The Kaohsiung National Taxation Bureau of the Ministry of Finance stated that in order to comply with the international anti-tax avoidance trend, the Executive Yuan approved the Controlled Foreign Company (hereinafter referred to as CFC) system for profit-seeking enterprises on January 14, 2011 and began to implement it in 2012.
The Bureau stated that the CFC system for profit-making enterprises refers to the profit-making enterprises and their related parties who hold more than 50% of the shares or capital of related companies in low-tax countries or regions, or have significant influence on the related companies. The CFC's current year earnings shall be recognized as investment income taxable according to the shareholding ratio and holding period, provided that the CFC has substantial operating activities in the country or region where it is located, or the current year's earnings are NT$7 million (the same below) Below RMB, the CFC system can be exempted from taxation.
The bureau further gave an example. A domestic company A established a company A with no substantive operating activities in a country or region with a low tax burden (company A holds 100% of its shares), and then transferred investment through company A to company B with substantive operating activities. Before the implementation of the CFC system, when Company B distributes a surplus of 200 million yuan to Company A, Company A can retain the allocated surplus of Company B in Company A through equity control, and Company A does not need to recognize investment income for taxation, resulting in Evasion of China's tax obligations that should have been borne; after implementation, regardless of whether Company A decides to distribute the surplus, it will be deemed as a distribution. Company A shall recognize the surplus of Company A as investment income based on its shareholding ratio and incorporate it into the current year's income for taxation. That is, when Company A handles the income tax settlement declaration of profit-making enterprises in the current year, it should recognize the CFC investment income of Company A, and the income tax of profit-seeking enterprises is 40 million yuan [(Company A's current year profit 200 million yuan × direct shareholding ratio 100% × holding Period 365 days/365 days) × tax rate 20%].
The Bureau added that the non-tax increase measures of the CFC system for profit-making enterprises are to prevent profit-making enterprises from avoiding the taxation obligations that should have been borne by my country through tax planning. When the equity can be adjusted, the cost and the actual distribution of CFC dividends will no longer be included in the income and other mechanisms, in order to maintain the fairness of taxation. For information about the CFC system, please visit the anti-tax avoidance section of the bureau’s website ( https://www.ntbk.gov.tw ) or call the toll-free service number 0800-000-321.
Provider: Review Section 1 Contact Person: Section Chief Chen Yanling Contact Number: (07)7256600 Ext. 7100
Contributor: Zhu Peidi Tel: (07)7256600 extension 7163
Issued by: Kaohsiung National Taxation Bureau, Ministry of Finance Release date: 2022-07-29 Update date: 2022-07-29
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