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Relaxation of taxation rules for CFCs’ profits from invested enterprises in non-low-tax jurisdictions recognized under the equity method

The Controlled Foreign Company ( CFC) system was officially launched in 2023. To facilitate the promotion of the CFC system, the Ministry of Finance has referred to outside opinions to amend the “Regulations Governing Application of Recognizing Income from Controlled Foreign Company for Profit-Seeking Enterprise”(hereinafter referred to as the CFC Regulations) on December 21. The purposes are to gather comprehensive data regarding the implementation of our country’s CFC system and, considering the investment patterns of Taiwanese businesses overseas, to exempt CFCs’ profits received from invested enterprises in non-low-tax jurisdictions recognized under the equity method for the 2022 fiscal year and previous years from taxation in the current year, if CFCs have reached a resolution on the distribution of profit before March 31, 2024.

The National Taxation Bureau of Kaohsiung, Ministry of Finance, has expressed that, according to the CFC Regulations before the amendment, CFCs’ profits from invested enterprises in non-low-tax jurisdictions recognized under the equity method may be recorded as deductions and the profits actually distributed by the invested enterprises (or their realized investments losses) may be recorded as additions(or deductions). Therefore, prior to the aforesaid amendment, the profits distributed in 2023 should have been recognized as CFCs’ profits for the fiscal year 2023. Nevertheless, the investment income allocated to CFCs in the fiscal year 2023 mostly consists of profits accumulated before the implementation of the CFC system, and some profits from invested enterprises in non-low-tax jurisdictions in 2022 are restricted by local regulations, which allowed for their distribution only in 2023. This amendment to the CFC Regulations has relaxed rules governing the distribution of CFCs’ profits from invested enterprises in non-low-tax jurisdictions recognized under the equity method. Specifically, profits for the 2022 fiscal year and previous years may not be recorded as additions and may be exempted from taxation as CFCs’ profits for the current year, if the CFC has reached a resolution on the distribution of profit before March 31, 2024.

The Bureau further explained with an example: A domestic company, Company X, invests in a CFC in low-tax jurisdictions, Company A, which then reinvests in a company in non-low-tax jurisdictions, Company B. If Company B reaches a resolution on the distribution of profits for 2022 and the previous year before March 31 of this year, Company B shall, within the prescribed income tax return filing period (from May 1 to May 31), submit the application along with relevant certification documents (e.g., Company B’s shareholder agreement or minutes of shareholders’ meeting) to avoid recording Company A’s profits for the current year as additions and for taxation only after Company A actually receives the profits in Taiwan.

The Bureau would like to remind taxpayers that, for CFCs whose profits received from invested enterprises comply with conditions after the aforementioned amendment, the taxpayer should provide sufficient evidence of the related documents for profit distribution within the prescribed income tax return filing period in order to be exempted from recording the CFC’s current profits as additions. Moreover, as this May marks the first income tax return filing period after the launch of the CFC system, taxpayers are encouraged to familiarize themselves with relevant regulations, the format of income tax return filing documents, and the necessary documentation, in order to safeguard their own rights and interests. If you have any questions, please 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 by clicking “Home > Themes > Taxation > Income Tax > Anti-tax Avoidance Rules.”

Contact person: Profit-seeking Enterprise Income Tax Division, Ms. Zhu   Tel: (07)7256600 ext.7141 

 

Issued:National Taxation Bureau of Kaohsiung Release date:2024-05-03 Last updated:2024-05-03 Click times:224