Requirements for a branch office to deduct its apportionment of the foreign head office’s management expenses

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      Multinational corporations provide their global affiliates with centralized management services (such as IT management, risk management, accounting, HR services, IT system support, etc.) to integrate resources for greater efficiency within the group so as to achieve the group’s overall operation target.  To cope with this increasing international trend, the “Regulation Governing Assessment of Profit-Seeking Enterprise Income Tax Article 70” stipulates that if a Taiwan branch can comply with relevant requirements of the tax regulations, its appointment of foreign head office’s or regional headquarters’ (“RHQ”) management expenses, after being verified and approved, is allowed a tax deduction.

A Taiwan branch is allowed to deduct its apportionment of a foreign head office’s or RHQ’s management expenses if the following requirements are met:

1. The foreign head office or RHQ business is not open to the public but has an operating department.  This operating department shall share management expenses of the foreign head office’s or RHQ’s non-operating department with other affiliates within the group.
 

2. The apportionment of the head office’s or RHQ’s management expenses should not be included in the Taiwan branch’s purchasing cost, and the head office or RHQ makes funding to the Taiwan branch for its working capital needs available without any finance charge to the Taiwan branch.
 

3. The apportionment of management expenses shall be calculated on the basis of each income share of the head office’s or RHQ’s operating department and branch divided by the total company’s revenue.  If there is any special situation, the applicant shall report to the competent authority for approval on a reasonable allocation basis.
 

Foreign businesses that there are suitable criteria for a Taiwan branch to report its apportionment of the head office’s or RHQ’s management expenses, and the applicant should provide relevant financial reports and related information which should be verified by local consulate offices or other government-authorized institutes, or certified by a foreign tax authority, to protect its own interests.

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【News release from The Taipei National Taxation Bureau of the Ministry of Finance】

 

When a foreign company’s branch in Taiwan files its profit-seeking enterprise income tax return, any apportionment of management expenses from its foreign head office or regional headquarters must be limited to the management expenses of non-operating departments.

The Bureau explained that, according to “Regulation Governing Assessment of Profit-Seeking Enterprise Income Tax Article 70", if a Taiwan branch apportions management expenses from its foreign head office or regional headquarters, these expenses may be recognized if they meet the following requirements:

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1. The head office or regional headquarters is not open to the public for business. The operating department must share the management expenses of the non-operating department with its branches in various locations.

2. The management expenses of the head office or regional headquarters must not be included in the purchasing costs of the branch, and the head office or regional headquarters must provide the branch with funds for operational purposes without charging interest.

Therefore, when a foreign branch in Taiwan apportions management expenses from its foreign head office or regional headquarters, it may only apportion management expenses related to the non-operating departments of the head office or regional headquarters.

The Bureau provided an example: In the 2021 profit-seeking enterprise income tax return filed by the Taiwan branch of Foreign Company A, a significant amount was reported under “other expenses.” Upon audit, it was found that NTD 20 million of this amount was allocated as research and development expenses incurred by Subsidiary B, established by Foreign Company A in another country. As these expenses do not qualify as non-operating department management expenses of Head Office A, they did not comply with the relevant regulations and were disallowed, resulting in additional taxes.

The Bureau urges profit-seeking enterprises to ensure that any apportionment of management expenses from their foreign head office or regional headquarters is handled in accordance with relevant regulations to avoid tax adjustments and penalties.