U.S.–Taiwan Chip Investment: Royalties, Fees and the Treaty Gap

As of October 4, 2026, the United States and Taiwan have no comprehensive income tax treaty in force. Taiwan's Ministry of Finance lists the United States under international transportation agreements, but not under comprehensive income tax agreements; the IRS treaty directory likewise has no Taiwan entry. That leaves a U.S. semiconductor supplier without a comprehensive treaty rate to apply to its Taiwan royalty or service income. Taiwan treaty network; IRS income tax treaty directory.

For a hypothetical U.S. equipment supplier, a Taiwan expansion contract might cover a tool, installation, process support and a license to use proprietary technology. The commercial team may quote one price, while the tax analysis depends on the rights granted, the work performed and the party earning each payment. A promise that the supplier will receive its fee free of Taiwan tax can also shift a substantial cost to the customer.

Congress has advanced relief, but the bills remain pending

The legislative record checked on October 4, 2026, shows these positions in the 119th Congress:

Neither record shows enactment. These are the actions reported by the H.R. 33 history and S. 199 history, not a forecast of when Congress will act.

H.R. 33's House-passed text has two parts. Title I would change U.S. tax treatment of qualifying Taiwan residents. Its proposed Internal Revenue Code section 894A(e) makes application conditional on a Treasury determination that Taiwan provides reciprocal benefits to U.S. persons. Title II, the United States–Taiwan Tax Agreement Authorization Act, would authorize a negotiated agreement after that determination. Entry into force would require U.S. approval and implementing legislation, together with confirmation of Taiwan's approval and implementation steps. H.R. 33, House-passed text, section 101 and sections 203–205.

For an American supplier receiving money from Taiwan, the direction of the payment matters. Proposed U.S. relief for a Taiwanese recipient does not itself supply a reduced Taiwan withholding rate for an American recipient. Pricing a Taiwan contract requires the Taiwan rules that actually apply to that payment and period.

Negotiations are a separate development. On October 29, 2024, the U.S. Treasury announced plans to begin comprehensive tax-agreement negotiations under the auspices of the American Institute in Taiwan and the Taipei Economic and Cultural Representative Office in the United States. It identified lower withholding, permanent-establishment rules, temporary-worker provisions and dispute resolution among the expected subjects, expressly connecting the initiative to semiconductor supply chains. That announcement describes negotiating objectives; it is not an effective agreement. U.S. Treasury announcement.

Taiwan taxes the income behind the invoice

The Taiwan-law discussion below reflects the provisions checked on October 4, 2026. Income Tax Act Article 8 distinguishes several sources of income. Subparagraph 3 addresses remuneration for services provided in Taiwan, subparagraph 6 covers royalties for specified intellectual property made available for use in Taiwan, and subparagraph 9 addresses profits from business conducted in Taiwan. A license to use a patented process and payment for engineers to perform work therefore raise different classification questions. Income Tax Act, Article 8.

A foreign bank account does not answer those questions. For the hypothetical supplier, the contract should describe whether the customer receives continuing rights to exploit technology, a completed engineering deliverable, access to software, or equipment with support. Accounting labels such as “technical fee” are too thin to explain that bargain on their own.

Remote work also needs a factual analysis. The Ministry of Finance's source-income principles address services performed partly inside and partly outside Taiwan, and offshore work requiring necessary participation by people or businesses in Taiwan. Supplying equipment, personnel or technical expertise can qualify as participation; a customer's routine background information, notices or confirmations do not by themselves meet that description. Electronic services have additional rules. An engineer's location alone therefore cannot settle the source of every remotely delivered service. MOF source-income principles, points 4 and 10.

Useful supporting records follow the work: statements of work, personnel assignments, site-access records, engineering reports and acceptance documents. These are practical evidence suggestions, not a statutory list of documents required for every payment. Their purpose is to let a tax adviser reconstruct which activities produced the fee and where they occurred.

Gross withholding can exceed the margin on the work

For a foreign enterprise without a Taiwan fixed place of business, the ordinary withholding rate on Taiwan-source royalties is 20% of the gross payment. Taxable service income outside the separately listed categories generally falls under the 20% gross-payment rule where the foreign enterprise has neither a fixed place of business nor a business agent in Taiwan. These starting rules are subject to applicable exemptions or approved computations; they do not impose 20% withholding on every overseas supplier invoice. Standards of Withholding Rates for Various Incomes, Article 3(1)(6) and (10).

