Finance Minister issued draft regulations on a controlled foreign company (CFC) and place of effective management commenced in July 2016 on 9 November 2016. The draft regulations intend to explain CFC income’s timing and amount addition CFC earnings exemptions, and the filing and reporting obligation of the PEM.
A domestic profit-seeking company will be requisite to contain its pro rata share of CFC’s earnings in its taxable income when the company and its related parties hold more than 50% of the shares of a CFC, or less than 50% of the shares but have significant influence on the CFC (i.e. personnel or financial decision power).
CFC’s earnings will be exempt if one of the following two conditions is fulfilled:
(1) The CFC has substance and active trade or business in its local jurisdiction by satisfying both of the following conditions:
- Business need to have a fixed place and hires employees to conduct business locally.
- Annual passive income (Dividend, interest, royalty, rent and capital gain) is less than 10% of the combined net operating income and total non-operating gross income though, royalties or capital gains resultant from the CFC’s self-developed intangible assets are disqualified from the passive income calculation.
(2) The CFC’s earnings in cumulative do not exceed the NTD7 million (US$230,000) threshold in a fiscal year.
Place of effective management rule: An enterprise currently is considered a Taiwan resident only if its head office is located in Taiwan. Under the new POEM rule, a foreign company will be deemed to have a PEM in Taiwan and will be subject to tax in Taiwan if all of the following conditions are met: Major decision makers of general management, accounting and finance or human resources, reside in Taiwan, or major business decisions are made in Taiwan; Accounting books and records, or the board or shareholder meeting minutes are prepared or stored in Taiwan; Major business activities are executed in Taiwan
However, a foreign company is not subject to the PEM rule if it conducts the above activities to meet the requirements of the listed company regulations of Taiwan Stock Exchange or over the counter stock trading regulations.
PEM tax reporting requirements: A PEM is treated as a domestic taxable entity and is required to comply with the following: File a corporate income tax return, disclose related party transactions, and pay the income tax, including undistributed earnings tax and provisional tax; Set up an imputation tax account to record the amount of income tax paid at the company level that could be distributed to shareholders in the form of tax credit; File and pay the withholding tax to the tax authority and provide the withholding tax certificate to income recipients; Pay taxes before other creditors’ claims (taxation safeguards principle) A foreign company can voluntarily apply for the PEM status and, once the application is approved, it can proceed with PEM registration. The tax authority may also request a foreign company to become PEM registered. Under both circumstances, a PEM needs to start meeting its tax obligations from the day it is PEM registered. If the foreign company fails to register before the due date, the tax collection authority may appoint the major decision maker as the responsible person of the foreign company who will be liable for noncompliance.