991 and export processing zone, science parks establishments drove
Taiwan’s economic growth in the past 50 years. Economic growth has accumulated
considerable amount of foreign exchange reserves2 and pushes production costs up toa substantial level. The enterprises have ability and necessity to invest outside.
In 1990s China investment fever phenomenon caused China as Taiwan’s hottest
outward investment area. According to China Ministry of Commerce data, as of 2006
Taiwan is number five investor in China. The realized FDI value was US$43.89
billion.3 Due to the geographic location and culture closed relation, Taiwanese
entrepreneurs prefer to invest in China. Besides, tax exemption or tax deduction
preferential treatments play an important role during the capital flow process. In theearlier stage, China used a lot of tax exemption policies to attract foreign investors.
Taiwan experienced from FDI inward country to outward country4.
After China reformed her economic system and adopted open door policies toattract inward investment, across the Taiwan Strait investment activities have become
more and more vigorous. Every country has own taxation territories. Multinational
income taxation is a complicated and serious issue in tax system.
In this paper, I will introduce current regulations on Taiwan outward investment
in China, taxation systems on Taiwan outward investment in China, double taxation
issues and finally is conclusions.

1

Please refer table 1.
It is US$270 billion at the end of 2007 November.
3
Please refer table 7.
4
Please refer table1 to table5.
22

II. Current regulations on Taiwan outward investment in China
The guideline about investment in China is "Act Governing Relations
between Peoples of the Taiwan Area and the Mainland Area". According tothis Act, anyone gets permission by the Ministry of Economic Affairs may
make investment, have technology cooperation, engage in business in China
or engage in the trade activities between the Taiwan Area and the MainlandArea. Based on the consideration of international treaty, national defense,national security and industry development, the product or business item
about the referred investment or technology cooperation are categorized into
prohibited and general categories.
The definition about “investment in China” denotes as any of thefollowing activities: establishing a new company or business entity;
increasing the capital of an existing local company or business entity;acquiring the equity of, and operating, an existing local company or business
entity, but not including the purchase of stock of a listed company;
establishing or expanding the business of a branch company or businessentity. Investment in China can also be applicable to those investments
activities mentioned above made by any Taiwanese company in a third area.
So investment in China includes direct investment and indirect investment.
For the purpose of investing in China, the capital carried out of Taiwan
shall be in the form of: cash; machinery, equipment and spare parts; rawmaterials, intermediate products or finished products; technical know-how,patent, trademark right or economic right; or other property in which underthe approval of Ministry of Economic Affair.
In order to simplify the administration procedure, the investment notover US$200 thousand may be made through filing. To control capitaloutflow leakage and reduce enterprise investment risks, the allowed
accumulated investment amount or ratio upper limit for investment in China
has been set as the following standards:

3

category

net worthindividual,
small andmedium
enterprise

allowed accumulated investment amountor ratio upper limit for outward investment
in China

NT$80 million

below NT$5billion

40% of net worth or NT$80 million
which one is higher(A). enterprise’s net worth below NT$5
more than NT$5billion : 40% of net worth,billion but less
(B). 30% on the portion of net worth more
capital share than 10 billion
than NT$ 5 billion
issued above(A). enterprise’s net worth below NT$ 5
NT$80 million
billion : 40% of net worth,
enterprise(B). 30% on the portion of net worth more
more than
than NT$ 5 billion but less than 10
NT$10 billion
billion,(C). 20% on the portion of net worth morethan NT$ 10 billion
Basically the investment amounts for any Taiwanese investors who makeinvestment in China cannot exceed the upper limit, but the enterprise uses its
earning to expand capital shares or the investment does not over US$200
thousand made through filing do not count into accumulated investment amount.
Investors who remit principal or earnings back to Taiwan, those amounts can be
subtracted from accumulated investment value.
In order to enlarge the investment scale, a lot of entrepreneurs urge thegovernment to loosen investment upper limit recently. On account of the pursuitof national sustainable development, the government still adopts“activemanagement, effective opening＂investment in China policies.