The collection obligation is separate from the supplier's pricing decision. Income Tax Act Article 88 requires the withholding agent to deduct tax when paying the covered income, including royalties and relevant foreign-enterprise income. A contract can allocate who bears the expense, but the parties' allocation does not remove that obligation. Income Tax Act, Article 88.

For a hypothetical service project with expensive engineering labor and travel, a tax calculated on gross receipts can consume much more than the same percentage of the project's profit. This is why a financial model should show the invoice, the withholding and the cash received separately. A single line labeled “Taiwan tax” can conceal the difference between a gross levy and a tax on net earnings.

Expansion through a Taiwan subsidiary creates a separate distribution question. As of the check date, the ordinary domestic withholding rate for dividends or profits distributed to a foreign-headquartered enterprise is 21%. That is a distribution rate, not a combined measure of subsidiary and shareholder taxation. Withholding Standards, Article 4.

Article 25 offers a conditional calculation for technical services

Article 25 applies to foreign-headquartered enterprises carrying on specified Taiwan activities, including construction contracting, technical services and equipment leasing, where allocating costs and expenses is difficult. Subject to MOF approval or determination, the non-transport activities use 15% of Taiwan business revenue as taxable income. The provision applies whether or not the enterprise has a Taiwan branch or agent, and excludes Article 39 loss deductions. Income Tax Act, Article 25.

Where tax is collected through the applicable Article 25 withholding route, the rate is 20% of that deemed income. The arithmetic is 15% × 20% = 3% of the relevant revenue. For a hypothetical approved technical-service contract with NT$1 million of qualifying Taiwan revenue, that produces NT$150,000 of deemed income and NT$30,000 of withholding. It is a conditional computation, not a generally available 3% service-tax rate. Withholding Standards, Article 9.

Royalties are excluded from this treatment under point 6 of the MOF's Article 25 review principles. The same guidance treats indivisible turnkey construction arrangements on their full revenue under its specified conditions, so dividing an invoice into separate lines does not necessarily divide the legal transaction. MOF Article 25 review principles, points 6 and 7.

That distinction has a direct drafting consequence for the hypothetical equipment supplier. Its engineers' installation work and its customer's continuing right to use proprietary technology need descriptions that reflect what each side will actually do. The fee allocation should have a commercial explanation. Replacing “license” with “service” while leaving the licensed rights unchanged does not establish eligibility for the technical-service calculation.

Approval also has a scope and duration. Under points 10 and 11 of the review principles, expanded work beyond the approved scope and contract extensions require further approval; approvals issued from May 29, 2023, are limited to five years or the shorter contract period. MOF Article 25 review principles. A new fab location, added deliverable or renewal should prompt a comparison with the approval letter rather than an assumption that the old treatment continues.

A net-fee promise changes the customer's cost

Consider a separate hypothetical license payment subject to 20% gross withholding, with no exemption, reduction or other adjustment. The following U.S.-dollar amounts illustrate the economics only; they do not address Taiwan currency-conversion or reporting requirements.

The second row follows US$100,000 ÷ (1 − 20%). Adding only US$20,000 would not deliver the promised net amount, because withholding would also apply to the additional payment under this example's assumptions. The assumed royalty rate is the one in Withholding Standards, Article 3.

The parties can negotiate who bears that cost. They also need a workable response if the tax treatment changes: whether the price adjusts, who supplies documents for a relief application, and who receives the benefit of a later refund. Those are contract choices, not automatic statutory entitlements. A customer funding a gross-up and a supplier making a relief application have different cash interests, which the agreement should address expressly.

The same review belongs in change orders. A separately priced technology license added to an existing service project should trigger a new tax analysis even if procurement treats it as a routine extension of the original purchase order.

A Taiwan presence changes the filing analysis

The distinction between withholding and ordinary business taxation cannot be resolved simply by saying the U.S. supplier has not incorporated a subsidiary. Income Tax Act Article 10 defines a fixed place of business to include specified business premises and defines a business agent by functions that include regularly accepting orders or habitually negotiating and signing contracts for the enterprise. The actual arrangement needs examination. Income Tax Act, Article 10.

Article 73 provides withholding treatment for covered income of an enterprise with neither a Taiwan fixed place of business nor a business agent. Where there is no fixed place but there is a business agent, it generally makes the agent responsible for filing, subject to the stated Article 25 and 26 exceptions. Income Tax Act, Article 73.

