Taiwan's Ministry of Finance recently issued two notices summarizing the enforcement of the controlled foreign company (CFC) rules for enterprises and individuals from 2023.
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Summary of the CFC Rules Enforced from the Taxable Year 2023 for Enterprises
The National Taxation Bureau of the Southern Area, Ministry of Finance (hereinafter "the Bureau"), indicated that to prevent any multinational enterprise from establishing a controlled foreign company (CFC) in a low-tax burden jurisdiction to retain earnings in the CFC for avoiding tax obligation in the R.O.C., the added Article 43-3 of the Income Tax Act was promulgated to formulate the CFC rules for enterprises on July 27, 2016. However, considering the influence on the global investment strategies arranged by Taiwanese enterprises, the enforcement date of the CFC rules would be determined by the Executive Yuan. After the expiration of the Management, Utilization, and Taxation of Repatriated Offshore Funds Act and OECD addressing Global Anti-Base Erosion rules, the Executive Yuan designated that the CFC rules would be enforced from taxable year 2023 for enterprises on January 14, 2022 to follow the trend of international anti-tax avoidance and to maintain the fairness of taxation.
In order to help enterprises gain a quick understanding of the CFC rules, the Bureau summarized the main points as follows:
1. For any profit-seeking enterprise and its related parties directly or indirectly holding 50% or more of shares or capital of a foreign affiliated enterprise registered in a low-tax burden country or jurisdiction, or having a significant influence on such a foreign affiliated enterprise, the foreign affiliated enterprise is a CFC.
2. A CFC that carries out substantial operating activities in its country or jurisdiction, or the current-year earnings of which are no more thanNT$7 million, may be exempt from the CFC rules.
3. To recognize its investment income based on its direct holding ratio and holding period of the shares or capital of a CFC, a profit-seeking enterprise shall deduct the legal reserve or restricted distributable earnings in accordance with the laws of the country or jurisdiction of the CFC, as well as the losses of past years assessed by the tax authority, from the earnings of the current year of a CFC, and such investment income shall be included in its taxable income of the current year.
4. To avoid double taxation, when a profit-seeking enterprise has received distributed dividends or earnings from each of its CFCs, the portion that has been recognized as investment income and has been included in the taxable income of the current year, shall not be included in the taxable income of the distribution year. Moreover, the taxes paid for the distributed dividends or earnings in accordance with the tax laws of the source country or jurisdiction, may be applicable for foreign tax credits.
For example, on January 1, 2023, Company X in Taiwan has acquired 80% shares of Company A, registered in a low-tax burden country without conducting substantial operating activities. Therefore, Company A is a CFC of Company X. The earnings of Company A in fiscal year 2023 are NT$20 million, and the legal reserve of Company A is NT$2 million. Company X shall declared its investment income of NT$14.4 million ((The current-year earnings NT$20 million – the legal reserve NT$2 million) × direct holding ratio 80% × holding period 365/365) in the taxable income of the taxable year 2023.
The Bureau would like to remind profit-seeking enterprises that the CFC rules would be enforced from the taxable year 2023. Relevant regulations and FAQs are available at the website of the Bureau (https://www.ntbsa.gov.tw/English) "Home > Themes > Taxation > Profit-seeking Enterprise income tax > Anti-tax Avoidance Rules > CFC Rules for Enterprises." For additional information, please contact us through our toll-free number 0800-000-321. We are at your service.
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The CFC Rules for Individuals to Be Enforced from January 1, 2023
The National Taxation Bureau of the Southern Area (hereinafter "The Bureau"), Ministry of Finance indicated that the controlled foreign company (hereinafter "CFC") rules for individuals will be enforced from January 1, 2023. The Bureau provided an overview of the CFC rules for individuals in response to frequently asked questions from the public.
The Bureau explained that the CFC rules for individuals were established by Article 12-1 of the Income Basic Tax Act. Whether an individual is subject to the CFC rules is determined by their residency of the R.O.C. in a taxable year in accordance with the Income Tax Act. If an individual is a non-resident of the R.O.C. in a taxable year in accordance with the Income Tax Act, the individual is not subject to the CFC rules.
Next, a foreign enterprise is treated as a CFC if the enterprise fits the CFC definitions of control requirements and establishment in a low-tax country or jurisdiction. Control requirements are further classified into "equity control" or "substantial control". The former means that individuals and their related parties directly or indirectly hold 50% or more of the shares or capital of a foreign enterprise. The latter means that individuals and their related parties have a significant influence on the personnel, finance, or business operation of a foreign enterprise.
Furthermore, even though a foreign enterprise fits the definitions of CFC, there are two exemption thresholds for an individual to exempt from the CFC rules once the CFC is eligible for one of the thresholds below.
First, a CFC conducts substantial operating activities.
Second, a CFC earns the current-year earnings of no more than NT$7 million. However, if the sum of the current-year earnings or losses of all of the CFCs under the control of the individual, his or her spouse, and dependents who file a joint consolidated income tax return in accordance with the Income Tax Act exceeds NT$7 million, the current-year earnings of each CFC shall be subject to the CFC rule for individuals.
In sum, if an individual is a resident of the R.O.C. in a taxable year in accordance with the Income Tax Act, and a foreign enterprise fits the definitions of CFC which is also not eligible for the exemption thresholds, then when that individual along with his or her spouse and relatives within the second degree of kinship who directly holds 10% or more of CFC shares, the individual shall calculate CFC business income and include it with the amount of other overseas income in the basic income of the current year. As for the calculation of CFC business income, it equals the amount that the current-year earnings of the CFC, deducting from the legal reserve or restricted distributable earnings and the losses of past years assessed by the tax authority, times individual's direct holding ratio and holding period.
For example, assume Company A, without conducting substantial operating activities, is established in a low-tax country or jurisdiction. Individual X owns 60% shares of Company A on April 1, 2023, which means Company A is a CFC of Individual X for meeting equity control of the control requirements. The earnings of Company A in 2023 are NT$36.5 million, and the legal reserve of Company A is NT$3.65 million. Individual X shall calculate overseas business income NT$14.85 million 【=（NT$36.5 million – NT$3.65 million）× 60% × (275/365) days】 to file in the basic income of the taxable year 2023.
The Bureau pointed out that the earnings retained in the CFC would not be subject to tax until the earnings were distributed before the implementation of the CFC rules. However, the undistributed earnings shall be regarded as distributed and calculated as CFC business income after the implementation of the CFC rules. Besides, to eliminate double taxation, the amounts of dividends or earnings from a CFC that has been calculated as CFC business income and subject to tax shall not be included in the basic income again when an individual receives dividends or earnings afterwards. The CFC rules for individuals only change the time point of taxation rather than levying additional taxes. The Bureau would like to remind people to pay more attention to the CFC rules and related regulations to maintain their rights and interests.