Following the global developments and trends in anti-tax avoidance, Taiwan has incorporated CFC Rules in Income Tax Act in 2016 and Income Basic Tax Act in 2017. Though CFC Rules have not come into effect officially, the effective date is just around the corner. The tax amnesty legislation to encourage fund repatriation back to Taiwan has officially expired in August 2021, and the incidental resolution of this legislation requests that the Executive Yuan should decide the effective date of CFC Rules within one year of the expiration of the tax amnesty legislation, which means the CFC Rules will come into force no later than 2022. In the past years, taxation on overseas profits was deferred until the dividends were distributed to the Taiwan parent company. Once the CFC Rules take effect, profits retained in offshore low taxed entities might be subject to corporate income tax under certain circumstances in accordance with the CFC Rules. This article will guide you through some important provisions of CFC Rules and the implications of the implementation of CFC Rules.

CFC Definition

Under the CFC Rules, if a Taiwanese company, by itself or with its related parties, directly or indirectly holds 50% or more of shares or capital of a foreign entity registered in a low-tax country or jurisdiction, or has significant influence on such a foreign entity, the foreign entity is a controlled foreign company. Whether a foreign entity is registered in a low-tax country or jurisdiction is determined based on a reference list of low-tax countries or jurisdictions announced by Ministry of Finance. The term significant influence refers to where the enterprise and its related parties have the dominant power over the personnel, finance, or business operation of the foreign entity.

CFC Rules apply on individuals as well. For any individual and his/her related parties directly or indirectly holding 50% or more of the shares or capital of a foreign entity registered in a low-tax country or jurisdiction, or having a significant influence on such a foreign entity, the foreign affiliated enterprise is a controlled foreign company.

Qualified investment income generated from a controlled foreign company will be deemed distributed and taxable regardless of whether there is dividend distribution to the Taiwan parent company. As for individuals, only when the individual himself/herself, with his/her spouse or relatives within the second degree of kinship hold up to 10% of the shares or capital of the foreign affiliated enterprise on December 31 will the qualified investment income be counted into the alternative minimum tax of that individual.

Exempmions

Not all CFCs are subject to the CFC Rules. If a controlled foreign company meets one of the following thresholds specified in the CFC Rules, the controlled foreign company is exempt from the CFC Rules:

•     The controlled foreign company carries out substantial economic substance in its country or jurisdiction. To meet this requirement, a CFC shall have a fixed place of business in  its registered jurisdiction where it recruits employees to carry out active business operations, or its annual passive income(e.g. investment income, dividends, interest, royalties, rental income, and profits resulting from the sale of assets) is less than 10% of its total income.

•     The current-year earnings of a controlled foreign company are less than NTD 7 million. However, if the sum of the current-year earnings or losses of all of the controlled foreign companies under the control of the same Taiwan parent company, or, in the case of individuals, the individual and his/her spouse, exceeds NTD 7 million, the current-year earnings are still subject to CFC Rules.

Definition of CFC Earnings

The current-year earnings of a CFC are the sum of the net income, the undistributed earnings of the current year transferred from other comprehensive income, and the distributed earnings of the invested enterprise of a non-low-tax country or jurisdiction, excluding investment income or loss derived from an invested enterprise of a non-low-tax country or jurisdiction, to be recognized under the equity method. Moreover, to recognize the income based on the holding ratio, the Taiwan parent company or an individual shall deduct the legal reserve or restricted distributable earnings, as well as the losses of previous years assessed by the tax authority, from the current-year earnings. The financial statements are required to be not only complied with Taiwan official authorized accounting standards but certified by public accountant.

Our Insight

Before the CFC rules come into effect, profit-seeking enterprises and individuals should  launch to consider to dealing with the impacts arising from the anti-avoidance trend. For instance, to meet the requirements for exemption from CFC rules, profit-seeking enterprises and individuals can evaluate the feasibility of CFC’s carrying out active business operations. Profit-seeking enterprises and individuals should also actively review the investment structure, so as to explore the possibility of adjusting the investment structure as well as mitigating the adverse impacts, taking into account the possible tax consequences and potential scope within CRS implement during the process of adjustments. Given the rapidly changing business environment, the risk management and the strategic layout of the group have become increasingly critical.