On Jan. 15, 2024, the U.S. House of Representatives (the “House”) overwhelmingly passed the United States-Taiwan Expedited Double-Tax Relief Act (H.R. 33) by a decisive vote of 423-1. This bill aims to address double taxation on cross-border investments between the United States and Taiwan, a critical step to strengthen bilateral economic ties.
The act introduces treaty-like benefits for qualified Taiwan residents and authorizes the President to negotiate a formal tax agreement that aligns with the 2016 United States Model Income Tax Convention (“U.S. Model Tax Treaty”). Key provisions include reductions in withholding taxes, application of permanent establishment (“PE”) rules and defining eligibility for Taiwan residents and corporations.
H.R. 33 builds upon previous bipartisan efforts that faced procedural hurdles, ensuring streamlined passage by reintroducing the bill as a standalone measure. The bill now awaits Senate consideration, where its approval is vital to fostering investments in critical industries like semiconductors and securing reciprocal benefits for U.S. citizens in Taiwan. Upon enactment, this bill will alleviate current tax burdens and pave the way for stronger U.S.-Taiwan economic collaboration.
Taiwan is currently the largest trading partner of the United States without an income tax treaty. While a tax deal with Taiwan has been in the works for years to bolster economic ties and alleviate instances of double taxation, a deal has been difficult to navigate because the U.S. does not formally recognize Taiwan as a sovereign nation. Instead, the United States recognizes Taiwan as a territory of China and as such, the United States has had to move forward carefully so as to not heighten tensions with China and undermine China’s sovereignty over Taiwan.
Due to the lack of formal diplomatic relations between the United States and Taiwan, traditional tax treaties cannot be negotiated. H.R. 33 introduces an alternative approach to resolving double taxation issues. The bill includes two primary components:
The bill previously passed the House in January 2024 as part of the larger Tax Relief for American Families and Workers Act (H.R. 7024). Despite bipartisan support for the double taxation remediation measure, the bill was rejected in an August 2024 procedural vote in the Senate due to objections unrelated to the Taiwan provisions. Specifically, disagreement over a child tax credit provision in the larger package hindered its advancement.
Lawmakers at the end of the last Congress pushed hard for Senate and House leaders to prioritize the measure, warning that delays could negatively impact Taiwanese investments in critical sectors of the U.S. economy, such as the semiconductor industry. By introducing H.R. 33 as a standalone bill, the House expedited its passage in the current session.
H.R. 33 would create a new section 894A of the Code, offering significant benefits to Taiwan residents (“qualified residents of Taiwan”), akin to those provided under the U.S. Model Tax Treaty. The provisions would be grouped into four main categories:
Since H.R. 33 mandates full reciprocal benefits, the legislation would not take full effect until Taiwan provides the same set of benefits to U.S. persons with income subject to tax in Taiwan, mirroring the reciprocal nature of a tax treaty.
An analysis of the key features of H.R. 33 and a comparison with the U.S. Model Tax Treaty and the existing U.S. tax treaty network, for the four main categories described above follows:
Reduction of withholding taxes: H.R. 33 would propose a reduction in withholding tax rates for qualified residents of Taiwan on various U.S.-source income, including interest, dividends, and royalties. Specifically, H.R. 33 would set a 10% withholding rate for most income types and a 15% rate for dividends, which can be further reduced to 10% if certain ownership conditions are met. This approach aligns with Articles 10, 11 and 12 of the U.S. Model Tax Treaty but is notably less generous than typical treaty provisions. Under many U.S. tax treaties, the withholding tax on dividends is typically reduced from 30% to 5% if the recipient corporation owns at least 10% of the voting stock of the payor, without any holding period requirement. Additionally, some treaties may reduce the rate to 0%, but this often comes with more stringent ownership requirements and a holding period condition. Finally, H.R. 33 would not eliminate withholding taxes on interest or royalties, which contrasts with the more favorable treatment often found in U.S. tax treaties.
Application of PE rules: H.R. 33’s treatment of PE would introduce complexities that diverge from standard U.S. tax treaty practices. Under many U.S. tax treaties, business profits are only taxable in the U.S. if a foreign entity has a PE and only profits attributable to that PE are subject to U.S. tax. In contrast, H.R. 33 would subject qualified residents of Taiwan to U.S. tax on income that is “effectively connected” to their U.S. PE, potentially broadening the scope of taxable income compared to the more restrictive “attributable to” standard found in treaties. This could lead to a situation where income not typically taxed under treaty provisions may be subject to U.S. taxation under H.R. 33, particularly due to the inclusion of the “residual force of attraction” rule,1 which is generally disavowed in U.S. tax treaties.
Income from employment: H.R. 33 would exempt qualified wages for personal services performed within the United States from U.S. taxation if paid by an employer to a qualified resident of Taiwan who is either: (i) not a U.S. resident, or (ii) employed as a member of the regular component of a ship or aircraft operated in international traffic. The definition of qualified wages aligns with Article 14 of the U.S. Model Tax Treaty including amounts paid by or on behalf of a non-U.S. person, and not borne by a U.S. PE, in the form of wages, salaries or similar remunerations with respect to personal services performed in the United States.
Directors’ fees, income derived as an entertainer or sportsman, income derived as a student or trainee, pensions, or amounts paid with respect to employment with the United States, any State, or any U.S. possession, or other amounts specified in regulations or guidance are not included within the scope of qualified wages. However, an exemption is provided under a different provision of the bill if the compensation paid to the entertainer or athlete for the taxable year does not exceed $30,000 and is not effectively connected with a U.S. PE.
