To maintain fairness in taxation, Article 43-4 was added to the Income Tax Act ("ITA") in July 2016 whereby any foreign entity with a place of effective management ("PEM") in the ROC shall be deemed an ROC tax resident and be subject to corporate income tax in accordance with the ITA and relevant regulations. While the Executive Yuan has yet announced when Article 43-4 will take effect, the Ministry of Finance, in its ruling dated May 23, 2017 (Ref. No.: Tai-Cai-Shui-Zi-10504692290), promulgated the Regulations Governing the Application of the PEM Rule ("Regulations").
The Regulations consist of 12 provisions which are summarized as follows:
1. Any foreign entity with a PEM in the ROC shall be deemed a business entity with its head office within the ROC, and be subject to income tax and alternative minimum tax ("AMT"). Said entity shall be responsible for withholding tax, making declarations, filing returns and paying taxes, as appropriate, in accordance with the ITA, the AMT Act, the Tax Collection Act and other relevant regulations. Penalties prescribed under the relevant laws and regulations will also apply if such entity fails to fulfill such obligations.
2. The Regulations provide three criteria for determining whether a foreign entity’s PEM is in the ROC: (i) the decision maker who makes major decisions on business, financial, and personnel management is an ROC resident, or the place where such major decisions are made is in the ROC; (ii) the financial statements, accounting books, board resolutions and/or shareholder resolutions are prepared or stored in the ROC; and (iii) the major business activities are conducted in the ROC.
3. The required documentation and registration process for a foreign entity to voluntarily apply for a PEM registration are stipulated under the Regulations.
4. The Regulations set forth the tax authorities’ procedures and burden of proof in determining whether Article 43-4 of the ITA applies to a foreign entity, as well as foreign entities’ obligations to cooperate and register PEM.
5. If a foreign entity is subject to Article 43-4 of the ITA and fails to apply for PEM registration within the set period, the tax authorities may appoint such entity’s major decision maker as the person responsible for applying for and completing the PEM registration.