Introduction

The newly signed income tax agreement between Taiwan and Singapore for the elimination of double taxation with respect to taxes on income and the prevention of tax evasion and avoidance (the "Taiwan–Singapore Tax Agreement" or the "New Agreement") will take effect in stages beginning in 2027.

To facilitate a better understanding of the key framework of the New Agreement before undertaking cross-border investments or transactions, this article summarizes certain important provisions relevant to such activities. In particular, it focuses on the taxation principles applicable to commonly encountered categories of income, and further explains how the New Agreement eliminates double taxation and the limitations applicable to benefits under the New Agreement.

Taxation of Different Categories of Income

Where a resident of Taiwan or Singapore derives income from sources in the other territory, the allocation of taxing rights between the territory in which the income arises and the territory in which the recipient is resident becomes relevant.

The following summarizes how taxing rights are allocated under the New Agreement with respect to several categories of income commonly encountered in practice, including income from immovable property, dividends, interest, royalties and capital gains.

1. Income from Immovable Property

Income derived by a beneficial owner from immovable property situated in the other territory is, in principle, taxable in the territory in which the property is situated. Gains derived from the alienation of such immovable property, however, are subject to the provisions governing capital gains under the New Agreement.

It is also worth noting that the provisions governing income from immovable property generally apply in priority to the provisions governing business profits even where the relevant property is owned by an enterprise or is used in connection with the performance of professional services.

2. Dividends, Interest and Royalties

As a general rule, both the territory in which the income arises and the territory in which the beneficial owner is resident may tax dividends, interest or royalties. In other words, both Taiwan and Singapore may tax such income. However, the tax imposed by the territory in which the income arises on dividends, interest and royalties is generally subject to a maximum rate of 10% of the gross amount of such income.

For example, where a Singapore company distributes dividends to a shareholder resident in Taiwan, both Singapore and Taiwan may have taxing rights over such dividends. Nevertheless, the tax imposed by Singapore on such dividends may not exceed 10% of the gross amount of the dividends.

3. Capital Gains

The allocation of taxing rights over gains derived from the alienation of assets depends primarily on the nature of the assets concerned. Under the New Agreement, capital gains may broadly be categorized as follows:

2. 1. 1. Gains relating to immovable property situated in the other territory, including gains from the direct alienation of immovable property and gains from the alienation of shares or comparable interests deriving more than 50% of their value from such immovable property, are generally taxable in the territory in which the immovable property is situated.
      2. Gains from the alienation of movable property forming part of the business property of a permanent establishment through which an enterprise carries on business in the other territory, such as a branch or office, are taxable in the territory in which such permanent establishment is situated.
      3. Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to the operation of such ships or aircraft, are taxable in the territory in which the transferor is resident.
      4. Gains from the alienation of other property are generally taxable only in the territory in which the transferor is resident.

Elimination of Double Taxation: Tax Credit Mechanism

After determining the allocation of taxing rights between the territory in which the income arises and the territory in which the recipient is resident, the New Agreement provides a tax credit mechanism to prevent the same income from being taxed in both territories. As a general rule, where a taxpayer has paid tax on the relevant income in the territory in which the income arises, the territory in which the taxpayer is resident should, in principle, allow such tax as a credit against the tax payable in that territory.

Under the previous agreement, where a taxpayer benefited from a tax incentive in the territory in which the income arose, the territory in which the taxpayer was resident would generally treat the taxpayer as having paid tax at the statutory rate and allow a corresponding tax credit, subject to a cap equal to the amount of tax payable in the residence territory in respect of that income. The New Agreement modifies this approach by generally calculating the available tax credit based on the amount of tax actually paid by the taxpayer in the other territory, thereby adopting a more stringent approach to the credit mechanism. A three-year transitional period is provided for this change. During this period, where a taxpayer benefits from an applicable tax incentive, the taxpayer may still claim a tax credit based on the statutory amount of tax, subject to the limitation that the credit may not exceed the amount of tax payable in the residence territory in respect of the relevant income.

Limitations on Treaty Benefits

To prevent treaty abuse, the New Agreement expressly provides that treaty benefits may be denied where obtaining such benefits was one of the principal purposes of an arrangement or transaction. This is intended to prevent taxpayers from using arrangements, including adjustments to transaction structures, to substantially reduce their tax liabilities.

In addition, where the territory in which the income arises is required under the New Agreement to grant a reduced tax rate or an exemption, but the territory in which the recipient is resident taxes the relevant income only by reference to the amount remitted to or received in that territory, rather than by reference to the full amount of such income, the exemption or reduction of tax under the New Agreement will generally apply only to the portion of the income that is actually remitted to or received in the residence territory. In other words, where the relevant income is not actually remitted to or received in the residence territory, the reduced tax rate or exemption under the New Agreement may not be available.

Conclusion

Overall, the New Agreement introduces a number of adjustments to the allocation of taxing rights, the mechanisms for eliminating double taxation, and the conditions for obtaining treaty benefits.

Businesses and investors engaging in cross-border planning should therefore take the relevant provisions of the New Agreement into account when reviewing existing or contemplated cross-border investment structures and transaction arrangements, so as to ensure that such structures and arrangements satisfy the application requirements under the New Agreement.

(The article is originally in Chinese which can be found here.)