Determination of qualified residents of Taiwan: H.R. 33 would exclusively benefit “qualified residents of Taiwan,” similar to the limitation on benefits (“LOB”) provisions found in the U.S. Model Tax Treaty and nearly all U.S. tax treaties. This term is intended to ensure that only individuals and entities with legitimate connections to Taiwan could access the benefits of H.R. 33.
Individuals: A qualifying individual under H.R. 33 is defined as someone who is liable for Taiwanese tax due to their domicile or residence. In line with the saving clauses found in U.S. tax treaties, Prop. section 894A(c)(1)(B) excludes “United States persons” from the benefits of H.R. 33. According to section 7701(a)(30), this term includes U.S. citizens and permanent residents, indicating that only non-resident individuals may qualify as residents of Taiwan. However, a dual residency provision broadens eligibility to include certain permanent residents who are liable for Taiwanese tax if they meet one of the following criteria: (1) they have a permanent home only in Taiwan; (2) they have a permanent home in both the United States and Taiwan but their center of vital interests is closer to Taiwan; or (3) they have their habitual abode in Taiwan and do not satisfy the first two conditions.
1. Ownership/base erosion test: A Taiwanese corporation satisfies the ownership/base erosion test if both of the following requirements are met: (a) Ownership test: at least 50% of the corporation’s vote and value must be owned, directly or indirectly, by qualified residents of Taiwan; and (b) Base erosion test: less than 50% of the corporation’s gross income is reduced through payments made to persons who are neither qualified residents of Taiwan nor certain U.S. persons who meet comparable conditions.
2. Publicly traded test: A Taiwanese corporation satisfies the publicly traded test if its principal class of shares, as well as any disproportionate class, is primarily and regularly traded on a Taiwanese exchange. Alternatively, if the corporation’s primary place of management and control is in Taiwan, the shares only need to be regularly traded on a Taiwanese exchange.
3. Qualified subsidiary test: A Taiwanese corporation satisfies the qualified subsidiary test if it meets the base erosion requirement outlined previously and is owned, directly or indirectly, by five or fewer companies that also satisfy the publicly traded test. Alternatively, the corporation can be owned by domestic corporations whose shares are primarily and regularly traded on a U.S. exchange. The intermediate foreign entity look-through rule mentioned earlier also applies for this test.
Alternatively, certain items of income derived from the United States may be treated as the income of qualified resident of Taiwan if the corporation satisfies an active trade or business test.
Taiwanese corporations may qualify as residents concerning certain items of income that emanate from, or are incidental to, their active trade or business in Taiwan. However, the definition of an active trade or business excludes activities such as operating as a holding company, supervising or administering affiliates, providing group financing, or merely making or managing investments. Notably, investment activities may qualify if conducted actively by banks, insurance companies or registered securities dealers in the ordinary course of their business.
While this provision aligns with the U.S. Model Tax Treaty, it is broader than similar provisions found in the U.S. tax treaty network. For income derived from a U.S. trade or business or from connected persons, H.R. 33 would impose an additional substantiality requirement, which is stricter than comparable provisions in many U.S. tax treaties.
Additionally, with the exception of the publicly traded test, H.R. 33 would not extend the benefits to residents of “foreign countries of concern” or entities owned or controlled by such residents. The People’s Republic of China is included in this category, meaning that Chinese entities qualifying under the U.S.-China tax treaty are not eligible for the foreign entity look-through rule. Furthermore, Taiwanese corporations that meet the active trade or business test would be ineligible for benefits if at least 50% of their ownership is held directly or indirectly by residents of the People’s Republic of China.
The bill grants the President the authority to negotiate and finalize a tax agreement with Taiwan. This agreement must align with standard bilateral U.S. tax treaties and adhere strictly to the U.S. Model Tax Treaty.
The bill requires the President to notify Congress in writing at least 15 days in advance before negotiations commence. Following the start of the negotiations, the President must provide regular updates on the agreement’s progress every 90 days, and subsequently every 180 days.
The Treasury Department is mandated to maintain regular consultations with the relevant congressional committees and meet with the chair or ranking member upon request.
Once a deal is reached, within 270 days, the President must submit the final text and a technical explanation of the agreement. Concurrently, the Treasury Department must propose any necessary changes to existing laws to facilitate the agreement’s implementation. Any provisions that conflict with the Code will be rendered ineffective under the bill.
For the agreement to take effect, the following conditions must be met:
On Jan. 16th, the bill proceeded to the Senate for consideration, where it was read twice and referred to the Committee on Finance. Upon enactment, it will address current tax burdens and lay the groundwork for future agreements aimed at fostering stronger economic ties between the two economies.
On Jan. 23rd, U.S. Senators Jim Risch (R-Idaho) and Jeanne Shaheen (D-N.H.), the chairman and ranking member of the Senate Foreign Relations Committee, along with Senators Mike Crapo (R-Idaho) and Ron Wyden (D-Ore.), the chairman and ranking member of the Senate Finance Committee, introduced legislation (S-199) to streamline double-tax relief on U.S.-Taiwan cross-border investments. The bill also authorizes the President to negotiate a tax agreement with Taiwan to provide broader bilateral tax relief.
This legislation serves as a companion bill to H.R. 33 and incorporates provisions from the U.S.-Taiwan Expedited Double-Tax Relief Act and the U.S.-Taiwan Tax Agreement Authorization Act. Both of these measures were successfully passed in the 118th Congress by the Senate Finance Committee and the Senate Foreign Relations Committee, respectively.
[1] Section 864(c)(3) and Reg. section 1.864-4(b).
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