According to the National Taxation Bureau of Kaohsiung, Ministry of Finance, in order to prevent individuals from establishing Controlled Foreign Company ("CFC") in low-tax burden countries or jurisdiction with no real operation, and influencing the earnings distribution policy of CFC, and retaining the overseas incomes that should be attributed to the individuals in the R.O.C., avoiding the tax obligations through share control or substantial control, the CFC system was established for individuals, which was approved by the Executive Yuan to become effective on January 1, 2023.
The Bureau states that a foreign company is a CFC of an individual if the individual and his/her related parties directly or indirectly holding 50% or more of the shares or capital of the company in a low-tax burden country or jurisdiction, or have significant influence on it. If an individual, with his/her spouse or relatives within the second degree of kinship directly own 10% or more of the CFC on December 31 of the current year, and the CFC does not meet the exemption requirements, the individual shall calculate the overseas business income from profits of the CFC for the current year based on the holding ratio and the holding period, and include it in the basic income with other overseas income. However, if the aggregate of the income in a filing unit is less than NT$ 1 million, it shall be excluded from the basic income.
The Bureau further provides an example. Individual K establishes Company B (CFC) in a low-tax burden country or jurisdiction with no real operation. Individual K holds 100% shares of Company B and then invests in Company A (10% owned by Company B) with real operation through Company B. Prior to the implementation of the CFC system for individuals, when the shareholders' meeting of Company A resolves to distribute all NT$100 million of the earnings, Company B is entitled to a dividend distribution of NT$10 million, and Individual K retains the earnings distributed to Company B through share control; therefore, Individual K is not required to report the overseas business income when filing his or her individual income basic tax return. However, after the implementation of the CFC system for individuals in 2023, whether or not Company B resolves to distribute its earnings, the earnings are deemed to be distributed and Individual K is required to calculate the income from CFC based on the direct share ratio and include the NT$10 million of earnings in the income basic tax for the current year. Assuming that Individual K's net taxable income and basic income deductions for 2023 are NT$0 and NT$6.7 million, and there are no other items and amounts that should be included in basic income, Individual K should be taxed with basic tax amount of NT$660,000【(basic income amount of NT$10 million - deduction amount of NT$6.7 million)*tax rate of 20%】.
The Bureau adds that the establishment of the CFC system for individuals is not a tax increase measure. It is intended to prevent individuals from avoiding their tax obligations in the R.O.C. through tax planning, so that they will bear the same tax burden as other individuals who file tax returns honestly in accordance with the law in order to maintain tax fairness. In addition, to avoid double taxation, the actual distribution of CFC dividends will no longer be included in the income tax, and there are mechanisms for foreign tax credits and cost adjustments upon the sale of CFC shares.
If you have any questions, please call the toll-free service number 0800-000-321 or contact the nearest branch or office of the National Taxation Bureau.
Provided by: Individual Income. Estate and Gift Tax Division
Contributor: Yu Jing-ying Telephone:(07)7256600 ext. 7213