III. Taxation systems on Taiwan outward investment in China
In Taiwan, profit-seeking enterprise income tax is levied base on national4

principle plus territoriality principle. Profit-seeking enterprise having its head officewithin Taiwan shall be levied on its total income derived within or without Taiwan.
Income tax has been paid on the income derived outside Taiwan such tax paid may be
deducted from the amount of tax payable. The foreign income tax deduction shall notexceed the amount of tax which is increased in consequence of inclusion of its income
derived from abroad.
Profit-seeking enterprise having its head office without Taiwan but having
Taiwan sources income shall be levied profit-seeking enterprise income tax.
Beginning from the year 1998, the integration of personal income tax andprofit-seeking enterprise income tax, the net dividend or net surplus earning received
by a profit-seeking enterprise organized as a company from its investment in anotherdomestic profit-seeking enterprise shall not be included in its taxable income, and theamount of tax deductible from such income shall be included in the balance in its
shareholder deductible tax account. To avoid investment income being double taxed, acompany receiving net dividend or net surplus from its investment in anotherdomestic profit-seeking enterprise is not counted into its income.
In order to encourage companies to utilize worldwide resources and set up
international operation network, if they establish operation headquarters within
Taiwan reaching a specific size and bringing about significant economic benefit like
employee numbers and sales revenue amount, their following incomes shall be
exempted from profit-seeking enterprise income tax:
1. the income derived from provision of management services or R&D services to its
affiliates abroad;2. the royalty payment received from its affiliates abroad;3. the investment return and assets disposal profits received under its investments in
its affiliates abroad.
Therefore, any profit-seeking enterprise of Taiwan having income derived from
China shall pay income tax together with the income derived from Taiwan. The
amount of the income tax already paid in China can be deducted from the amount of
the income tax payable.
Also, any profit-seeking enterprise of Taiwan permitted by the Ministry of
Economic Affairs to make indirect investment in China through a third area includes
the investment income in the third area, the investment income derived from theincome distributed by the invested company or enterprise in China shall be deemed as
the income derived from China. Taxable investment income from a third area refers to
the investment income amount distributed by company or enterprise in a third area,
and there is no need to separately compute income from sources in China. The
amount of income tax paid in China and a third area against the portion of investment
5

income derived from China may be deducted from the amount of the income tax
payable. The total amount to be credited may not exceed the increment of the income
tax payable computed, after including the income derived from China.
The amount of income tax paid in China and a third area includes the following
three parts:(1) Income tax on dividends has been paid in China by a company or enterprisein a third area got investment income from China.
(2) Income tax as computed according to the following formula has been paid ina third area by a company or enterprise in a third area got investment incomefrom China:
Corporate income tax of the year paid by the company or enterprise in a thirdarea × investment income of the year derived from China ÷ total income of
the company or enterprise in a third area for that year.
(3) Investment income of a company or enterprise in a third area for which
income tax on dividends has been paid in the third area.
Income tax on dividends has been paid in China and income tax paid in athird area by a company or enterprise in a third area got investment income
from China with documents in proof can be deducted from the amount of theincome tax payable within the prescribed limits regardless of the year whenincome tax was paid.

IV. Double taxation issues
China enterprise income tax law categorizes enterprises as resident enterprises
and nonresident enterprises. Resident enterprises include those established inaccordance with the laws of China within Chinese territory and those establishedunder the laws of another country but actual administration institution is locatedwithin China. Nonresident enterprises are those established in accordance with thelaws of foreign country whose actual administration institution is located outside theterritory of China. A resident enterprise shall pay enterprise income tax on worldwide
sources concept. Nonresident enterprise with organizations or establishments within
China, pay income tax on China source income as well as income derived fromoutside China but related to such organizations or establishments. Nonresident
enterprise without any organizations or establishments within China, or withorganizations or establishments within China but its income is not in fact related tosuch organizations or establishments, it pay income tax on China source income.
New enterprise income tax law enlarges taxation territory. Under the new law if6

