The CFC Rules for Individuals to Be Enforced from January 1, 2023
Date:2022-11-21
The National Taxation Bureau of the Southern Area (hereinafter "The Bureau"), Ministry of Finance indicated that the controlled foreign company (hereinafter "CFC") rules for individuals will be enforced from January 1, 2023. The Bureau provided an overview of the CFC rules for individuals in response to frequently asked questions from the public. The Bureau explained that the CFC rules for individuals were established by Article 12-1 of the Income Basic Tax Act. Whether an individual is subject to the CFC rules is determined by their residency of the R.O.C. in a taxable year in accordance with the Income Tax Act. If an individual is a non-resident of the R.O.C. in a taxable year in accordance with the Income Tax Act, the individual is not subject to the CFC rules. Next, a foreign enterprise is treated as a CFC if the enterprise fits the CFC definitions of control requirements and establishment in a low-tax country or jurisdiction. Control requirements are further classified into "equity control" or "substantial control". The former means that individuals and their related parties directly or indirectly hold 50% or more of the shares or capital of a foreign enterprise. The latter means that individuals and their related parties have a significant influence on the personnel, finance, or business operation of a foreign enterprise. Furthermore, even though a foreign enterprise fits the definitions of CFC, there are two exemption thresholds for an individual to exempt from the CFC rules once the CFC is eligible for one of the thresholds below. First, a CFC conducts substantial operating activities. Second, a CFC earns the current-year earnings of no more than NT$7 million. However, if the sum of the current-year earnings or losses of all of the CFCs under the control of the individual, his or her spouse, and dependents who file a joint consolidated income tax return in accordance with the Income Tax Act exceeds NT$7 million, the current-year earnings of each CFC shall be subject to the CFC rule for individuals. In sum, if an individual is a resident of the R.O.C. in a taxable year in accordance with the Income Tax Act, and a foreign enterprise fits the definitions of CFC which is also not eligible for the exemption thresholds, then when that individual along with his or her spouse and relatives within the second degree of kinship who directly holds 10% or more of CFC shares, the individual shall calculate CFC business income and include it with the amount of other overseas income in the basic income of the current year. As for the calculation of CFC business income, it equals the amount that the current-year earnings of the CFC, deducting from the legal reserve or restricted distributable earnings and the losses of past years assessed by the tax authority, times individual's direct holding ratio and holding period. For example, assume Company A, without conducting substantial operating activities, is established in a low-tax country or jurisdiction. Individual X owns 60% shares of Company A on April 1, 2023, which means Company A is a CFC of Individual X for meeting equity control of the control requirements. The earnings of Company A in 2023 are NT$36.5 million, and the legal reserve of Company A is NT$3.65 million. Individual X shall calculate overseas business income NT$14.85 million 【=（NT$36.5 million – NT$3.65 million）× 60% × (275/365) days】 to file in the basic income of the taxable year 2023. The Bureau pointed out that the earnings retained in the CFC would not be subject to tax until the earnings were distributed before the implementation of the CFC rules. However, the undistributed earnings shall be regarded as distributed and calculated as CFC business income after the implementation of the CFC rules. Besides, to eliminate double taxation, the amounts of dividends or earnings from a CFC that has been calculated as CFC business income and subject to tax shall not be included in the basic income again when an individual receives dividends or earnings afterwards. The CFC rules for individuals only change the time point of taxation rather than levying additional taxes. The Bureau would like to remind people to pay more attention to the CFC rules and related regulations to maintain their rights and interests. Press Release Contact: Ms. Cheng Second Examination Division TEL: 06-2223111 ext. 8040 Resources: Ministry of Finance, R.O.C.
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