US-Taiwan Double Taxation Relief Deal Piques Investors’ Interest

The business community is widely supporting the US-Taiwan Expedited Double-Tax Relief Act, which is being promoted as way to end double taxation between the US and its ninth-largest trading partner, and to help investments in critical sectors like the semiconductor industry.

Taxpayers with activities and investments in Taiwan—and Taiwan residents with activities and investment in the US—are focused on the dividend provisions in the agreement.

The bill reduces the withholding tax on US-source dividends that are paid to or received by a qualified resident of Taiwan to 15% from 30%. For example, a Taiwanese fund investing in US equities would be entitled to a reduced rate of 15% on dividends from those shares, so essentially a 50% savings in tax.

Dividends would be subject to a lower 10% rate if paid to a recipient that owns at least 10% of the shares of stock in the corporation, subject to limitations. For example, dividends paid from a US subsidiary of a wholly owned Taiwanese company would be subject to 10% withholding as opposed to the current 30%. This would make starting operations in the US more attractive to Taiwanese companies.

The reduced rates would apply only if reciprocal provisions apply to US persons for income sourced in Taiwan. Currently, US investors are subject to a 21% withholding tax on Taiwan source dividends and would welcome the reduced rate on their investments in Taiwan.

Lower withholding tax rates would not apply to amounts subject to the Foreign Investment in Real Property Act. A non-US person’s gain or loss from the disposition of a US real property interest is treated as effectively connected income under Section 897a of the tax code. The payor of income subject to the Foreign Investment in Real Property Act treats it as effectively connected income and is generally required to withhold US tax from the payment under Section 1445.

However, there would be another channel where a Taiwanese investor could get exposure to US real property at the lower tax rate. A dividend paid by a real estate investment trust that is publicly traded, and where the investor holds no more than 5% of any class of shares in that real estate investment trust would be eligible for a 15% rate under the new agreement.

Investors are also happy to see clarification related to US or Taiwanese employees on work travel or temporary assignments. Currently, those employees may be subject to tax by both systems.

Under the proposed legislation, no US tax may be imposed on certain wages of qualified residents of Taiwan in connection with personal services performed in the US. Such wages can’t be paid by a US person or borne by a US permanent establishment of a foreign person.

This doesn’t apply to certain types of wages, such as directors’ fees, pensions, and other wages that are generally taxable under the US Model Tax Treaty. This clarification is another provision that would assist in more investment in US operations.

Next Steps

The absence of official diplomatic relations between Taipei and Washington has created a jurisdictional disagreement on how to move forward with an agreement that acts like a tax treaty but isn’t one.

The bill proposes changing the US tax code so that it includes new double-tax relief rules for American and Taiwanese workers and businesses that are “analogous” to provisions typically found in bilateral tax treaties on condition that Taiwan enacts reciprocal tax measures

The Joint Committee on Taxation estimates that the bill will have no effect on the federal fiscal year receipts from 2023 to 2033.

The Senate Finance Committee approved the bill 27-0 on Sept. 14, advancing it to the full chamber. Companion legislation to both bills is being considered in the House by the Ways and Means Committee and the House Foreign Affairs Committee.

The provisions of the legislation would take effect on the date that the legislation would be enacted, for amounts paid during periods to which the new tax code section would apply. The provisions would only apply after the US Treasury Secretary determines that Taiwan has granted benefits to US persons that are reciprocal to the benefits provided to a qualified resident of Taiwan.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

David Weisner is a managing director, global tax services, with Brown Brothers Harriman & Co. He is also vice chair of the investment management committee of the American Bar Association’s tax section.

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