According to the National Taxation Bureau of Taipei, Ministry of Finance, in order to prevent any multinational enterprise from establishing a controlled foreign company (CFC) in a low-tax country or jurisdiction to retain earnings in the CFC for tax avoidance, Article 43-3 of the Income Tax Act was promulgated on July 27, 2016 to set the CFC rules for enterprises. To follow the international trend and reinforce sound anti-avoidance systems, the Executive Yuan designated that the CFC rules shall be enforced from the 2023 taxable year for enterprises.
The Bureau explained that starting in 2023, if a profit-seeking enterprise holds shares or capital of a foreign enterprise that is treated as a CFC and this CFC does not meet the exemption threshold requirements of the CFC rules, the profit-seeking enterprise shall calculate CFC investment income and be subject to profit-seeking enterprise income tax. The aforementioned exemption threshold is "the CFC carries out substantial operating activities in its country or jurisdiction" or "the individual CFC's earning in the current year is less than NT$7 million." Regarding the aforementioned exemption threshold of NT$7 million, if the CFC's operating period in a fiscal year is less than one year, the exemption threshold of NT$7 million shall be calculated on a pro rata basis according to the actual number of months in operation. If the CFC's operating period is less than one month, it shall be taken as one month.
For example, Company A holds shares of the CFC which is established on April 17, 2023, and the CFC has no substantial operating activities in its country or jurisdiction. The current-year earnings of the CFC for the fiscal year 2023 is NT$6 million. Since the operating period in April is less than one month, it is taken as one month, and the operating period for the fiscal year 2023 is nine months. The exemption threshold is calculated as follows: NT$7 million × 9/12 = NT$5.25 million. Since the CFC's current year-earnings of NT$6 million exceeds the exemption threshold of NT$5.25 million, Company A shall calculate the CFC investment income pursuant to Article 43-3 of the Income Tax Act, and be subject to profit-seeking enterprise income tax.
The Bureau emphasizes that the CFC rules for profit-seeking enterprises is not a tax increase measure, but a measure to prevent profit-seeking enterprises from avoiding their tax obligations by retaining the CFC earnings without distribution. It treats the CFC's current-year earnings as being distributed to advance taxation, as a part of improving the fair and reasonable tax system in Taiwan. The information about the CFC rules for profit-seeking enterprises is available at the website of the Bureau (https://www.ntbt.gov.tw/English) "Home/Themes/Taxation/Profit-seeking Enterprise Income Tax/ Anti-tax Avoidance Rules".
(Contact person: Section Head Hsu of First Examination Division; Tel: 2311-3711 ext. 1308)