Fund Taxation Alert 2021-09
Update on pre-approval process in Taiwan to enjoy benefits under the DTA
Update on pre-approval process in Taiwan to enjoy benefits under the DTA
Background
As of January 1, 2015, an agreement for the avoidance of double taxation between Luxembourg and Taiwan (“DTA”) has been in effect. For eligible Foreign Institutional Investors (“FINIs”) to enjoy benefits under the DTA, they are required to submit a pre-approval application each year with the Taiwanese Tax Authority (“TTA”) which entitles them to benefit from a reduced 15% withholding tax rate on Taiwanese dividend payments (instead of 21% according to Taiwanese domestic law). Where the pre-approval application has been successfully processed by the TTA, the FINIs may benefit from tax relief at source for the entire calendar year. If the pre-approval is not granted in time, as an alternative, FINIs may file a tax reclaim at any time in the following five years.
Recent Changes
In response to the increase in dividend distribution frequency (up to 4 times a year), the TTA has notified the Taiwan Stock Affairs Association of a new procedure which is intended to facilitate the process of implementation of the pre-approval letter by the local custodians and tax withholding units (i.e., listed companies). The new procedure allows some eligible FINIs to opt to apply for a pre-approval of a longer duration (up to 18 or 24 months) if certain conditions are met.
This procedure is rather an adjustment to the local practice adopted by relevant parties for the purpose of allowing a reduced tax rate to apply to the dividends distributed in the first quarter of the year, which would benefit eligible FINIs and additionally minimize the need of having to file additional tax reclaims. However, it is important to note this new procedure does not change the fact that the treaty eligibility of the FINI must still be evaluated on an annual basis, in accordance with the local regulations, since the FINI’s status may change during the duration of the pre-approval.
Way forward
The table below indicates which pre-approval period FINIs may opt for, based on the criteria and requirements:
Pre-approval Period |
Criteria/ Requirements |
|---|---|
12 months (e.g., 2022/1/1 – 2022/12/31) |
The FINI is a first timer to file a pre-approval application. The FINI has previously not obtained a pre-approval letter from the TTA in any single year over the past 3 years. The FINI cannot claim itself as the beneficial owner. |
Optional: 18 months (e.g., 2022/1/1-2023/6/30) |
The FINI has previously obtained a pre-approval letter from the TTA in any single year over the past 3 years. The FINI claimed itself as the beneficial owner. The FINI’s status/structure will not change in the following years. |
Optional: 24 months (e.g., 2022/7/1-2024/6/30) |
The FINI has previously obtained a pre-approval letter up to 2022/6/30 from the TTA. The FINI claimed itself as the beneficial owner. The FINI’s status/structure will not change in the following years. |
KPMG is experienced in preparing and submitting the pre-approval applications for investors. As the dividend distribution season generally starts early each year (January), the 2022 pre-approval application will have to be submitted in early 2022. To obtain a tax relief at source in time, we would encourage investors to take immediate action by contacting us if you would like help with an application.
A dedicated team of tax advisers and project management experts could support you to benefit from reduced rates in Taiwan.
