The Controlled Foreign Company (CFC) Rule for profit-seeking enterprises will be implemented from 2023
The National Taxation Bureau of the Northern Area (NTBNA), M.O.F., stated that in order to prevent multinational enterprises from establishing controlled foreign companies (CFC) in low-tax burden countries or jurisdictions to keep surplus earnings undistributed to avoid the tax burden in the R.O.C., Article 43-3 of the Income Tax Act was amended on July 27, 2016, to establish the CFC rule for profit-seeking enterprises. However, in order to avoid the impact on the global investment plan of Taiwanese businesses, the implementation date of the preceding rule is authorized to be determined by the Executive Yuan. In line with the expiration date (Aug. 16, 2021) of “The Management, Utilization, and Taxation of Repatriated Offshore Funds Act” and in response to the OECD Pillar Two-Global Minimum Tax, the CFC Rule for profit-seeking enterprises was approved by the Executive Yuan on Jan. 14, 2022 to be implemented from 2023 to follow the trend of international anti-tax avoidance and maintain tax fairness.
The Bureau further explained that, pursuant to the provisions of Paragraph 2, Article 30 of “Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax”, the investment income of a profit-seeking enterprise shall only be taxed in the profit realization year. As long as the shareholders’ meeting of the overseas invested company decides not to distribute the surplus, the profit-seeking enterprise does not need to recognize the investment income when declaring the profit-seeking enterprise Income Tax Return for the year, which leads to the result that the domestic profit-seeking enterprise does not distribute the surplus earnings of the overseas invested company to achieve the effect of deferred tax burden for a long time. However, after implementation of Article 43-3 of the Income Tax Act, for profit-seeking enterprises in the R.O.C. 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 affiliated enterprise is the CFC of the profit-seeking enterprise), the surplus earnings of the foreign affiliated enterprise shall be recognized as the profit-seeking enterprise’s investment income which is calculated according to the ratio and holding period of the shares or capital, and such investment income shall be included in taxable income of the current year. Taking into consideration the costs of tax collection for the tax authority and taxpayer in the implementation of the CFC Rule, the threshold for tax exemption was established, deduction of losses incurred in the preceding 10 years to offset the surplus of CFC, the dividends or surplus earnings from the foreign affiliated enterprises shall not be included in the taxable income of the receiving year, and foreign tax credit.
The Bureau explained using an example: Company A is located in a low-tax burden country or jurisdiction. Domestic Company B obtained 60% equity of Company A on April 1, 2023, making Company A a CFC of domestic Company B. The surplus earnings of Company A in 2023 was NT$36.5 million, and the legal reserve of Company A pursuant to the laws of the country or region where it is located is NT$3.65 million, then Company B should recognize investment income NT$14.85 million of Company A = (CFC’s surplus earnings of current year – the legal reserve or restricted distribution pursuant to the laws of the country or region where CFC is located – losses of past years assessed by the tax authority) × direct holding ratio × holding period = (NT$36.5 million – NT$ 3.65 million – NT$0) × 60% × 275/365 at declaration of the profit-seeking enterprise income tax return of 2023.
The Bureau emphasized that the CFC Rule for profit-seeking enterprises is one of the measures to optimize the fair and reasonable tax system to ensure the soundness of finances in the R.O.C. After the CFC Rule comes into force from 2023, when a profit-seeking enterprise files the income tax return of 2023 in 2024, it shall disclose relevant information on a prescribed form, and shall provide the following documents for the tax authority’s inspection and review:
1. The organization chart of the profit-seeking enterprise and its related parties, shareholding amounts and ratios of the shares or capital on the settlement date of the annual accounts of the current year.
2. The controlled foreign company’s statements for loss deduction of the past ten years.
3. The controlled foreign company’s investment income, details of the change of shareholding of the profit-seeking enterprise and its related parties, and the controlled foreign company’s financial statements. In response to the implementation of the CFC Rule, the website of the Taxation Administration, Ministry of Finance, R.O.C. provides relevant regulations and frequently asked questions about the CFC Rule for profit-seeking enterprises <https://www.dot.gov.tw/>, or click into Tax Reform \ Anti-Tax Avoidance Rules \ CFC Rules for Enterprises, for inquiries for enterprises of all industries. A dedicated service window for consultation has been set up in the National Taxation Bureau in each area. If you have any questions, you can also consult the local collection authority-in-charge. In case of the need of seminars and training courses concerning the CFC Rule for professional tax agents, the National Taxation Bureau in each area can also assist, thus facilitating the smooth implementation of the CFC Rule for profit-seeking enterprises.
If you have any questions, please call the toll-free number 0800-000-321 for professional service.
Reference URL：https://www.mof.gov.tw/Eng/singlehtml/f48d641f159a4866b1d31c0916fbcc71?cntId=133915a0b0964b5e85409b8d56763f17