enterprise was registered in foreign country but actual administration institution islocated within China, it will be levied on worldwide income. Actual management
institution denotes actually and completely management and control aboutenterprise’s production, personnel, accounting books, properties.
Taiwan income tax act divides enterprise into resident enterprises andnonresident enterprises according to the location of head office within or without
Taiwan. Enterprise’s head office within Taiwan or subsidiary company in a third area
investment in China but has actual administration institution located within China will
become double resident enterprise. Owing to taxation territory overlap causes double
taxation. That’s the point so many Taiwanese enterprises choose to invest in China via
a third area like Hong Kong or BVI. Furthermore, to avoid investment in China upper
limit amount or ratio and to tax planning reasoning most of enterprises retain theirinvestment earnings in China. Most of countries use foreign tax credit, investment
income exemption or sign tax agreement to resolve multinational double taxation
problem.
For those enterprises adopt direct investment in China. The income tax burdens
in China are 25% enterprise income tax rate plus10% dividend outward remittancewithholding rate. The investment income tax burden in Taiwan is 25% profit-seeking
enterprise income but 10% dividend income tax levied in China can be deducted fromincome tax payable.
For those enterprises adopt direct investment in China but establish operation
headquarters within Taiwan. The income tax burdens in China are 25% enterpriseincome tax rate plus 10% dividend outward remittance withholding rate. The
investment income is exempted from Taiwanese profit-seeking enterprise income tax
but 10% dividend income tax levied in China can be deducted from income tax
payable.
For those enterprises via a third area adopt indirect investment in China but
establish operation headquarters within Taiwan. The income tax burdens in China are
25% enterprise income tax rate plus 10% dividend outward remittance withholdingrate. The investment income is levied according to the tax rate or is exempted in tax
heaven. The investment income is exempted from Taiwanese profit-seeking enterpriseincome tax but 10% dividend income tax levied in China and the income tax paid in athird area can be deducted from income tax payable.

7V.

Conclusions
Now China is the largest world manufacture factory. Enterprises build theirproduction factory in China. In the near future China will become the largest worldconsumer markets. Enterprises will establish their operation headquarter in China
gradually. In face of this trend, Taiwan government should adjust her investment in
China examination criteria like to loosen investment upper limit amount or ratio or
examination by classifications. Tax system revise is necessity to harmony withincreasing close investment and trade activities with China. Furthermore, to avoid
investment double taxation by signing tax agreement with China is the ultimate goal.

References
1. Act Governing Relations between Peoples of the Taiwan Area and the Mainland
Area
2. Enforcement Rules for the Act Governing Relations between Peoples of the Taiwan
Area and the Mainland Area
3. Enterprise Income tax Law
4. Guide to R.O.C. Tax 2007
5. Income Tax Act
6. Regulations Governing the Approval of Investment or Technical Cooperation inMainland China
7. Statute for Upgrading Industries

8Table 1 Statistics on Taiwan Approved Overseas Chinese andForeign Investment

Year

Case

Amount（unit）（US$1,000）

1952~1996

8,197

24,721,779

1997

683

4,266,629

1998

1,140

3,738,758

1999

1,689

4,231,403

2000

1,410

4,607,752

2001

1,178

5,128,518

2002

1,142

3,271,749

2003

1,078

3,575,674

2004

1,149

3,952,148

2005

1,131

4,228,068

2006

1,846

1,3969,247

1952~2006

20,04378,691,729

2007 01~11

1,619

11,900,333

Source: Investment Commission, Ministry of Economic Affairs9Table 2

Taiwan Top 10 Approved Inward Investment country from 1952 to 2007 November

AmountCountry

Case (unit)

Share （%）

Share （%）（US$1,000）

Total

22,080100.00%92,829,253.98

100.00%U.S.A.

3,584

16.23%

18,094,347.96

19.49%

Japan

5,518

24.99%

15,213,037.40

16.39%

Caribbean Sea

3,088

13.99%

15,188,725.79

16.36%

Netherlands

363

1.64%

14,604,172.24

15.73%

Singapore

1,120

5.07%

5,559,314.11

5.99%

473

2.14%

4,721,365.38

5.09%

Hong Kong

2,855

12.93%

4,416,327.60

4.76%

Bermuda1030.47%

1,955,590.41

2.11%

German403

1.83%

1,742,048.53

1.88%

Malaysia

695

3.15%

1,624,699.77

1.75%

U.K.

Source: Investment Commission, Ministry of Economic Affairs

10Table 3 Statistics on Taiwan Approved Outward Investment

Year

Case

Amount（unit）（US$1,000）

1952~1996

2,997

12,420,173

1997

759

2,893,826

1998

896

3,296,302

1999

774

3,269,013

2000

1,391

5,077,062

2001

1,387

4,391,654

2002

925

3,370,046

2003

714

3,968,588

2004

658

3,382,022

2005

521

2,447,449

2006

478

4,315,426

1952~2006

11,50048,831,561

2007 01~11435

5,126,512

Source: Investment Commission, Ministry of Economic Affairs

11Table 4 Taiwan Top 10 Approved Outward Investment country from 1952 to 2007 November

Country

Case (unit)

AmountShare （%）

Share （%）（US$1,000）

Total

11,935100.00%53,958,072.47

100.00%

Caribbean Sea

1,897

15.89%

20,035,109.98

37.13%U.S.A.

