Ye-Hsin Lin and Connie Chiou

The Taiwan Ministry of Finance (MOF) issued a ruling on 26 March 2008 indicating that nonresident shareholders (including nonresident individuals and foreign profit-seeking enterprises with no fixed place of business in Taiwan) of Taiwanese companies that declared a dividend after 22 October 2007 would not be entitled to a credit against their withholding tax if the dividends received by a nonresident shareholder are all from distributed earnings of the current year.

Taiwan generally operates an imputation system to avoid double taxation of dividends. Thus, where a Taiwan company distributes after-tax profits as dividends to resident shareholders, the distributing company also allocates the company’s income tax paid on the dividends to the shareholders as an imputed tax credit. The imputation credit, however, is not extended to nonresidents. To mitigate the tax burden of nonresident shareholders, the 10% advance tax on undistributed retained earnings paid at the corporate level may be credited against the withholding tax on dividends distributed to nonresident shareholders.

The MOF issued a ruling on 22 October 2007, which states that if dividends received by a nonresident shareholder are all from distributed earnings of the current year (on which the 10% advance tax has not yet been levied), no creditable tax against withholding is permitted. The MOF announced in its 26 March ruling that the October ruling should be extended to apply to dividends declared after 22 October 2007.

For a nonresident shareholder to credit the 10% advance tax against the dividend withholding tax, the company may consider a distribution of its earnings covering two portions: one from the current year’s earnings and the other from a previous year’s earnings. However, if the current year’s earnings are not distributed in full, the remaining portion may be subject to the 10% advance tax.

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