According to Article 3 of Income Tax Act, for a profit-seeking enterprise having its head office within Taiwan, its income derived both within or outside Taiwan is subject to the profit-seeking enterprise income tax (“Tax”), whereas for a profit-seeking enterprise having its head office outside Taiwan, only its income derived within Taiwan is subject to the Tax. Therefore, under the current law, the location of the head office of a company would affect whether its income derived “outside” Taiwan is subject to the Tax. In practice, the tax authority usually uses the registered address to determine the location of a company’s head office.
The Legislative Yuan passed the Amendment of Article 43-4 of the Income Tax Act in its first reading on April 1, 2013. Under the proposed amendment, effective from 2015, a profit-seeking enterprise which is incorporated pursuant to foreign law but has its actual business management and operation (i.e. “effective management”) in Taiwan shall be deemed as a profit-seeking enterprise having its head office within Taiwan, and its income derived “within and outside” Taiwan is subject to the Tax. The place of “effective management” is where key management and business decisions necessary for an entity's overall business are actually made. The Legislative Yuan authorized the Ministry of Finance to devise rules concerning the criteria of determining the above as well as other relevant matters.
The legislative purpose for adopting the place of effective management as the criterion for determining whether a company is a foreign company is to prevent a profit-seeking enterprise from establishing paper companies in tax havens and avoiding its tax liability by changing the company’s tax residence. The legislative purpose also refers to relevant rules issued by OECD and UN, stating that determining a company’s place of effective management may take into account the following facts—the place where a company is actually managed and controlled, the place where the highest decision-making on important management decisions is made, the most important place for the company’s management from economic and functional point of view, the place where the most important accounting books are kept, etc.
The global trend now is to determine a company’s head office by its place of effective management so as to expand the tax base. In Taiwan, many companies establish paper companies in Cayman or other tax havens without hiring any employee there and the companies are actually managed in Taiwan. If the above amendment is passed, such holding companies will be greatly impacted because all of their incomes—no matter derived within or outside Taiwan—will be subject to the Tax. Affected companies should take appropriate measures as early as possible to respond to the amendment.