Hopes of buying from the United States came to nothing then, but the State Department now backs selling Taiwan technology to build its own.
That is a "breakthrough," Taiwan Defense Ministry spokesman Chen Chung-chi said, but he did not give details.
The deal will anger Beijing, coming soon after President Donald Trump cleared travel by top officials to Taiwan.
Washington switched recognition from Taipei to Beijing in 1979 but maintains trade relations with the island and is its main arms supplier.
President Tsai Ing-wen has pushed for Taiwan to build hardware domestically, including submarines.
Then-president George W Bush approved in 2001 the sale of conventional submarines, but there had not been progress on the deal.
Taiwan has four submarines bought abroad, but only two of them are fit for combat.
The first Taiwan-built submarine is expected within 10 years.