12.23.2012
Income Tax Exemption to the Royalties Paid to Foreign Enterprises Shall Be Limited to the Domestic Use
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According to Article 4-1-21 of the Income Tax Act (the Act), if a domestic company has paid the royalties to a foreign benefit-seeking enterprise for its patent rights, trademarks, and/or various of licensed rights to introduce new production technology, improve product quality, or reduce production cost, the foreign enterprise will be eligible for application of the income-tax exemption of the royalty payment.
Promoting the R&D investment and encouraging the introduction of foreign patent rights to upgrade and innovate the domestic industrial technology is the main reason of the legislation of Article 4-1-21. By this provision, domestic companies could remove the obstructions that would occur when introducing foreign knowledge and technical skills. However, domestic companies should bear in mind that when using the patent rights licensed from a foreign benefit-seeking enterprise, the use of the patent rights should be limited only in the territory of Taiwan, i.e., not to expand the use outside Taiwan.
A recent decision made by the Administrative Court demonstrated that if the patent rights licensed are not used in Taiwan, the tax exemption on royalty payments on the basis of Article 4-1-21 will not apply, which means that the profit-seeking enterprise will be taxed at 20% rate on the royalty payment. A foreign benefit-seeking enterprise (patent licensor), which signed a Patent Licensing Agreement with a Taiwan domestic company, received approximately US$8,595,800 for the patent royalty and according to Article 4-1-21 of the Act applied for the tax exemption. The domestic company, however, transferred the licensed patent to its subsidiary in Mainland China for manufacturing. The National Tax Administration of Southern Taiwan Province therefore rejected the tax exemption application, given that the licensed patent was for foreign use and manufacturing instead of domestic company’s use, which was against the legislation reason of the promotion of the domestic economic development. The patent licensor thus lodged an administrative litigation, which was dismissed by the Administrative Court. The patent licensor was judged to pay approximately US$1,718,600 for royalty revenue.
The National Tax Administration reminds domestic companies that, when introducing foreign intellectual property rights and/or various of licensed rights, said rights must be used and conducted within the territory of Taiwan and be in accordance with the provisions of relevant laws like in the Income Tax Act and its Enforcement Rules, as well as Review Principals of Exemption of Royalties of Manufacturing, Technical Service and Power Industries, and Technical Service Rewards charged by Foreign Enterprises. Only such royalties obtained may therefore be exempted from income tax.
Promoting the R&D investment and encouraging the introduction of foreign patent rights to upgrade and innovate the domestic industrial technology is the main reason of the legislation of Article 4-1-21. By this provision, domestic companies could remove the obstructions that would occur when introducing foreign knowledge and technical skills. However, domestic companies should bear in mind that when using the patent rights licensed from a foreign benefit-seeking enterprise, the use of the patent rights should be limited only in the territory of Taiwan, i.e., not to expand the use outside Taiwan.
A recent decision made by the Administrative Court demonstrated that if the patent rights licensed are not used in Taiwan, the tax exemption on royalty payments on the basis of Article 4-1-21 will not apply, which means that the profit-seeking enterprise will be taxed at 20% rate on the royalty payment. A foreign benefit-seeking enterprise (patent licensor), which signed a Patent Licensing Agreement with a Taiwan domestic company, received approximately US$8,595,800 for the patent royalty and according to Article 4-1-21 of the Act applied for the tax exemption. The domestic company, however, transferred the licensed patent to its subsidiary in Mainland China for manufacturing. The National Tax Administration of Southern Taiwan Province therefore rejected the tax exemption application, given that the licensed patent was for foreign use and manufacturing instead of domestic company’s use, which was against the legislation reason of the promotion of the domestic economic development. The patent licensor thus lodged an administrative litigation, which was dismissed by the Administrative Court. The patent licensor was judged to pay approximately US$1,718,600 for royalty revenue.
The National Tax Administration reminds domestic companies that, when introducing foreign intellectual property rights and/or various of licensed rights, said rights must be used and conducted within the territory of Taiwan and be in accordance with the provisions of relevant laws like in the Income Tax Act and its Enforcement Rules, as well as Review Principals of Exemption of Royalties of Manufacturing, Technical Service and Power Industries, and Technical Service Rewards charged by Foreign Enterprises. Only such royalties obtained may therefore be exempted from income tax.
