Taiwan CFC rules will be implemented as of 2023 in response to the Global Minimum Tax

On 14 January 2022, Taiwan’s Executive Yuan announced that controlled foreign company (CFC) rules will come into force in 2023 in response to Pillar Two of the OECD’s Global Anti-Base Erosion (GloBE) Proposal. Taiwan’s CFC rules aim to prevent the artificial diversion of profits from Taiwan to CFCs operating in low- or zero-tax jurisdictions. They were introduced in 2016 for corporations and in 2017 for individuals but have since been pending an implementation date from the Executive Yuan.

When the Management, Utilisation, and Taxation of Repatriated Offshore Funds Act was enacted in July 2019, an accompanying resolution was made requiring the Taiwanese Ministry of Finance to report to the Executive Yuan for approval of an implementation date within one year after the expiration of a date set in the Management, Utilisation, and Taxation of Repatriated Offshore Funds Act, which fell on 16 August 2021. The CFC rules were estimated to take effect in 2022 at the earliest. Now, so as to align with the OECD’s timeline for domestic implementation of a 15% global minimum tax (which takes effect in 2023), Taiwan’s government has decided that its CFC rules will be implemented on 1 January 2023.

Definition of a CFC under Taiwan law

A foreign entity is deemed a CFC if:

1. it is resident in a low-tax country or jurisdiction, defined as one having a corporate income tax rate not exceeding 70% of Taiwan’s current tax rate (70% of 20% is 14%), or which taxes only domestically sourced income (or foreign-sourced income is taxed only on a remittance basis); and
2. 50% or more of the entity’s shares are directly or indirectly owned by, or are substantially influenced by, a Taiwanese enterprise or individual or persons related to a Taiwanese enterprise or individual.
    

CFC exemptions and threshold requirements

The CFC rules would not apply where:

1. the CFC carries on substantive economic activities in a low-tax country or jurisdiction and its passive income (such as rent, interest income, royalties, and dividends) does not exceed 10% of the CFC’s total income (income from overseas branches is excluded); or 
2. the annual revenue of the CFC does not exceed TWD 7 million. After the implementation of the CFC rules, a Taiwan corporate taxpayer may be subject to corporate income tax on its share of the CFC’s undistributed income unless CFC exemptions are met. The same also applies to an individual shareholder. For any individual who directly holds 10% or more of shares or capital of a CFC, calculated together with the shares owned by his/her spouse and second-degree relatives, the income earned by the CFC would be deemed distributed to the Taiwanese shareholder in proportion to his/her shares. The deemed dividends would be further regarded as the individual’s overseas income and may be subject to a 20% alternative minimum tax rate.
    

CFC and Taiwan’s version of GloBE

To catch up with global trends and enhance Taiwan’s competitive edge in the international tax community, Taiwan decided to implement its CFC rules in 2023, with the aim of ensuring the effective tax rate of CFCs meets the global tax standards. It is advisable for businesses or shareholders to re-examine their organisational structure and analyse potential tax risks under the CFC rules.

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