Taiwan's Ministry of Finance has published an overview of the amendments to the 2002 income tax treaty (agreement) with the UK, which are made through an amending protocol signed in August 2021. The protocol will enter into force once the ratification instruments are exchanged.
Amendment to the Taiwan-UK Income Tax Agreement
In August 2021, Taiwan and the UK completed the signing of a Protocol to amend the Taiwan-UK Income Tax Agreement. Both sides will each notify the other of the completion of the internal procedures required for bringing into force the said Protocol according to Article 18 of that Protocol. The said Protocol will enter into force on the date of the later of these notifications.
The Ministry of Finance explained that "Agreement between the Taipei Representative Office in the United Kingdom and the British Trade and Cultural Office, Taipei for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains" (hereinafter referred to as the 2002 Agreement) was signed and brought into effect in 2002. In order to align with the new international standards, strengthen tax cooperation between the two sides, and enhance the efficiency of cross-border tax dispute resolution mechanisms, the Ministry of Finance and the Her Majesty's Revenue and Customs (HMRC) have conducted consultations regarding the amendment to the 2002 Agreement since 2019. The "Protocol Amending the Agreement between the Taipei Representative Office in the United Kingdom and the British Trade and Cultural Office, Taipei for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, and the Annex thereto, Signed at London on 8 April 2002" (hereinafter referred to as the Amending Protocol) was then reached in consensus and signed in 2021. Key contents of the Amending Protocol are as follows:
To meet with the related standards proposed by the "Base Erosion and Profit Shifting (BEPS) Actions" - Protocol Articles 1 and 2
The title and preamble of the 2002 Agreement are being updated pursuant to the minimum standard of the BEPS Action 6 (Prevention of Tax Treaty Abuse).
To meet with the related standards proposed by the BEPS Actions - Protocol Article 5
Article 1 (Persons covered) of the 2002 Agreement is being added with a new paragraph addressing the application of the Agreement to income derived by or through a fiscally transparent entity.
To meet with the related standards proposed by the BEPS Actions - Protocol Article 8
Article 4 (Residence) of the 2002 Agreement is being updated to provide that where a person other than an individual is a resident of both territories, the competent authorities will determine that person's solo resident status for the purposes of the Agreement through mutual agreement having regard to relevant factors.
To meet with the related standards proposed by the BEPS Actions - Protocol Article 15
Article 25 (Mutual agreement procedure) of the 2002 Agreement is being updated to be in line with the minimum standard of the BEPS Action to improve the dispute resolution mechanism.
To meet with the related standards proposed by the BEPS Actions - Protocol Article 10, Article 11, Article 13, Article 14, and Article 17
A new Article 27 (Entitlement to benefits) is being added to the 2002 Agreement for incorporating the Principal Purpose Test (PPT) provision (one of the minimum standards of the BEPS Actions). Similar provisions provided in the 2002 Agreement are accordingly being deleted to accommodate the addition.
To accommodate the UK's tax policy concerning dividends distributed from its Real Estate Investment Trusts (REITs) - Protocol Article 9
Paragraph 2 of Article 10 (Dividends) of the 2002 Agreement is being updated with the addition of a 15% limited tax rate for dividends paid by REITs which are companies of a territory to residents of the other territory who are the beneficial owners of the dividends. However, where the beneficial owner of the dividends is a pension fund, the 10% limited tax rate which is provided in the 2002 Agreement shall apply to that case.
To align with the international standards for information transparency - Protocol Article 16
Article 26 (Exchange of information) of the 2002 Agreement is being updated to enhance the sound legal basis for carrying out the exchange of information in tax matters in accordance with the international standards.
Concerning the above-mentioned revision of the limited tax rate applicable to the taxation of dividends distributed by REITs, the Ministry of Finance further explained that this amendment is made to account for the UK's adoption in its tax treaty policy to retain a 15% rate applicable to the dividends distributed from its REITs (The limited tax rate stipulated in Paragraph 2 of Article 10 of the 2002 Agreement is 10%.). Following this amendment, where REITs of the UK paid out dividends (which are paid out of income derived directly or indirectly from immovable properties, i.e., the Property Income Dividends, PIDs) to a resident of Taiwan, the applicable limited tax rate of the case shall be 15%. However, in the case that the recipient of the dividends is a pension fund of Taiwan, that fund may present to the UK a Certificate of Resident for addressing the status of that fund issued by Taiwan's tax collection authority so as to apply for a lower 10% limited tax rate.
With respect to real estate investment trust funds of Taiwan (hereinafter referred to as REITs of Taiwan) which are stipulated under the Real Estate Securitization Act, where REITs of Taiwan distributed their trust interest to a resident of the UK according to Paragraph 1 of Article 50 of the aforementioned Act, since REITs of Taiwan are treated as fiscally transparent for tax purposes (REITs of Taiwan are neither residents nor companies for the purposes of the 2002 Agreements), that trust interest derived by a resident of the UK shall retain its nature as income from immovable property if the distributed trust interest is paid out of income that is sourced form Taiwan's immovable properties. When that distributed trust interest applies for the Taiwan-UK Income Tax Agreement, Taiwan may tax such distribution in accordance with the provision of Paragraph 1 of Article 6 (Income from immovable property) of that Agreement, and the provisions regarding the limited tax rate on dividends shall not apply to that case.
The Ministry of Finance emphasized that, generally speaking, the Amending Protocol neither changes the reduction of or exemption from tax provided by the 2002 Agreement for which taxpayers of both sides may apply, nor reduces the benefits to or the rights of the taxpayers. These amendments are made to align the Taiwan-UK Income Tax Agreement with the OECD BEPS relevant standards, to enhance the sound legal basis for carrying out the exchange of information in tax matters in accordance with the international standards, and to expressly recognize that this Agreement does not intend to create opportunities for non-taxation or reduced taxation through tax evasion or avoidance; all of these would form the basis to protect the benefits to and the rights of legitimate taxpayers, and to facilitate fairness in taxation.