Ang Lee's latest film Lust, Caution will not be in the running for next year's best foreign language film Oscar because it broke the entry rules.
Lee won an Oscar for Brokeback Mountain in 2006
Officials rejected the award-winning film because some of the key crew members were not local, said Taiwanese official Chen Chun-Jer.
Oscar spokeswoman Teni Melidonian said too few Taiwanese workers were involved in the production.
A record 63 countries have submitted films in the foreign language category.
"We and Ang Lee are disappointed... this movie was also popular in Taiwan," said Chen Chun-Jer, acting director of the Taiwanese government's film department.
Stanley Hung, secretary-general of Taiwan's Motion Picture and Drama Association, said the group had appealed the rejection of Lust, Caution but had not heard back yet.
The movie was given a restrictive NC-17 rating in the US. Sex scenes were also cut for audiences in China, according to Screen Daily.
The film, based on a novella by Eileen Chang, follows a Chinese woman in Japanese-occupied Shanghai during World War II, who finds herself in the centre of a plot to seduce and kill a married enemy collaborator.
It won the prestigious Golden Lion award at this year's Venice film festival.
Lee previously won the best director Oscar for Brokeback Mountain in 2006.
This year's Foreign Oscar entries include Poland's Katyn, directed by Andrzej Wajda and Yin Li's The Knot for China.