CFC Taiwan: Implications of New Regulations for Offshore Trusts and Broader APAC Insights

Taiwan’s new CFC regulations, effective January 1, 2023, tighten tax rules for offshore trusts held by Taiwanese residents. A recent July 2024 ruling requires offshore trustees to register with Taiwan’s tax authorities and adhere to new reporting standards. The experts from TAK ASSOCIES and ECOVIS Taiwan CPA Firm explore these developments and their broader impact across the Asia-Pacific region.

General overview of Control of Foreign Corporations

On January 1st, 2023, a new regulation called Control of Foreign Corporations (CFC) came into force in Taiwan (Article 43-3 of the Income Tax Act, as amended on July 27, 2016), as part of a move by the Taiwanese authorities to expand the taxation of offshore entities. Taiwan has already implemented several laws and regulations to combat tax evasion, starting with general regulations on transfer pricing, and more specifically with some laws such as the Place of Effective Management, aimed at taxing in Taiwan the profits of companies located abroad, but managed from Taiwan.

A CFC is defined as a foreign corporate entity registered in a jurisdiction with low tax rates, where more than 50% of the paid-up shares are held (or controlled) directly or indirectly by a Taiwan tax resident individual or corporate entity.

Under the CFC rules, a low tax rate jurisdiction refers to a jurisdiction where:

1. corporate income tax is 14% or less; or
2. income is taxed on a territorial basis (i.e. foreign-sourced income is not taxable in that country). This includes territories such as Hong Kong or Singapore.

Practical impact on foreign trusts

Since 2023, taxpayers in Taiwan must report their interests owned in foreign countries as soon as they meet the above requirements, as required by CFC regulations.

One issue has been raised as to how taxpayers can report their income distributed by discretionary trusts. Indeed, by definition, the beneficiaries of discretionary trusts do not know in advance how much they will receive.

To address this issue, the Taiwan Ministry of Finance (MOF) issued an interpretation on January 4th, 2024, to clarify the rules. According to this interpretation:

1. For discretionary trusts, the rule requires CFC income to be allocated on an average basis based on the number of beneficiaries. Two issues may arise from this rule: (1) it does not address potential discrepancies between the CFC income currently reported and actual distributions that may be received in the future;  (2)  there is concern that the ruling suggests an equal allocation among beneficiaries regardless of each beneficiary’s actual situation. Furthermore, such an approach does not take into consideration who in fact would have direct or indirect control of the trust, which could be unfair to some beneficiaries.
2. The ruling imposes reporting obligations on foreign trustees based on Article 92-1 of the Taiwan Income Tax Act, which should apply to domestic trustees. This could pose practical challenges, as this article pertains specifically to domestic trustees and domestic withholding, which are required to complete particular tax forms. It was unclear how to assess the level of compliance for foreign trustees.

A surprising move in July 2024

On July 10th, 2024, the MOF surprised the business community by issuing a new ruling requiring offshore trustees to register with the Taiwan tax authorities when a Taiwan tax resident settlor transfers the shares or capital of a Controlled Foreign Corporation located in a low-tax country or region outside of Taiwan as trust assets. The MOF pointed out that this new ruling was to complement the January 2024 ruling, which imposes the Alternative Minimum Tax (AMT) on the settlor/beneficiary of offshore trusts when CFC is involved.

Under the new ruling, offshore trustees are required to prepare detailed books, income statements, distribution statements, and other records for all trust assets, including both CFC and non-CFC assets, in accordance with Taiwan’s Income Tax Act (ITA). Offshore trustees without a physical presence in Taiwan must appoint a local agent for registration, obtain a tax identification number, and manage all related reporting and withholding responsibilities going forward.

Even more surprisingly, the ruling states that it is applicable from January 1st, 2024, making it retroactive, and potentially non-compliant for offshore trustees! This new ruling requires all interested parties (including foreign trustees) to reassess their situation with regard to compliance (including potential penalties), automatic exchange of information (Common Reporting Standards or CRS) and also money-laundering regulations.

Looking beyond

The move by the Taiwanese tax authorities should not only be considered a local initiative, since several APAC countries have also implemented CFC rules (South Korea with a much lower threshold for CFC eligibility – 10% , Mainland China, Japan, Australia, etc.).