Look out! The Profit-Seeking Enterprise Controlled Foreign Company Rules will become effective in 2023.
The National Taxation Bureau of Kaohsiung expressed that, to respond to the international anti-tax avoidance trends, the Executive Yuan has approved the Profit-Seeking Enterprise Controlled Foreign Company (CFC) Rules (hereinafter referred to as the CFC Rules) on January 14, 2022, and the CFC Rules would become effective in 2023.
The Bureau explained that the CFC Rules were 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 (i.e., the CFC), or having a significant influence on such a CFC. The current year surplus earnings of the CFC shall be recognized as the profit-seeking enterprise’s investment income, which is calculated based on its shareholding ratio and shareholding period, and such investment income shall be included in taxable income of the current year. Nevertheless, the taxation under the CFC Rules may be exempted when the CFC has substantial operating activities in its country or jurisdiction; or the current year surplus earnings of the CFC are below NTD7,000,000.
The Bureau further made an example: A domestic company, Company A, established Company B, whose common stock is 100% owned by Company A, in a low-tax burden country or jurisdiction; and then, through Company B, reinvested Company C that has substantial operating activities. Before the implementation of the CFC Rules, when Company C distributes NTD200 million to Company B as surplus earnings, Company A can, through equity control, retain the surplus earnings received from Company C in Company B without having it distributed, so that Company A does not have to recognize the amount as its investment income and will be able to avoid tax liabilities derived therefrom in our country. After the implementation of the CFC Rules, whether Company B decides to distribute the said surplus earnings or not, it will be determined as being distributed: Company A has to, based on its shareholding ratio, recognize Company B’s surplus earnings as its investment income and incorporate it into its annual income tax. That is, when Company A declares its profit-seeking business income tax of the year, it should recognize the investment income of its CFC (i.e., Company B) and pay the profit-seeking business income tax of NTD40 million. 【(Company B’s current year surplus earnings of NTD200 million × direct shareholding ratio of 100% × possession period of 365 days/365 days) × tax rate 20%】.
The Bureau added that the Profit-Seeking Enterprise Controlled Foreign Company Rules was not a tax increase measure, but was designed to prevent profit-seeking enterprises to avoid its tax liabilities in our country through tax planning. Besides, the Bureau said that, to avoid repeated taxation and maintain fair and reasonable taxation, the CFC Rules was designed with mechanisms of foreign tax credit and, when disposing CFC equity, the profit-seeking enterprise may adjust its cost and amount of received CFC dividends without incorporating them into the income tax. If there are any questions, feel free to dial the free service hotline 0800-000-321 for more information or go to the Bureau’s website (https://www.ntbk.gov.tw) to make an inquiry online through the national tax smart customer service “National Tax Assistant”.
Provided by: Profit-seeking Enterprise Income Tax Division
Contact person: Ms. Wang telephone number: (07)7256600 ext.7140
Reference URL：https://www.mof.gov.tw/Eng/singlehtml/f48d641f159a4866b1d31c0916fbcc71?cntId=98ab7f2cc6334fdc817ee1b21bb51766