Taiwan amends tax treaty rules on residency, permanent establishment, treaty abuse

On August 12, Taiwan’s Ministry of Finance promulgated amendments to the regulations governing the application of double tax treaties to update the decade-old rules for developments in international tax trends and conventions, improve administrability, and clarify various provisions.

Principal purpose test

The amendments clarify that the principal purpose test will be applied in cases where the facts and circumstances cause the tax authority to reasonably conclude that one of the principal purposes of a transaction is to obtain treaty benefits that are not in line with the intended purposes of the treaty. The rule is included to comply with the OECD’s base erosion and profit shifting (BEPS) Action 6 minimum standard on preventing the granting of treaty benefits in inappropriate circumstances.

Taiwan tax residents

The amended rules clarify certain persons who would qualify as Taiwan tax residents for treaty purposes and thereby be eligible to apply for treaty benefits. They specify that Taiwan tax residents include an “organization or institution, which is established for educational, cultural, public welfare or charitable purposes,” a “government agency,” and an “entity that is held or controlled by the government and meets the relevant requirements.”

Dual-resident status

The regulations define the criteria for determining a dual resident’s “permanent home” for purposes of determining sole residency when applying for treaty benefits. For an individual, this requires a residency of 183 days or more. For a dual-resident company, if the treaty adopts a place of effective management provision, the amended rules specify that such determination is made with reference to the OECD model tax treaty commentaries.

The rules also clarify that when a person with a dual-resident status under the applicable treaty is considered as only a resident of the other contracting state for treaty purposes, this result has no effect on that person’s applicable tax administrative procedure in Taiwan.

Permanent establishment

To prevent certain disputes, the regulations state that, when determining whether there is a fixed place of business under the concept of a permanent establishment, “a particular location within which the activities are moved would be required to be identified as constituting a coherent whole commercially and geographically with respect to its associated business activity.”

The regulations also clarify the calculation of the duration period for determining a permanent establishment as stipulated in tax treaties.

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