Last year on 12 July 2016, Taiwan's Income Tax Act has been amended to include the controlled foreign company (CFC) and place of effective management (PEM) rules. While such Income Tax Act amendments in relation to CFC and PEM apply only to Taiwan's profit-seeking enterprises and their related parties, CFC held by Taiwan's individual taxpayers are out of the picture. To avoid individual taxpayers bypassing the CFC rules by operating the CFC under his or her own name, in June 2016 the Executive Yuan proposed to amend the Income Basic Tax Act (the so-called Alternative Minimum Tax or AMT Act) to cover the individual taxpayers. The AMT Act amendments regarding personal CFC rules are now being reviewed at the Legislative Yuan.
Another new development in relation to CFC and PEM rules in Taiwan is that on 9 November 2016 the Ministry of Finance published proposed CFC and PEM bylaws (respectively, CFC By-laws and PEM By-laws) to provide detailed regulations for Taiwan CFCs and PEMs.
On 25 April 2017, the amendments to the Estate and Gift Tax Act were passed by the Legislative Yuan, and the new law is estimated to take effect in mid May 2017. Under the new law, instead of a flat 10% estate tax and gift tax, a 3-tier rate scheme (10%, 15% and 20%) applies.
The new rules
1. Proposed Personal CFC Rules
According to the proposed AMT Act amendments, a Taiwan individual taxpayer shall include in his/her AMT the pro rata share of the taxable profits of his/her CFC, provided (i) the Taiwan individual taxpayer directly or indirectly owns 50% or more of the CFC shares or has dominant influence on said CFC, AND (ii) the Taiwan individual taxpayer's shareholding in the CFC, either in his/her own name or combined with his/her spouse and relatives within the second degree of kinship, reaches 10% or more of the CFC shares.
A "CFC" referenced in the proposed personal CFC rules refers to a corporation established in low tax territories (i.e., a country or jurisdiction whose corporate income tax is 11.9% or less or a country or jurisdiction which only taxes on a territorial basis) that is more than 50% owned (directly or indirectly) or dominantly influenced by a Taiwan business entity. "Dominant influence" is not defined in the proposed AMT Act amendments, but the definition given in the proposed CFC By-laws (which supplement Article 43-3 of the Income Tax Act) may be used as a reference - according to the proposed CFC By-laws, "dominant influence" means the profit-seeking enterprises and their related parties have control over the corporation established in low tax territories or have material influence on such company's personnel, finance, business operations or management policies.
Exemptions apply when the CFC has actual business activities in the jurisdiction of its incorporation or its profits do not reach the threshold prescribed by the Taiwan tax authorities. "Actual business activities," according to the proposed CFC By-laws, means the CFC (i) has fixed place of business at the country / jurisdiction of incorporation and hires employees operating business therein; AND (ii) its passive income (e.g., dividends, interests, royalties, rental income, capital gains from the sale of assets) is 10% or less of aggregate amount of operating income and non-operating income. The exempt profit threshold, according to the proposed CFC By-laws, is NTD 7 million (approximately USD 233,333). If the CFC re-invests in other companies and is expected to receive dividends or profits distribution from such re-investment companies, such income is recognized and to be calculated in the NTD 7 million threshold in the year of its actual distribution / realization.
2. Place of Effective Management under the Proposed PEM By-Laws
According to the draft PEM By-laws, F-shares companies (i.e., foreign companies listed in Taiwan) are excluded from being deemed to have a PEM in Taiwan. In order to comply with applicable Taiwan IPO requirements, F-shares companies are required to convene shareholders' meeting in Taiwan and having at least one independent director with Taiwan nationality, to name a few. Given that, those F-shares companies are likely to be considered having PEM in Taiwan. Considering many of those F-shares companies may not have actual place of management in Taiwan but instead have certain connections with Taiwan due to the compliance requirements under Taiwan listing rules, to solve this issue the proposed PEM By-laws exclude F-shares companies from the PEM determination.
3. Increased Estate and Gift Tax Rate from 10% to 20%
Currently the estate and gift tax rate is 10% flat. On April 25, 2017, the amendments to the Estate and Gift Tax Act were passed by the Legislative Yuan, and the new law is estimated to take effect in mid May 2017. Under the new law, instead of a flat 10% estate tax and gift tax, 3 tier rates (10%, 15% and 20%) apply.
Regarding estate tax, the tax exemption remains NTD 12 million (approximately USD 400,000) per individual. New tax rates under the amendments are as follows: (i) 10% estate tax rate applies to taxable estate of NTD 50 million (approximately US$1.67 million) or less; (ii) in the event that taxable estate value is more than NTD 50 million but less than NTD 100 million (approximately USD 1.67 million to USD 3.3 million), the estate tax is NTD 5 million plus 15% of the amount exceeding NTD 50 million; and (iii) when the taxable estate value is NTD 100 million (approximately USD 3.3 million) or more, the estate tax is NTD 12.5 million plus 20% of the amount exceeding NTD 100 million.
Regarding gift tax, the annual exclusion remains NTD 2.2 million (approximately USD 73,333) per doner. New tax rates under the amendments are as follows: (i) 10% gift tax rate applies to taxable gifts of NTD 25 million (approximately USD 833,333) or less; (ii) in the event that taxable gifts value is more than NTD 25 million but less than NTD 50 million (approximately USD 833,333 to USD 1.67 million), the gift tax is NTD 2.5 million plus 15% of the amount exceeding NTD 25 million; and (iii) when the taxable gifts value is NTD 50 million (approximately USD 1.67 million) or more, the gift tax is NTD 6.25 million plus 20% of the amount exceeding NTD 50 million.
According to the statistics provided by the Ministry of Finance, the new amendments affect primarily on high-net-worth individuals. In 2014 only 0.4% of the estate tax filings in which the taxable estate is worth NTD 50 million or more, and 0.46% of the gift tax filings where the taxable gifts are worth NTD 25 million or more.
Possible Impact on Taiwan Individual Taxpayers who have Offshore Companies
1. Proposed Personal CFC Rules
As the proposed personal CFC rules target on Taiwan individual taxpayers who hold offshore CFCs and require such CFC distribution to be included in such individual taxpayers' AMT, once the AMT Act amendments have been approved by the Legislative Yuan, the AMT liabilities for Taiwan individual taxpayer will be increased. Nevertheless, the silver lining is that even if the proposed AMT Act amendments had been passed by the Legislative Yuan, according to the draft language, the new law will take effect simultaneously with the corporate CFC rules. That is, the proposed personal CFC rules may not take effect until the promulgation of the cross-Strait tax arrangements, implementation of common reporting and due diligence standards (CRS), and enactment of related regulations.
2. Increased Estate and Gift Tax Rate from 10% to 20%
According to the soon-to-be effective new amendments to the Estate and Gift Tax Act, 20% estate tax applies to taxable estate of NTD 100 million (approximately USD 3.3 million) or more, and 20% gift tax on taxable gifts of NTD 50 million (approximately USD 1.67 million) or more. Taiwanese high-net-worth individuals, when making wealth management plans onward, should take into consideration the tax implications in association with the new amendments and consult with tax counsel in advance.