The National Taxation Bureau of Taipei, Ministry of Finance stated that in accordance with Article 43-3 of the Income Tax Act, if a profit-seeking enterprise holds shares or capital of a foreign affiliated enterprise located in a low-tax country or jurisdiction (hereinafter referred to as low-tax jurisdiction) that meets the definition of a controlled foreign company (hereinafter referred to as CFC), and such CFC does not qualify for exemption provisions, the profit-seeking enterprise shall recognize CFC investment income and include it in the taxable income for the current year.
The Bureau further explained that when determining whether a foreign affiliated enterprise located in a low-tax jurisdiction and held by a profit-seeking enterprise constitutes a CFC, the determination should be made in accordance with Article 2 of the Regulations Governing Application of Recognizing Income from Controlled Foreign Company for Profit-Seeking Enterprise (hereinafter referred to as CFC Regulations). If a profit-seeking enterprise and its related parties directly or indirectly hold 50% or more of the shares or capital of a foreign affiliated enterprise in a low-tax jurisdiction (equity control) or have significant influence over such enterprise (substantial control), then the foreign affiliated enterprise in a low-tax jurisdiction constitutes a CFC. Additionally, in accordance with Article 3 of the CFC Regulations, related parties include not only affiliated enterprises as specified in Paragraph 2 of the aforementioned Article, but also related parties other than the affiliated enterprises as specified in Paragraph 4 of the aforementioned Article.
The Bureau provides the following example: Taiwan Company A believed that its direct shareholding of 18% in Hong Kong Company B (in a low-tax jurisdiction) did not meet the control requirements for CFC constitution, and therefore did not disclose CFC-related information in its 2023 profit-seeking enterprise income tax return. However, the Bureau discovered that the four children of Taiwan Company A’s responsible person directly held a combined shareholding of 42% in Hong Kong Company B, making the combined direct shareholding by Taiwan Company A and its related parties amounting to 60% (=18%+42%), more than 50%. Hong Kong Company B therefore qualifies as a CFC of Taiwan Company A and the responsible person’s four children. Regarding Hong Kong Company B’s 2023 earnings, CFC investment income was assessed for Taiwan Company A, and CFC business income was assessed for the responsible person’s four children, based on their respective shareholding ratios and holding periods in Hong Kong Company B.
The Bureau would like to remind profit-seeking enterprises that if it is discovered that they have failed to report or under-reported CFC investment income as required, they may voluntarily file supplementary tax declarations and pay supplementary taxes plus interest to the tax collection authority under Article 48-1 of the Tax Collection Act, as long as it is neither a case brought about by an informant, nor a case under investigation by an investigator appointed by the tax collection authorities or the Ministry of Finance, and the taxpayer may be remitted from punishments. CFC rules for profit-seeking enterprises can be found on the Bureau’s website (https://www.ntbt.gov.tw) by clicking on “Themes/Type of Website Visitor/Enterprises/Anti-tax Avoidance Rules/CFC Rules for Enterprises.”
(Contact: Mr. Chen, Head of Profit-seeking Enterprise Income Tax Division; Tel: +886-2-2311-3711 ext. 1308)