Taiwan’s Legislative Yuan amended the Income Tax Act (ITA) on 12 July 2016, and introduced the controlled foreign company (CFC) rules, incorporating some of the recommendations provided in the Organization for Economic Co-operation and Development’s final report on Action. The amendment also provides criteria for determining a foreign company’s place of effective management (PEM). Once the foreign company’s PEM is deemed to be in Taiwan, the foreign company is subject to tax on its worldwide income.

The amendments are discussed in below:

CFC Regime:  A Taiwanese company will be required to include its pro rata share of CFC’s earnings in its taxable income if the company and its related parties directly or indirectly hold more than 50% of the shares of a company located in a low-tax jurisdiction (i.e., jurisdictions with a corporate income tax rate lower than 11.9% or no tax imposed on offshore income) or have substantial control of the CFC’s operations, unless: The foreign entity has substance and an active trade or business in its local jurisdiction; and the foreign entity and its foreign affiliates’ earnings in aggregate satisfy a threshold. .

Double tax relief: Earnings that have been previously taxed under the CFC rules would be exempt from Taiwan corporate income tax upon actual distribution. Withholding tax imposed on a CFC’s earnings upon distribution may be claimed as a foreign tax credit.

PEM rule: Article 3 of the ITA provides that, where an entity’s head office is located in Taiwan, the entity is taxed on worldwide income in Taiwan. The amendment expands this definition to a foreign company. If all of the following criteria are met, the foreign company is deemed to have a PEM in Taiwan: (a)The major decision makers in charge of general management, accounting and finance, or human resources, reside in Taiwan, and the headquarters of the foreign company is located in Taiwan, or major business decisions are made in Taiwan,  (b) Accounting books and records, or the board or shareholder meeting minutes are prepared or stored in Taiwan and (c) Major business activities are executed in Taiwan.

Other developments:  The Taiwan tax authority plans to introduce CFC rules applicable to individual shareholders by incorporating CFC rules in the Taiwan’s Alternative Minimum Tax (AMT) regulations. Under the current AMT regulations, an individual shareholder is taxed only when an actual dividend is distributed to the shareholder. The proposal is an anti-deferral provision and would require a 10% or more individual shareholder of a CFC to include CFC’s earnings prior to the distributions. This proposal is expected to be submitted to the Executive Yuan at the end of 2016.