Three to one. That is the ratio of related-party debt to equity that Taiwan accepts before a borrower starts losing interest deductions. When a Taiwan subsidiary funded by intercompany loans from its US parent goes past that line, the share of related-party interest that corresponds to the excess cannot be deducted in its profit-seeking enterprise income tax (營利事業所得稅) return.
The rule is Article 43-2 of the Income Tax Act, added on January 26, 2011 and applied from the 2011 tax year. Banks, credit cooperatives, financial holding companies, bills finance companies, insurance companies and securities firms are outside it (paragraph 4). The Ministry of Finance set the ratio and the arithmetic in regulations on interest expenditure on debts owed to related parties (營利事業對關係人負債之利息支出不得列為費用或損失查核辦法, "the thin-cap regulations"), issued on June 22, 2011. The national law database shows no amendment since.
Which loans count
A company that directly or indirectly holds 20% or more of the voting shares or capital of the borrower is a related party (Article 3 of the thin-cap regulations). A US parent of a wholly owned Taiwan subsidiary plainly qualifies. So does the foreign head office of a Taiwan branch (Article 3, paragraph 2, item 7).
Related-party debt reaches further than a direct loan. Article 4(1) also covers parent money routed through an unrelated party, a loan from an unrelated lender such as a bank that the parent guarantees with joint liability, and any other debt-type financing from a related party. On the cost side, "interest" includes margins, default interest, guarantee fees, mortgage fees, loan commitment fees, financing fees and similar charges (Article 5(2)).
What about an interest-free loan? If the tax office applies the transfer pricing rules, imputes arm's-length interest income to the lender and raises the subsidiary's interest expense to match, that money becomes related-party debt for the ratio (Article 6(1)). The same applies when the parties make that adjustment themselves in their returns.
Monthly averages and the formula
Both sides of the ratio use monthly averages. For each month, add the opening and closing book balances and divide by two; then divide the year's total for related-party debt by the year's total for equity (Article 5(3)).
Equity (業主權益) is the net worth on the balance sheet. It cannot fall below paid-in capital plus the capital reserve from issuing shares above par: if net worth is smaller, that sum is used instead (Article 4(3)). For a Taiwan branch of a foreign company, equity means the working capital the head office has actually put in without charging interest.
Once the ratio exceeds 3:1, the disallowed interest is the year's related-party interest × (1 − 3 ÷ the actual ratio) (Article 5(1)). Take a Hsinchu subsidiary of a Texas equipment maker with average equity of NT$150 million, average parent loans of NT$900 million and NT$36 million of interest paid to the parent in the year (an invented example; assume no exemption applies). Its ratio is 6:1. One minus 3/6 is 0.5. Half the interest, NT$18 million, is disallowed. The other NT$18 million survives this test.
Companies and debts left out of the calculation
Three exemptions come from a Ministry of Finance ruling of September 26, 2011 (台財稅字第10000367210號). The first covers a company whose declared net operating revenue plus non-operating income for the year is NT$30 million or less. The second covers one whose declared interest expense and related-party interest are both NT$4 million or less. The third covers a company with negative taxable income before interest, where the loss cannot be carried forward under the proviso to Article 39(1) of the Income Tax Act. Such companies leave related-party debt out of the formula and do not disclose the ratio.
Some debt drops out as well. Debt is excluded where its interest must be capitalized under items 7 to 9 of Article 97 of the audit regulations for profit-seeking enterprise income tax (營利事業所得稅查核準則), which deal with assets bought or built with borrowed money; item 9 also covers interest booked as a deferred expense (Article 4(2)). A loan from an unrelated financial institution may also be left out where the company can prove it fully secured the loan with its own assets and the bank's credit practice still required a related-party guarantee with joint liability (same 2011 ruling).
Holding a transfer pricing report is not on the list.
The rate: a 1.3% monthly ceiling, then arm's length
Interest inside the ratio can still be disallowed if the rate is too high. Under item 14 of the same Article 97, interest on borrowing from anyone other than a financial institution is not recognized above a ceiling proposed by the regional National Taxation Bureaus and approved by the Ministry of Finance. For the 2026 tax year the ceiling is 1.3% a month (月息一分三厘) (Ministry of Finance ruling of December 19, 2025). Simple multiplication gives 15.6% a year. Interest on loans from financial institutions is recognized at the contract rate under the same ruling.
A rate under the ceiling still has to be arm's length. An intercompany loan is a "use of funds" transaction under the transfer pricing regulations (Article 5, item 6). Article 13 lists the comparable uncontrolled price method, the cost plus method and other methods the Ministry approves. A party that provides funds without actually controlling the financial risk and related risks earns only a risk-free return (Article 8-1(3)). The thresholds for a transfer pricing report are covered in Taiwan Transfer Pricing Documentation: Local File, Master File and CbCR Thresholds.
