萬國法律事務所

In response to the public's demand to prevent international tax evasion and to maintain fair taxation, on June 8, 2016, the draft amendment to the Income Tax Act past its first reading in the Legislative Yuan. If becoming law, the legislation will subject Taiwan companies registered in tax havens to comply with their tax duties in Taiwan. Rules for Controlled Foreign Corporations “CFC” and Place of Effective Management “PEM” are the two standards that will be used to subject Taiwan companies to the amendment. However, the amendment still provides two exemptions. The two standards and exemptions are as follows:

(1) CFC: Where a profit-seeking enterprise and its affiliates directly or indirectly hold 50% or more of the shares or capital in or have substantial influence on an offshore affiliate entity, such profit-seeking enterprise will be required to recognize the earnings of such affiliate entity of the then current year as investment income according to the holding ratio and period of the shares or capital in such affiliate entity. However, companies that have actual business operations in the tax havens and its annual earnings do not exceed certain threshold amounts can be exempt from this standard.

(2) PEM: A profit seeking enterprise established according to foreign laws with the actual management in Taiwan will be deemed as a profit seeking enterprises headquartered in Taiwan and the profit-seeking enterprise income tax will be levied in accordance with the Taiwan Income Tax Act.

Regardless of the passage of the first reading by the Legislative Yuan, the Ministry of Finance announced three conditions that must be met before such amendment will officially become effective after the final passage by the Legislative Yuan. First, an Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income between Taiwan and China must have come into effect. Second, Common Reporting Standards (CRS) must have been implemented. Thirdly, secondary regulations for the legislative amendment must have been promulgated.