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Emigration from Hong Kong to Taiwan: The Importance of Pre-Migration Tax Planning (6)

Among all the destinations, Taiwan is always one of Hong Kong people’s favorite choice for emigration, likely because of its relatively affordable living standard, similar language and culture and democratic lifestyle. According to data from Taiwan’s Ministry of the Interior, immigration from the Hong Kong to Taiwan has increased by 28 percent from January to July in 2019. 

This article will examine from a taxation perspective the considerations which a person should pay due regard to before emigration, so as to better plan for future taxes which might arise at the time of and after the emigration to Taiwan.

Overview of Ways to Obtain Taiwan Citizenship

Taiwan offers a number of pathways to citizenship through permanent residency, covering family, study, business innovation, investment, and employment.

Individuals who wish to immigrate to Taiwan shall first obtain the Alien Resident Certificate (similar to the green card in the United States). This Alien Resident Certificate allows individuals to legally stay in Taiwan based on the fact that they are working in Taiwan under the permission, or being married to a Taiwanese spouse, or being an investor having invested over a certain amount of capital with the approval by the relevant authorities in Taiwan etc.. 

1.    Investment

If you opt for the investment route, you shall first apply for a resident visa for investment and then the Alien Resident Certificate. The criteria for obtaining an investment visa in Taiwan is relatively less demanding comparing with some other popular choices for migration, especially for applicants from Hong Kong and Macau. 

Applicants from Hong Kong and Macau may make an investment of at least NTD6 million (i.e. around USD200,000 or HKD1.5 million) in a private Taiwanese company in order to be eligible for making an application for the investment visa and the Alien Resident Certificate. They may then apply for naturalization as Taiwanese directly after:- (a) 1 year of legal residency, during which the applicant cannot leave Taiwan for more than 30 days; or (b) 2 consecutive years of legal residency and having been physically present in Taiwan for at least 270 days per year.

Non-Hong Kong and Macau applicants may opt for the following alternative route for obtaining an Alien Permanent Resident Certificate (the “APRC”) (i.e. permanent residence permit) thus Taiwanese citizenship, in which case the applicant will not be required to be physically present in Taiwan during his residency:-

a. Making an investment of NTD15 million in a Taiwanese business which creates 5 or more full-time jobs for Taiwan nationals for over 3 years, in which case the applicant is required to have held the Alien Resident Certificate for over 3 years before making the application for the APRC; or

b.  Making an investment of NTD30 million in the government bonds of Taiwan for over 3 years, in which case the applicant is required to have held the Alien Resident Certificate for over 5 years before making the application for the APRC.

Foreign nationals who own the APRC and have legally and continuously resided in Taiwan for 5 years and having been physically present in Taiwan for at least 183 days per year can apply for naturalization as Taiwanese.

2.    Studies

Graduates from universities in Taiwan may apply for permit to work locally thus residency in Taiwan. Permanent residency and naturalization as Taiwanese may then be applied for after the applicant resides in Taiwan for 5 years legally and continuously and having been physically present in Taiwan for at least 183 days per year. 

Alternatively, graduates from universities in Taiwan may first return to their home place of residence to work for 2 years or more, and apply for permit to work locally thus residency in Taiwan. Permanent residency and naturalization as Taiwanese may then be applied for after 1 year in fastest cases. 

3.    Business innovation

You may apply for a Taiwan entrepreneur visa and residency if any of the following requirements is met:-

a. Having received venture capital investment or international fundraising in your business innovation of more than NTD2 million;

b. Having received approval to reside at a recognized innovation park or incubator in Taiwan;

c. Having obtained patent rights or professional skills certificate;

d. Having been awarded in a leading startup or design competition, or has been involved in a foreigner entrepreneurship project in Taiwan;

e. Having been or is currently located in a startup accelerator recognized by the Taiwanese government;

f. The enterprise or the person in charge of the enterprise has been nominated or awarded in a film festival;

g. Having received innovation subsidy of at least NTD3 million from the central government or at least NTD1 million from the local government;

h. Having possessed innovation capability specified or recommended by the Taiwanese government; or

i. Legal representative, manager or director of an established enterprise with innovation capability in Taiwan with an investment of at least NTD1 million.

Permanent residency and naturalization as Taiwanese may then be applied for after 5 years in the fastest cases. 
 
4.    Skilled immigrants

Applicants being professional at certain fields, including accountants, lawyers, medical practitioners, architects etc. may apply for Taiwan residency through its skilled immigration program.

They may then apply for naturalization as Taiwanese after:- (a) 1 year of legal residency, during which the applicant cannot leave Taiwan for more than 30 days; or (b) 2 consecutive years of legal residency and having been physically present in Taiwan for at least 270 days per year.

5.    Family reunion

Like other countries, one may also immigrate to Taiwan on the basis of family reunion, if he has a direct relative or a spouse with Taiwan citizenship. 

Overview of Taxation in Taiwan 

For personal income tax, the progressive tax rates of personal income tax in Taiwan range from 5% to 40%. Similar to Hong Kong, Taiwan levies personal income tax on a territorial basis (i.e. only Taiwan sourced income (for both resident and non-resident) is subject to income tax in Taiwan). That being said, for Taiwan resident whose income is derived from sources outside Taiwan, such income is subject to alternative minimum tax (“AMT”).[1] As for capital gain, Taiwan does not tax capital gains separately. All gains, unless otherwise specifically exempted by the applicable laws, are taxed as ordinary income.

