TIPS^®  Taiwan Intellectual Property Special

The Royalty of Foreign Technology Licensing through a Contractor of Research and Development Cannot be Exempted from Income Tax

Pursuant to the “Rules Governing the Screening of Application for Exemption from Income Tax on Royalty Payments and Technical Services Fees Collected by Foreign Profit-Seeking Enterprises,” (“Rules”) a foreign profit-seeking enterprise provides domestic manufacturing industries and related technical services industries with its patent right or trademark right which is recorded at the Intellectual Property Office for use in the form of technical cooperation during the exclusive period of such patent right or trademark right, may apply with the Industrial Development Bureau of the Ministry of Economic Affairs for income tax exemption on the royalty received therefrom in accordance with Paragraph 21, Article 4 of the Income Tax Law. Such rules also apply to technical know-how licensing cases. This exemption has long been the domestic companies’ bargaining power when negotiating technology licensing with foreign companies, given the fact that the royalty and/or technical service fees received by the foreign companies may be exempted from income tax which is amounted to 20% of such royalty.

Recently, the Bureau of Tax, Ministry of Finance rejected the application of the exemption from a domestic semiconductor manufacturer which obtaining foreign technology through a contractor of research and development. The Bureau of Tax indicated that, in this application, the manufacturing process provided by the American semiconductor company (the contractor) is still at the stage of R&D rather than a well-developed know-how or patent. Moreover, since whether or not such 0.2μm DRAM process will be developed into a patent or workable know-how is still uncertain, such process is of the nature of an on-going R&D. Therefore, the fees paid to the American company by the domestic manufacturer is actually the remuneration for the R&D rather than the royalty or payment of the procurement of a patent, which is not compliant with the Rules and thus cannot be exempted from the income tax.