Taiwan clarifies CFC rules, limiting deductions to assessed prior-year losses.
Taiwan’s National Taxation Bureau, under the Ministry of Finance, has clarified rules on the calculation of Controlled Foreign Company (CFC) investment income for profit-seeking enterprises, emphasising that accumulated losses recorded in a CFC’s accounts before the implementation of the CFC system in 2023 cannot be deducted from current-year earnings.
This announcement was made on 28 November 2025.
Under the CFC system, in effect since 2023, profit-seeking enterprises must calculate investment income based on their direct holding ratio and holding period of the CFC’s shares or capital. Enterprises may deduct legal reserves or items of restricted distribution of surplus earnings under the CFC’s local laws, as well as losses of prior years assessed by the tax authority. Deductions must be claimed within the income tax filing deadline and can be applied sequentially for up to ten years, starting from the year following the loss, provided all relevant regulations are met.
The Bureau provided an example: when Company A filed its 2023 Profit-Seeking Enterprise Income Tax Return, it reported CFC investment income of TWD 7,000,000. Company A held 100% of the shares of Company B in Mauritius, which qualified as a CFC. CFC B’s earnings for 2023 were TWD 9,000,000, with TWD 2,000,000 declared as “legal reserve or items of restricted distribution of surplus earnings.” Of this, TWD 1,100,000 was used to offset accumulated losses from 2022 and prior years, and TWD 900,000 was appropriated as a legal reserve under local law.
The Bureau noted that the TWD 1,100,000 used to compensate pre-2023 losses did not meet the definition of “losses from prior years assessed by the tax authority” and could not be deducted. Company A’s assessed investment income was TWD 8,100,000, calculated as:
(CFC B’s 2023 earnings of TWD 9,000,000 – TWD 900,000 legal reserve) × 100% shareholding ratio.
As a result, taxable income for Company A increased by TWD 1,100,000 (TWD 8,100,000 – TWD 7,000,000), generating an additional tax liability of TWD 220,000.
The Bureau reminded profit-seeking enterprises to carefully follow the regulations when reporting CFC earnings to ensure accurate calculation of taxable income and avoid adjustments or additional taxes.
