The National Taxation Bureau of the Southern Area, Ministry of Finance stated that, considering the short-term fluctuation of financial instruments measured at fair value through profit or loss (FVPL) held by a Controlled Foreign Company (CFC) is relatively significant and beyond human control, profit-seeking enterprises are thus permitted to choose to defer the recognition of unrealized FVPL valuation gains and losses when calculating the CFC’s current-year earnings. These gains and losses will be calculated upon future disposal or reclassification to reflect the actual profit and loss situations.

The Bureau explained that, according to the provisions of Paragraphs 1 and 3 of Article 7 of the Regulations Governing Application of Recognizing Income from Controlled Foreign Company for Profit-Seeking Enterprise, when calculating the current-year earnings of the CFC in which it directly holds shares or capital, a profit-seeking enterprise may choose to defer the recognition of changes in fair value of FVPL held by the CFC. Once chosen, it cannot be changed. When the FVPL is actually disposed of or reclassified, the adjustment amounts for the disposal or reclassification (namely the fair value on the transaction date minus the original acquisition cost) will be included in the current-year earnings of the CFC in the year of disposal or reclassification. However, when selecting to defer the recognition of FVPL, a profit-seeking enterprise shall disclose and provide the necessary documents for verification by the tax authorities during tax filing and investigations as required. 

The Bureau provides the example: Company C declared two CFCs, Company A and Company B, for the 2023 taxable year. When calculating the current-year earnings of Company A and Company B, Company C claimed deductions for unrealized FVPL valuation gains of NT$28 million and NT$63 million respectively. During the National Taxation Bureau’s tax audit, Company C failed to provide a certified public accountant’s audit report on the holding, measurement, and disposition of financial instruments of the CFCs as required. As a result, Company C was disallowed from applying the provisions of deferred recognition of FVPL valuation gains and losses for its CFCs and was assessed additional tax of NT$18.2 million. 

The Bureau would like to especially remind profit-seeking enterprises that, if it chooses to defer the recognition of FVPL valuation gains and losses for its CFCs, it shall use the same method for all directly held CFCs, and the method cannot be changed once chosen. If, in the future, the same calculation method is not used or the necessary documents are not provided within the deadline as required, the enterprise will be disqualified from applying the provisions of deferred recognition of FVPL valuation gains and losses for 10 years from that year. Moreover, the accumulated adjustments of gains and losses shall be included in the current-year earnings. While enjoying the benefits of tax deferral, companies should pay attention to the relevant regulations to protect their rights and interests.

Press Release Contact: Ms. Tseng
Profit-seeking Enterprise Income Tax Division
TEL: 06-2223111 ext.8041