For expansion planning, the tax team needs more than an entity chart. It needs to know who takes orders, which entity owns the supplied technology, where engineers work, and what authority local personnel exercise. The board's separate discussion of subsidiaries, branches and agents for semiconductor suppliers addresses the organizational choices. A presence assessment should be revisited when the operating model changes, not only when a company is first registered.

U.S. foreign tax credits require a separate assessment

The treaty gap does not mean that every dollar of Taiwan tax necessarily produces an additional dollar of final U.S. tax. Nor does it establish that every withholding amount will be fully recoverable through a U.S. credit. As general U.S. background, the IRS's Form 1118 instructions describe corporate credits for qualifying foreign taxes, subject to limitations, income categories and other requirements. They also caution against claiming amounts not legally owed, including amounts eligible for refund. IRS, Instructions for Form 1118, December 2025 revision.

A U.S. tax adviser should assess the particular recipient, income, tax year and Taiwan charge. The project budget can then distinguish cash withheld now from a credit expected later and from any amount that may remain a cost. That distinction is especially useful when engineering expenses fall in one period and the customer pays in another. No credit outcome is assumed here.

Payment timing belongs in the expansion budget

Taiwan's withholding timetable can arrive before a project team has resolved its internal tax questions. For income covered by Article 92(2), including payments to enterprises without a Taiwan fixed place of business, the withholding agent generally must remit the tax and complete the specified certificate procedures within ten days from withholding. If that period includes at least three consecutive national holidays, the statute extends it by five days. Income Tax Act, Article 92.

The source history matters here. Amendments to the withholding provisions, including Articles 88 and 92, were promulgated on August 7, 2024, and took effect on January 1, 2025. The Act's latest amendment shown at the check date, September 11, 2026, concerned Articles 17 and 126; it did not amend Articles 8, 25, 88 or 92. Income Tax Act legislative history.

For a new Taiwan project, finance can assign each expected payment a recipient, income classification, assumed tax base, rate and contractual cost bearer. Any pending application belongs beside that assumption, with responsibility for obtaining the decision and delivering it to accounts payable. A supplier seeking a net fee needs that conversation while the price is still negotiable.

Possible future U.S.–Taiwan relief can be modeled separately. The operative budget should use the treatment supported for the actual transaction, with a contractual mechanism for adjusting to a later legal change. Neither a favorable vote nor an announced negotiation supplies the tax documentation for the next remittance.

For advice on the Taiwan contracts and tax procedures involved in a semiconductor expansion, contact Attorney Wei Tseng (曾雋崴), a partner at Hovering International Law Firm: wei@hoveringlaw.com.tw. Please send only a non-confidential outline initially. Taipei office: 7F-2, No. 35, Sec. 1, Chengde Rd., Datong Dist., Taipei City 103, Taiwan.

More columns for semiconductor companies

Sources

All sources checked on October 4, 2026 (KST). Taiwan legal statements use the official Chinese provisions; English titles below identify the relevant instruments.

• Taiwan Ministry of Finance, Department of International Fiscal Affairs, III. Treaty Network, updated September 4, 2026.
• Internal Revenue Service, United States Income Tax Treaties — A to Z, current online directory checked on the date above.
• Congress.gov, Library of Congress, H.R. 33, 119th Congress — all actions, latest action displayed January 16, 2025; House-passed text, January 15, 2025.
• Congress.gov, Library of Congress, S. 199, 119th Congress — all actions, latest action displayed January 23, 2025.
• U.S. Department of the Treasury, United States and Taiwan to Begin Negotiating a Comprehensive Tax Agreement to Address Double Taxation, October 29, 2024.
• Ministry of Justice, Laws and Regulations Database, Income Tax Act: Article 8, Article 10, Article 25, Article 73, Article 88 and Article 92; legislative history, latest amendment September 11, 2026.
• Ministry of Justice, Laws and Regulations Database, Standards of Withholding Rates for Various Incomes: Article 3, Article 4 and Article 9, current provisions checked on the date above.
• Taiwan Ministry of Finance, Principles for Determining Taiwan-Source Income under Article 8 of the Income Tax Act, particularly points 4 and 10, current text checked on the date above.
• Taiwan Ministry of Finance, Review Principles for Foreign Enterprises Applying to Calculate Income under Article 25(1) of the Income Tax Act, amended May 29, 2023, particularly points 6, 7, 10 and 11.
• Internal Revenue Service, Instructions for Form 1118 — Foreign Tax Credit, Corporations, December 2025 revision.

General information, not individualized legal or tax advice. Sources checked October 4, 2026 (KST).