For purposes of facilitating industrial upgrades and lowering the barrier for local industries to acquire technical know-how from other countries, royalties and technical service fees collected by foreign profit-seeking enterprises for licensing their patents, trademarks and specially-licensed rights to Taiwanese profit-seeking enterprises may be exempt from tax under the Income Tax Act. Accordingly, the Ministry of Economic Affairs and the Ministry of Finance have enacted the “Rules Governing the Applications for Exemption from Income Tax on Royalties and Technical Service Fees Collected by Foreign Profit-Seeking Enterprises from the Manufacturing Industry, Technical Services Industry and Power-Generating Industry” (the “Rules”) to provide an uniform standard for tax exemption review.
As the relevant tax incentives under the “Statute for Upgrading Industries” no longer apply, the Ministry of Economic Affairs and the Ministry of Finance promulgated the amendment of the Rules on January 29, 2014. The amendment shall apply retroactively to all licenses granted after January 1, 2011. The key points of the amendment concerning patent license are as follows:
- Broadened the scope of “patent right” with which foreign profit-seeking enterprises may enjoy tax exemptionbr Under the amendment, patents licensed by foreign profit-seeking enterprises and that may qualify for tax exemption are no longer limited to patents duly registered in Taiwan. In other words, a foreign profit-seeking enterprise may still be exempt from tax even if its licensed patents are registered outside of Taiwan.
- Recordation of patent licensing with the Intellectual Property Office (the "TIPO") is no longer required Prior to the amendment, to license their patents, foreign profit-seeking enterprises were required to apply for patent licensing recordation with the TIPO. The recordation requirement is removed under the amendment. Foreign profit-seeking enterprises may directly apply for tax exemption on royalties collected under patent licenses with the Industrial Development Bureau, Ministry of Economic Affairs, using the patent approval certificate issued by the TIPO or certificate of patent registered pursuant to foreign laws.
- Added limitation on the nationality of foreign profit-seeking enterprise The pre-amendment Rules were silent on the nationality of foreign profit-seeking enterprise. Considering that the amendment broadens the scope of patent right to include patents registered abroad by foreign profit-seeking enterprises, the nationalities of foreign profit-seeking enterprises under the post-amendment Rules are limited to countries which reciprocally allow ROC nationals to claim patent priority or members of the WTO.
- Added Limitation on the types of industries to which licensees using or implementing the licensed patents must belong The pre-amendment Rules had no limitation on the types of industry to which licensees must belong. According to the amendment, the patents shall be licensed for use by certain types of industries only, such as display industry, biotechnology industry, smart electronics and parts industry.
- Added requirement that the patents licensed shall be of “key technology” The amendment provides that for an enterprise to be eligible for tax exemption, the patents that it licenses shall be of “key technology.” After the amendment, to apply for tax exemption, foreign profit-seeking enterprises shall provide relevant evidence (e.g., performance variance analysis) to show that the patents they license are of “key technology” that no Taiwanese entity can provide, or that although a Taiwanese entity do provide such technology, its performance does not meet the specification requirements of the applying enterprise.
- “Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm’s-Length Transfer Pricing” shall apply to assess whether the costs and expenses are of ordinary practice Considering that a foreign profit-seeking enterprise granting licenses to its subsidiary in Taiwan and collecting royalties therefrom might involve a non-arm’s-length transaction, the amendment provides that foreign profit-seeking enterprises shall apply the “Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm’s-Length Transfer Pricing” to assess whether their costs and expenses reported are of ordinary practice. Royalties in excess of amounts derived from ordinary practice shall not be reported as cost or expense.
- The amendment applies retroactively The amendment of the Rules applies retroactively to all licensing contracts or agreements executed by local and foreign profit-seeking enterprises after January 1, 2011.
This amendment of the Rules not only affects the application procedure of tax exemption for foreign profit-seeking enterprises, but with its retroactive effect, the amendment also allows foreign patent holders to seek tax exemption on royalty income under license agreements executed after January 1, 2011.