Paperwork follows the numbers. A company within the rule discloses its related-party debt-to-equity ratio in the annual return in the prescribed format, and keeps eight categories of records. They include changes in equity, the nature and purpose of each debt, its currency, amount, rate, term, financing conditions and exchange-rate basis, collateral and guarantees, and rates on comparable loans of the same kind and period. Without the disclosure and records, the tax office may set the ratio from the information it obtains (Article 7).
Withholding on interest sent to the parent
As of October 2026, a subsidiary paying interest to a parent with no fixed place of business in Taiwan withholds 20% of the amount paid (Standards of Withholding Rates for Various Incomes, Article 3, item 4(5)). A US parent has no lower rate to claim. The Ministry of Finance's list of income tax agreements, updated September 4, 2026, shows only a 1988 shipping and air transport arrangement with the United States. The status of the pending US legislation is discussed in Paying a US or Vietnamese Parent from Taiwan.
Vietnamese, Japanese and Korean parents are in a different position. Taiwan's agreements with Vietnam, Japan and Korea were concluded between representative offices or associations, and each caps the tax at 10% of the gross interest where the beneficial owner is a resident of the other side (Article 11(2) of each). The Taiwan–Vietnam agreement adds a limit in Article 11(6): where a special relationship pushes the interest above what unrelated parties would have agreed, the cap applies only to that arm's-length amount, and the excess is taxed under each side's law, with due regard to the agreement's other provisions. Japan and Korea have the same rule in Article 11(8). To withhold at 10%, the parent supplies a residence certificate from its home tax authority and proof that it is the beneficial owner (Regulations Governing Application of Agreements for the Avoidance of Double Taxation, Article 25).
To deduct the interest at all, the subsidiary needs the parent's receipt, plus proof of the foreign-exchange settlement or, if none was made, of the bank remittance (Article 97, item 18 of the audit regulations). A US tax adviser can confirm how the foreign tax credit applies to the 20% withheld in Taiwan.
Capital or loan
Capital raises the denominator; loans raise the numerator. They are also remitted differently. Under Article 4, item 3 of the Act for Investment by Foreign Nationals, a loan of one year or more to the invested company is itself an investment, and Article 12(3) makes the foreign-exchange settlement of loan principal and interest follow the approved terms. Remitting share capital is covered in Taiwan Company Formation: Capital Remittance, Banking, and Foreign Hiring.
Questions about the rate, term or agreement paperwork of an intercompany loan can be sent to Hovering International Law Firm at wei@hoveringlaw.com.tw.
Official sources
- Income Tax Act (所得稅法, last amended September 11, 2026), Art. 39, Art. 43-2, legislative history
- Regulations Governing Assessment of Interest Expenditure on the Debts Owed by a Profit-seeking Enterprise to a Related Party (營利事業對關係人負債之利息支出不得列為費用或損失查核辦法, issued June 22, 2011), Art. 3, Art. 4, Art. 5, Art. 6, Art. 7; official English title at law.moj.gov.tw/ENG
- Audit regulations for profit-seeking enterprise income tax (營利事業所得稅查核準則, last amended December 11, 2023), Art. 97
- Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm's-Length Transfer Pricing (營利事業所得稅不合常規移轉訂價查核準則, last amended December 28, 2020), Art. 5, Art. 8-1, Art. 13
- Standards of Withholding Rates for Various Incomes (各類所得扣繳率標準, last amended June 30, 2021), Art. 3
- Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income (適用所得稅協定查核準則, last amended April 8, 2025), Art. 25
- Act for Investment by Foreign Nationals (外國人投資條例, last amended November 19, 1997), Art. 4, Art. 12
- Ministry of Finance rulings 台財稅字第10000367210號 (September 26, 2011) and 台財稅字第11400691940號 (December 19, 2025; 2026 borrowing-rate ceiling)
- Ministry of Finance, list of income tax agreements (updated September 4, 2026); Taiwan–Vietnam agreement English text; Taiwan–Japan agreement English text; Taiwan–Korea agreement English consolidated text
Checked: October 7, 2026
Frequently Asked Questions
- If our loans are slightly above three times equity, is all the interest disallowed?
- No. The disallowed amount is the year's related-party interest multiplied by (1 − 3 ÷ the actual debt-to-equity ratio). At 4:1, a quarter of that interest is disallowed; at 6:1, half. Debt and equity are both measured as monthly averages of opening and closing book balances.
- Does a small Taiwan subsidiary have to run the calculation?
- Not if it meets one of the Ministry of Finance's 2011 exemptions: declared net operating revenue plus non-operating income of NT$30 million or less; declared interest expense and related-party interest both NT$4 million or less; or negative taxable income before interest where the loss cannot be carried forward under the proviso to Article 39(1) of the Income Tax Act. Those companies are also exempt from disclosing the ratio.
- What does Taiwan withhold on interest paid to a US parent?
- As of October 2026, 20% of the amount paid to a parent with no fixed place of business in Taiwan, because no comprehensive US–Taiwan income tax agreement is in force. A Vietnamese parent that is the beneficial owner can claim the 10% cap in the Taiwan–Vietnam agreement, but only on interest at the level unrelated parties would have agreed.
This article provides general information and is not legal advice on any individual matter.
