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The Treaty of Taipei acknowledged the terms of the Treaty of San Francisco in which Japan renounced all the rights, nominal rights, and claims concerning Taiwan and Penghu. In addition, all treaties made between China and Japan before 1942, such as the Treaty of Shimonoseki were voided. Like the Treaty of San Francisco, the Treaty did not explicitly grant sovereignty of Taiwan and Penghu to the ROC, a point made by advocates of Taiwan independence to justify self-determination.

At the time the treaty was signed, the ROC government was in dispute with PRC over the sovereignty of China. The Treaty suggested that all the inhabitants of Taiwan are of Republic of China nationality and Japan recognized that ROC sovereignty was limited to the islands of Taiwan and the Pescadores:

For the purposes of the present Treaty, nationals of the Republic of China shall be deemed to include all the inhabitants and former inhabitants of Taiwan (Formosa) and Penghu (the Pescadores) and their descendants who are of the Chinese nationality in accordance with the laws and regulations which have been or may hereafter be enforced by the Republic of China in Taiwan (Formosa) and Penghu (the Pescadores).

In the Exchange of Notes following the Treaty, the Japanese delegate Isao Kawada specifically defined the Chinese government which the Japan government was signing the Treaty with:

In regard to the Treaty of Peace between Japan and the Republic of China signed this day, I have the honor to refer, on behalf of my Government, to the understanding reached between us that the terms of the present Treaty shall, in respect of the Republic of China, be applicable to all the territories which are now, or which may hereafter be, under the control of its Government.

In 1972 upon establishment of diplomatic relations with the People's Republic of China, Japanese Foreign Minister Ohira announced that the treaty had become obsolete and was therefore rescinded (as he had been requested by the PRC to do), though the the legality of the move was subject to some debate. According to the Joint Communique of the Government of Japan and the Government of the People's Republic of ChinaThe Joint Communique of the Government of Japan and the Government of the People's Republic of China was signed in Beijing on September 29, 1972. This established diplomatic relations between Japan and the People's Republic of China and resulted in the se, Japan understood and respected (but not necessarily recognized) the PRC position that Taiwan was part of the PRC.

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