The National Taxation Bureau of the Northern Area, Ministry of Finance (NTBNA) stated that, to prevent profit-seeking enterprises from using Controlled Foreign Companies (CFC) established in low-tax jurisdictions – which lack substantial operating activities – to avoid tax liabilities, Taiwan implemented the CFC rules starting from the 2023 fiscal year. Unless a CFC meets the exemption criteria stipulated in Paragraph 1, Article 43-3 of the Income Tax Act, a profit-seeking enterprise must calculate and recognize its investment income based on its shareholding or capital contribution ratio and holding period. This income must be included in the enterprise’s taxable income for the current year.
The NTBNA explains that the CFC rules include exemption provisions to ensure that the normal operations of multinational enterprises are not adversely affected. The exemption refers to CFCs that have substantial operating activities, or annual earnings of NT$7 million or less. However, the term “substantial operating activities” is easily misused. According to Paragraph 2, Article 5 of the Regulations Governing Application of Recognizing Income from Controlled Foreign Company for Profit-Seeking Enterprise, CFCs having “substantial operating activities” refer to those which have a fixed place of business in its registered location and recruits employees to carry out actual operating business in the local area, and the sum of its investment income, dividends, interest, royalties, rental income, and gains on the sale of assets for current year constitutes less than 10% of the sum of its net operating income and non-operating income.
The NTBNA provides the following example: When filing its profit-seeking enterprise income tax, Company A claimed that its 100% owned CFC, B, having a fixed place of business and local employees, with passive income below 10%, thus qualifies for the exemption. Upon investigation, the Bureau found that its annual rent was only approximately NT$20,000, with no recorded utility expenses (water/electricity). Employment contracts also revealed that employees were responsible for overseas market sales and were not actually stationed at the place of registration. The CFC, B, did not meet the conditions for exemption, and the Bureau recognized NT$600 million in investment income for Company A, resulting in a tax deficiency of NT$120 million.
The NTBNA would like to emphasize that the CFC rules are designed to enhance the effectiveness of Taiwan’s anti-avoidance mechanism while balancing the reasonable operational needs of multinational profit-seeking enterprises. Enterprises should evaluate the actual operating status of their CFCs and disclose relevant CFC information in the prescribed format during the annual income tax settlement filing. If the exemption criteria are met, the taxpayer must also attach supporting documents and file within the statutory deadline. For more information, please check the relevant laws and regulations on the NTBNA’s website (https://www.ntbna.gov.tw) or dial our toll-free service number 0800-000321. The NTBNA is pleased to provide further consultation services upon inquiry.
〔Contact person： Mr. Chang, Head, Profit-seeking Enterprise Income Tax Division. ;Tel：(03)3396789, ext. 1320〕