4,885

40.93%

10,130,615.57

18.77%

SINGAPORE

444

3.72%

3,873,029.82

7.18%

Hong Kong

967

8.10%

2,672,125.82

4.95%

Bermuda990.83%2,511,657.32

4.65%

Thailand383

3.21%1,936,735.83

3.59%

Malaysia

306

2.56%

1,708,121.78

3.17%

Vietnam

352

2.95%

1,463,251.07

2.71%

Netherlands

139

1.16%

1,235,744.57

2.29%

Panama67

0.56%

1,198,918.00

2.22%

Source: Investment Commission, Ministry of Economic Affairs

12Table 5

Statistics on Approved Indirect Mainland Investment

Year

Case

Amount（unit）（US$1,000）

11,637

6,873,724

8,725

4,334,313

1.284

2,034,621

1999

488

1,252,780

2000

840

2,607,142

1,186

2,784,147

5,440

6,723,058

2003＊

10,105

7,698,784

2004

2,004

6,940,6632005

1,297

6,006,953

2006

1,090

7,642,335

1991~2006

35,54254,898,520

2007 01~11917

8,448,607

1991~1996
＊

1997

1998

＊

2001
2002

＊

Source: Investment Commission, Ministry of Economic Affairs＊including supplementary approved cases and amounts

13Table 6

Investment from Taiwan from 1989 to 2007 Nov.
Realized FDI Value

Number of Projects(US$10,000)
Year
TaiwanNational

ShareTotal（%）

TaiwanNational

ShareTotal（%）

1989

539

5779

9.33

15,479339,257

4.56

1990

1,103

7,273

14.17

22,240348,711

6.38

1991

1,735

12,97813.37

46,641

436,634

10.68

1992

6,430

48,76413.19

105,050

1,100,751

9.54

1993

10,94883,43713.12

313,859

2,751,495

11.41

1994

6,247

47,54913.14

339,104

3,376,650

10.04

1995

4,847

37,011

13.10

316,155

3,752,053

8.43

1996

3,184

24,556

12.97

347,484

4,172,552

8.33

1997

3,014

21,00114.35

328,939,

4,525,704

7.27

1998

2,970

19,79915.00

291,5214,546,275

6.41

1999

2,499

16,918

14.77

259,870

4,031,871

6.45

2000

3,108

22,347

13.91

229,628

4,071,481

5.64

2001

4,214

26,14016.12

297,994

4,687,759

6.36

2002

4,853

34,171

14.20

397,064

5,274,286

7.53

2003

4,495

41,081

10.94

337,724

5,350,467

7.35

2004

4,002

43,664

9.07

311,749

6,062,998

5.14

2005

3,907

44,0198.88

215,171

7,240,569

2.97

2006

3,752

41,485

9.04

213,583

6,946,761

3.07

2007/01~11

2,993

34,4198.70

143,426

6,167,413

2.33

source: Department of Foreign Investment Administration ,Ministry of Commerce

14

Table 7

Top 15 Investors in China as of 2006

Realized FDI
Country

No. of Projects

Share （%）

Value（US$100

Share （%）

million）Total

594,445100

7,039.74

100

Hong Kong

269,55545.35

2,797.55

39.74

Japan

37,7146.34

579.73

8.24

U.S.A.

16,6162.80

571.648.12

Virgin Islands

52,211

8.78

539.55

7.66

Taiwan71,84712.09

438.93

6.24

R.O.K.

43,1307.26

349.99

4.97

Singapore

15,5562.62

300.04

4.26

U.K.

5,359

0.90

139.22

1.98

Germany

5,338

0.90

134.18

1.91

Cayman Islands

1,843

0.31

107.55

1.53

France

3,271

0.55

78.02

1.11

Netherlands

1,949

0.33

77.59

1.10

Macau

4,358

0.73

75.13

1.07

West Samoa10,697

1.80

69.40

0.99

Canada

9,788

1.65

54.14

0.77

Others45,2137.60

727.0910.33

source: Department of Foreign Investment Administration, Ministry of Commerce

15