Taiwan CFC Rules Will Take Effect on January 1, 2023

Frank Lin/Alvin Chen

In order to contain the deferred taxation resulting from profit-seeking enterprises' parking dividends overseas, Taiwan promulgated Article 43-3 of the Income Tax Act (ITA) on July 27, 2016 to introduce the Controlled Foreign Company (CFC) Rules for profit-seeking enterprises.

 

In addition to profit-seeking enterprises, individuals investing in overseas companies might intentionally park dividends overseas, so to defer taxation. Therefore, Taiwan amended Article 12-1 of the Income Basic Tax Act (IBTA) to introduce the CFC Rules for individuals.

 

As it is common for companies and individuals in Taiwan to invest in overseas companies, the Taiwan CFC Rules would have a significant compact, and so the above-mentioned amendments did not take effect immediately. After the "Management, Utilization, and Taxation of Repatriated Offshore Funds Act" cease to be effective on August 16, 2021, the Ministry of Finance (MOF) proposed to the Administrative Yuan that the Taiwan CFC Rules take effect on January 1, 2023.

 

For a foreign company invested by Taiwan shareholders, if it is deemed to be a CFC, then even before it makes actual dividends distribution, its shareholders in Taiwan (profit-seeking enterprises or individuals) should include the foreign company’s income in the Taiwan shareholder's income when reporting the income tax or the alternative minimum tax (AMT), according to the Taiwan shareholder's shareholding percentages and holding period in the foreign company.

 

The criteria for determining whether a foreign company is a CFC are as follows:

1.         A profit-seeking enterprise or an individual together with its related parties directly or indirectly holding 50% or more of a foreign company or has a significant influence on such a foreign company. The "related parties" include:

(1)    Affiliated enterprises; and.

(2)    Related parties other than the affiliated enterprises.

2.         The foreign company is located in a low-tax burden country or jurisdiction. The "low-tax burden country or jurisdiction" means:

(1)    The tax rate in the country or jurisdiction is equal to or less than 70% of the income tax rate for the profit-seeking enterprise in Taiwan (which is currently 20%); or

(2)    The country or jurisdiction imposes taxes on a territorial basis, and does not impose taxes on incomes derived offshore, or imposes taxes only after incomes are remitted back.

The MOF will announce a reference list of low-tax burden countries or jurisdictions.

3.         The foreign company does not have substantial operating activities in the country or jurisdiction. The "substantial operating activities" means:

(1)    The foreign company has a fixed place of business in its registered place and recruits employees to carry out actual operating business at the local area; and

(2)    The sum of the foreign company's investment income, dividends, interest, royalties, rental income, and profits resulting from the sale of assets accounts for less than 10% of the sum of its net operating income and its gross non-operating income.

4.         The current-year earnings of the foreign companies are above certain standard or the aggregate current-year earnings of all the foreign companies invested are above certain standard. The "certain standard" here is set to be NTD7,000,000 by the MOF.

 

For profit-seeking enterprises, the CFC income recognized is subject to the ITA and so they should pay the income tax accordingly. As profit-seeking enterprises are required to file certain information about their affiliated enterprises when filing the income tax report, theoretically it should be easier for profit-seeking enterprises to cope with the Taiwan CFC Rules. However, please note that the "related parties" under the Taiwan CFC Rules include the related parties other than the affiliated enterprises, and so profit-seeking enterprises should carefully recognize their related parties.

 

For individuals, the CFC income recognized is subject to the IBTA and so they should pay the alternative income tax accordingly. As individuals are not required to file the related party information when filing the income tax report (including the AMT report), the individuals might not be familiar with the reporting requirement under the Taiwan CFC Rules and should pay close attention to it. Especially, the "related parties" include the related parties other than the affiliated enterprises. For example, the trustee of a trust established by an individual and the non-settlor beneficiaries of the trust, as well as the partners and their spouses of a partnership to which the individual is a partner, are all considered the individual's "related parties."

 

For profit-seeking enterprises and individuals, the MOF respectively promulgated the "Regulations Governing Application of Accrued Income from Controlled Foreign Company for Profit-Seeking Enterprise" and the "Regulations Governing Application of Accrued Income from Controlled Foreign Company for Individuals" (collectively the "CFC Application Regulations"). Furthermore, in order to enhance the MOF's consistencies in reviewing the CFC reporting filed by profit-seeking enterprises or individuals, the MOF also respectively promulgated the "Regulations Governing Reviewing Standards of Accrued Income from Controlled Foreign Company for Profit-Seeking Enterprise" and the "Regulations Governing Reviewing Standards of Accrued Income from Controlled Foreign Company for Individuals" (collectively the "CFC Reviewing Standards Regulations"). In essence, profit-seeking enterprises and individuals should follow the CFC Application Regulations to file their CFC reporting, while the MOF should follow the CFC Reviewing Standards Regulations to review the CFC reporting filed by profit-seeking enterprises or individuals.

 

Taiwan CFC Rules are newly introduced rules to comply with the international anti-tax avoidance trends, and are not previously seen in the Taiwan tax system. Therefore, the MOF commenced many kinds of explanations and promotions more than 1 year before the Taiwan CFC Rules officially take effect, in order to a smooth transition into the CFC regime. Profit-seeking enterprises and individuals investing in overseas companies should pay close attentions to the relevant regulations and policies promulgated by the MOF.

 

Lee and Li's tax team comprises attorneys and CPAs licensed in Taiwan and several other jurisdictions and keeps up with the most advanced development in both domestic taxation and international taxation. Our tax team closely cooperates with L&L, Leaven & Co., CPAs and has an in-depth understanding on the taxation practice of the government authorities. If you have any questions about the Taiwan CFC Rules, please contact Mr. Frank Lin or Mr. Alvin Chen in our tax team.