The latest progress of regulations of CFC( Controlled Foreign Company ) and PEM( Place of Effective Management )
Date:2016-08-26
The Article 43-3, 43-4 and 126 of the Income Tax Law with respect to the Controlled Foreign Company (CFC) and the Place of Effective Management (PEM) were amended by the President and have been announced on July 27. The gist of the law is as follows: 1. The establishment of the CFC system: 1.1 Article 43-3 stipulates the profit-seeking enterprise and its related parties directly or indirectly holding up to 50% of shares or capital of a foreign-affiliated enterprise registered in a low-tax burden country or jurisdiction, or having a significant influence on such a foreign-affiliated enterprise, the surplus earnings of the foreign-affiliated enterprise shall be recognized as the profit-seeking enterprise’s investment income which is calculated according to the ratio and holding period of the shares or capital, and such investment income shall be included in taxable income of the current year. 1.2 For carrying out the spirit of the CFC system as well as considering the cost of the relevant affairs, the profit-seeking enterprises could be exempted from the aforesaid tax if their surplus earnings of the foreign-affiliated enterprise are below to a certain standard in the current year. 1.3 In order to precisely reflect on the disposable earnings, the losses of each year incurred in the foreign-affiliated enterprise may be deducted from surplus earnings of the foreign-affiliated enterprise within ten years, and the recognized investment income doesn't to be included in taxable income when the profit-seeking enterprise receives the dividends or surplus earnings from the foreign-affiliated enterprise. 2. The establishment of the PEM system: 2.1 Article 43-4 stipulates any foreign profit-seeking enterprise established according to the foreign law having a PEM in the Republic (ROC) of China shall be deemed as a profit-seeking enterprise having its head office within the territory of the ROC and shall be subject to profit-seeking enterprise income tax. The tax withholders shall withhold the income tax from various income payments, and issue withholding certificates, dividend vouchers, and other relevant certificates in accordance with Income Tax Act and other relevant laws. 2.2 The definitions of the PEM are as follows: 2.2.1 The decision maker who makes significant decisions in business management, financial management, and personnel management is an individual resident in the ROC or its head office is within the territory of the ROC, or the place where the significant decisions are made is in the ROC. 2.2.2 Financial statements, records of accounting books, minutes of meetings of the Board of Directors or minutes of meetings of the shareholders prepared or stored in the territory of the ROC. 2.2.3 Major business activities carried out in the ROC. 2.3 Once the system of the PEM takes in place, it can prevent tax erosion and entitles the PEM who recognized as the resident in the ROC to the tax benefit of The Cross-Strait tax agreement as well as protects the right for the enterprises having business across the Strait. 3. To avoid the impact that the enforcement it may cause, the effective date depends on the situation of implementing the Cross-Strait tax agreement as well as the international progress, including Singapore and Hong Kong, of the Common Reporting and Due Diligence Standard (CRS), which obtains information from their financial institutions and automatically exchange that information, and it shall also complete the relevant sub-law plan and propaganda before the laws come into force.e. Resource: Taxation Administration, MOF, R.O.C. https://www.etax.nat.gov.tw/etwmain/web/ETW118W/CON/444/5215864286050740719?tagCode=
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