2021-08-23

Anti-Tax Avoidance Rules May Come into Force Next Year

On 16 August 2021, the “Management, Utilization, and Taxation of Repatriated Offshore Funds Act” (hereinafter the “Repatriated Offshore Funds Act”), a law granting tax preference to profit-seeking enterprises that repatriate investment incomes derived from offshore invested enterprises, officially expired.  According to the incidental resolution passed by the Legislative Yuan during the third reading of the Repatriated Offshore Funds Act on 3 July 2019, the Ministry of Finance is required to request the Executive Yuan to decide the effective date of Article 43-3 of the Income Tax Act within one (1) year of the expiration of the Repatriated Offshore Funds Act.
 
According to Article 43-3 of the Income Tax Act, the surplus earnings of foreign affiliated enterprise controlled by any profit-seeking enterprise in the Republic of China shall be recognized as the profit-seeking enterprise’s investment income, and such investment income shall be included in taxable income of the current year (which will be subject to a 20% individual income tax or a profits-seeking enterprise income tax).  The “foreign affiliated enterprise” mentioned in Article 43-3 of the Income Tax Act is usually referred to a “Controlled Foreign Company (CFC)”, and Article 43-3 is also known as the “CFC Rule”.  Besides, there is an Article 43-4 of the Income Tax Act, which is known as the “PEM (Place of Effective Management) Rule”: “Any foreign profit-seeking enterprise established according to foreign law but with a place of effective management in the Republic of China shall be deemed as a profit-seeking enterprise having its head office within the territory of the Republic of China, and shall be subject to profit-seeking enterprise income tax in accordance with Income Tax Act and other relevant laws.”  Both Rules prevent Taiwanese companies to avoid tax through establishing foreign companies, and apply to foreign companies.  In the event that a foreign company meets the elements as specified in both Rules, the PEM Rule shall prevail.  However, as the PEM rule was not mentioned in the above incidental resolution of the Legislative Yuan, it is not necessary that it will come into force along with the CFC rule.  In addition, considering the Covid-19 pandemic and the fact that the CFC Rule will increase tax obligations, the government may also decide that the CFC Rule will not take effect within one (1) year after the expiration of the Repatriated Offshore Funds Act.
 
Previous Back to list Next