For corporate income tax, a Taiwan resident company is taxed on its worldwide income. The current corporate income tax rate is 20%. Similar to the treatment on individuals, there is also no separate capital gains tax in Taiwan for companies.

Hong Kong currently does not have a comprehensive treaty for double taxation with Taiwan. This essentially means that, for example, in the absence of bilateral tax concessions, a Hong Kong citizen or alien in Taiwan whose income has a Hong Kong source can be taxed twice, once in Hong Kong based on Hong Kong’s territorial source principle of taxation, and another time on AMT paid in the Taiwan. That being said, Taiwan provides unilateral tax credit relief in respect of foreign-sourced income – income tax paid in other countries on income derived outside Taiwan may be credited against one’s total income tax liability in Taiwan. It is also worth noting that double taxation on the income received by people and companies across Taiwan and China is alleviated by the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, but Hong Kong is not a party thereto.

Pre-migration Tax Planning

Pre-migration tax planning is particular important to people (especially Hong Kong resident) who are planning to immigrate to Taiwan for the following reasons:-

1. Taiwan has a higher corporate tax rate and individual income tax rate compared to Hong Kong;

2. There is no capital gain tax in Hong Kong, whilst capital gain is taxed as ordinary income and subject to personal income tax as high as a rate of 40% (compared to the cap of 17% in Hong Kong) or corporate income tax of 20%;

3. There is no tax on dividends in Hong Kong, whilst dividends can be taxable in Taiwan; and

4. There is no estate duties in Hong Kong, whilst the same exists in Taiwan (which will be further discussed below).

We list out hereinbelow some of the pre-emigration preparation which one may need to consider in order to properly plan his/her tax affairs before immigrating to Taiwan.  

Trust 

Unlike Hong Kong, estate tax exists in Taiwan and the same will be levied on the following estate properties:-

1. Property remained by the deceased who was a Taiwan citizen and regularly resided in Taiwan, regardless of the location of the property; and

2. Property left by the deceased who was a Taiwan citizen but resided outside Taiwan regularly, or who was not a Taiwan citizen, if the property is located within Taiwan.

Estate tax rates in Taiwan range from 10% for net taxable estate amount of or under NTD50,000,000, to 20% for net taxable estate amount of or over NTD100,000,001. Accordingly, for individuals (especially high-net worth individuals with properties located in other countries) who are planning to immigrate to Taiwan and acquire Taiwan citizenship, it would be advisable to set up a trust before the migration, such that estate taxes can be saved in respect of the trust assets.

How the trust shall be structured is another important issue. Under Taiwan tax laws, gift tax would be levied for:-

1. Gift made by a donor who is a Taiwan citizen who regularly resides in Taiwan, regardless of the location of the gifted property; 

2. Gift made by a donor who is not a Taiwanese citizen or a Taiwanese citizen residing outside of Taiwan as long as the property is located within Taiwan. In determining whether the property is located in Taiwan, a gifted property to a trust would be deemed as locating in Taiwan (even though it might not be physically present in Taiwan) if the residence of the trustee is Taiwan. The donor i.e. the settlor of such trust in the circumstance would then be subject to gift tax. 

Gift tax rates in Taiwan range from 10% for net taxable gift amount of or under NTD25,000,000, to 20% for net taxable gift amount of or over NTD50,000,001. Accordingly, one would need careful consideration and shall seek professional advice on the trust structure (including timing of settling the trust (i.e. whether the settlement shall be done before acquiring Taiwan citizenship), choice of settlor, choice of trustee, choice of trust assets etc.) so as to minimise any gift tax arising from the settlement of the trust.

Capital Gains and land value increment tax for real estates

If one intends to acquire real estates in Taiwan, he may also need to consider the holding structure of such properties as any transfer of real estates in Taiwan is subject to, inter alia, significant land value increment tax and capital gain tax, and that there are also different tax treatments in relation to the rental income generated from these real estates by corporate/individual, or Taiwan/non-Taiwan residents. 

Land value increment tax is computed based on the increase in the assessed value of the relevant land since the last ownership transfer. Land value increment tax rates vary from 20% to 40%, while capital gain tax rates in respect of transaction of real estates in Taiwan range from 15% to 45%, depending on the holding period and the residence of the parties. 

Conclusion

As could be seen above, however attractive the “Formosa” might be, in terms of taxation, Taiwan is a less friendly jurisdiction to taxpayers compared to Hong Kong. Accordingly, careful pre-migration tax planning is required and tax advice shall be sought before one moves to Taiwan.

OLN provides a range of migration, corporate restructuring and tax advisory services.  If you have any questions on the above, please contact one of the members of our Tax Advisory Team. 

Disclaimer: This article is for reference only. Nothing herein shall be construed as Taiwan or Hong Kong legal advice or any legal advice for that matter to any person. Oldham, Li & Nie shall not be held liable for any loss and/or damage incurred by any person acting as a result of the materials contained in this article.

[1] Residents with AMT taxable income exceeding NTD6.7 million is subject to an AMT tax rate calculated by the following formula:- (Income subject to AMT – NTD6.7 million)x20%. Separately, any overseas income exceeding NTD1 million is reportable.

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