Taiwan’s Ministry of Finance has announced a de minimis test enabling profit-seeking enterprises to avoid recognizing investment income under the CFC Rules on September 2024.

The National Taxation Bureau of the Southern Area, Ministry of Finance (hereinafter “The Bureau”) stated that, the Controlled Foreign Company (hereinafter “CFC”) rules were implemented in the taxable year 2023.

According to Paragraph 1, Article 5 of the Regulations Governing Application of Recognizing Income from Controlled Foreign Company for Profit-Seeking Enterprise (hereinafter “CFC Regulations”), if a CFCs current-year earnings do not exceed a given standard, the CFC may pass the de minimis test. Consequently, the profit-seeking enterprise does not need to recognize investment income under the CFC Rules.

The Bureau explained that, considering the compliance costs for tax authorities and taxpayers, CFCs earning minimal profits are excluded from the CFC rules. Therefore, according to Paragraph 3, Article 5 of the CFC Regulations, where the current-year earnings of each CFC are no more than TWD 7 million individually, the profit-seeking enterprise in the Republic of China (the R.O.C.) may be exempt from recognizing the investment income of the CFCs. However, for CFCs whose shares or capital are directly held by the same profit-seeking enterprise within the territory of the R.O.C. and do not meet the criteria of substantial operating activities, if the sum of their current-year earnings or losses is a positive number exceeding TWD 7 million, the aforesaid profit-seeking enterprise shall recognize its investment income under Paragraph 1, Article 8 of the CFC Regulations. It is important to note that for a CFC whose operating period within a fiscal year is less than one year, when applying the de minimis test, its current-year earnings or losses shall be annualised based on the proportion of the months of operation to the full year. Any part of the operating period less than a full month shall be regarded as a full month for such calculations.

For instance, Company X is a CFC of Company A, registered on 17 April 2023. The earnings of the CFC for the taxable year 2023 are 6 million. As the operating period of the CFC in April was less than one month, it should be regarded as a full month. Therefore, the operating period for the taxable year 2023 is 9 months. As for the de minimis test, the earnings of the CFC were adjusted to be TWD 8 million [TWD 6 million ÷ (9 months/ 12 months) = TWD 8 million], exceeding the de minimis threshold of TWD 7 million. Thus, Company A shall recognize the investment income of the CFC according to the CFC Regulations.

The Bureau would like to remind profit-seeking enterprises that they shall disclose CFC-related information in the prescribed format when filing their income tax returns. Even if a CFC passes the de minimis test, the profit-seeking enterprises shall still disclose the information and submit the relevant documents on time to the tax authority for verification to safeguard their rights and interests.