Taiwan and Mainland China signed a Cross-Straits Income Tax Agreement

Taiwan and Mainland China signed the “Cross-straits Agreements for the Avoidance of Double Taxation on Income and Solidifying Cooperation with respect to Taxes” (hereinafter referred to as “Cross-straits ITA”) on 25 August 2015. After the draft Article 25-2 of the “Act Governing Relations between the People of the Taiwan Area and the Mainland Area” is passed by the Legislative Yuan and takes effect, the double taxation on the income received by people and enterprises across Taiwan and China may be alleviated.

The contents of the Cross-straits ITA primarily comprise of (i) the measures of exempting/reducing taxes on various types of income, (ii) the disputes resolution mechanism, and (iii) the anti-tax avoidance provisions. The Cross-straits ITA applies to the residents (including individuals and enterprises) in Taiwan and China. For Taiwan investors that indirectly invested in China via a third-area company, if such a third-area company has its place of effective management in Taiwan and has paid taxes as a Taiwan tax resident, the benefits offered by the Cross-straits ITA would also be eligible.

With respect to the measures of exempting/reducing taxes on various types of income, the definition of “permanent establishment” is relaxed in the Cross-straits ITA, when compared to the tax treaties that Mainland China has entered into with other countries. The maximum withholding rate of 5% on dividends, provided that certain circumstances are met, and 7% on interests are more favorable than the terms of the tax treaties between China and other countries. Moreover, the income realized from selling the shares/rights held by Taiwan residents in Chinese companies can be taxed by the Taiwan tax authorities only, without being subject to any tax in China. This is a unique feature that cannot be found in other tax treaties signed by China with other countries.

In terms of disputes resolution, relevant disputes will be negotiated and settled through the platform established by the Ministry of Finance of Taiwan and the State Administration of Taxation of China.

With respect to the anti-tax avoidance provisions, it is agreed that the exchange of information should be subject to the following principles: (i) the information cannot be used retroactively, i.e., the information exchanged by the parties is limited to the information that falls within the tax year starting on or after January 1 of the subsequent calendar year after the Cross-Strait ITA takes effect; (ii) the information cannot be used in any criminal law cases; (iii) the information cannot be used for any purpose other than income tax assessment, collection, mandatory execution and administrative litigation; and (iv) the information must be pertinent to specific cases, which means that neither party is obligated to automatically or voluntarily exchange any information.