Written by: Gautam Chopra & Rita M. Ryan
New IRC Section 894A, which is part of H.R. 7024 – Tax Relief for American Families and Workers Act of 2024, provides substantial, treaty-like benefits to Taiwan residents. The Provisions of Section 894A fall into four primary categories and are like those provided to other foreign residents/companies under the 2016 U.S. Model Income Tax Convention. We discuss these special rules in more detail below.
Reduced Rates of Withholding
A reduced rate of withholding tax would apply to certain items of U.S. source income paid to qualified residents of Taiwan. Instead of the statutory 30% withholding tax currently imposed, reduced withholding rates would apply as follows:
- Interest and royalties: 10%
- Dividends: 15% generally, or 10% in case of payment to a 10% owner, subject to limitations
Application of Permanent Establishment Rules (PE)
The threshold of Permanent Establishment generally found in tax treaties, instead of current U.S. trade or business standard, shall be applied to determine U.S. taxation of trade or business carried on in the U.S.
As such, to trigger Permanent Establishment, Section 894A would require a place of management (a branch, office, etc.) in addition to the review of the activities of agents/employees, etc. in-country.
Employment Income Relief
Certain employment income arising from services performed in the U.S. shall not be subject to U.S. taxation so long as such amounts are not paid by a U.S. person or borne by a U.S. permanent establishment of a foreign person. This exemption would not apply to director’s fees, pensions, and other remunerations that are not generally taxable under current U.S. tax treaties.
The benefits under section 894A shall be subject to:
- Reciprocity clause: The benefits shall apply once the U.S. has determined that Taiwan has extended similar benefits to the U.S. person; and
- Limitation of benefits clause: Individuals and corporations must meet the requirements under the limitation of benefits clause of the U.S. Model Convention.
Qualified Resident Determination
Under 864A, a person would be treated as a “qualified resident of Taiwan” so long as they are NOT a U.S. person and the person is liable for tax to Taiwan by reason of their domicile, residence, place of management, place of incorporation, or any similar criterion.
Regarding corporations, the corporation must meet one of three tests provided in the Limitation on Benefits section of the model treaty: the Ownership-Base Erosion Test, the Publicly Traded Company Test, or the Subsidiary of a Publicly Traded Company Test.
Applicability
The provisions of Section 894A are effective as of the date of enactment of H.R. 7024. However, a contingency is included so that the provisions only apply when the Treasury Secretary determines that Taiwan has granted benefits to U.S. persons that are reciprocal to the benefits provided by Section 894A.
Wolf Insight
The United States currently does not have and is unable to enter into a tax treaty with Taiwan, so the enactment of Section 894A would address the current double taxation issues for American and Taiwanese tax residents. Taiwan has become an important trade partner for the U.S. and having this section of the IRC enacted would help ongoing business relationships. The provisions in Section 894A are generally consistent with other U.S. treaty provisions, so working within the parameters of Section 894A should not be an issue. Those taxpayers with activities in Taiwan and Taiwanese residents with activities in the United States should monitor these developments accordingly.
If you need assistance with your international tax needs, reach out to our experts at Wolf & Company today.
