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The consequence when declaring a low/high value on exporting goods

    Writing an incorrect customs value declaration, or more specifically declaring a wrong value for customs, is something that many shippers have tried to do At this point we would like to remind you that customs duties are governmental taxes, and not paying them is actually committing fraud.  Here we wound not discuss the civil penalty or criminal penalty of such behaviors.  We would like to discuss the tax implication that undervalues customs declaration when import and import.

Case 1: Undervalue the export goods

You may have been asked by your foreign clients to declare a lower value. Since the customs duties in most countries are calculated on a percentage of the good’s value, your foreign clients can pay less tariff if the values of goos are lower.  

VAT in Taiwan: 

Company income tax in Taiwan:  

 Taiwanese tax residents, including individuals and companies, hold more than 50% of the shares of overseas companies in low-tax countries (the tax rate is lower than 14%), or have significant influence, the tax authority can adopt the principle of substantive taxation to tax on the reserved earnings of these overseas companies, even these oversea companies do not distribute dividends. 

   Dividends from foreign subsidiaries have often been distributed to the overseas holding companies and not to the shareholders in Taiwan to defer income taxation. However, after the implementation of the CFC, as long as the overseas company holding companies receive the dividends distributed by the foreign subsidiaries, it is deemed that the shareholders have received the dividends and shareholders must include the dividend in the personal overseas income in accordance with the Basic Income Tax. After deducting the basic allowance of NTD 6.7 million per person per year, the remaining domestic and foreign income must be taxed at 20%. 
Ex:
    An individual invests in a company in China through a Samoa registered company. Under the current CFC, if the net profit of the China company is 50 million NTD last year, the dividend will be paid to the Samoa company this year, as long as the Samoa company does not distribute dividends to the individual shareholder, individuals do not need to be taxed. 
    But after the implementation of CFC, the individual shareholder is deemed to have received the dividend, and the dividend income of 50 million NTD must be included in calculating the personal income tax.  After deducting the basic allowance of 6.7 million NTD per person per year, the remaining domestic and foreign income must be taxed at 20%. The possible tax due is 8.66 million NTD.

CFC declaration exemption

    After CFC hits the road, will all overseas companies be required to apply for CFC declaration? In fact, it is not. As mentioned in the previous column, the individual should confirm whether the overseas holding company is in a low-tax country or region, and then judge the individual and his/her relatives directly or indirectly holds more than 50% of the shares of an overseas holding company or has significant influence to this company.
     The individual shareholder can waive the CFC declaration if the overseas holding company meets both requirements:

Requirement one: Set up a fixed business office in the place of registration, hire employees, and actually operate the business locally.

Requirement two: Passive income accounts for less than 10% of total income. Negative income includes investment income, dividends, interest, royalties, rents, gains from the sale of assets, etc.

The second exemption is that the current year's net profit of the foreign holding company is below 7 million NTD. When the foreign holding companies's annual net profit is less than NT$7 million can be exempted from reporting. However, in order to prevent individuals from diversifying CFC surplus for exemption purposes, the individual, spouse and dependent relatives of the same comprehensive income tax return household are regulated. If the total surplus or loss of the CFC under control is positive and exceeds NT$7 million, the individual CFC’s surplus for the current year cannot be exempted from reporting.

Individual Controlled Foreign Company (CFC) Rules

Exemption Threshold
(1) The CFC carries out substantial operating activities
(2) The current year earnings of the CFC are less than NTD 7 million

Avoidance of  Double Taxation
1. When actually receiving dividends or earnings, the amount shall not be included in the basic income again
2. Foreign tax credits may be applicable
3. When an individual trades CFC shares and calculates capital gains, the  CFC’s business income included in the individual’s income previously can be deducted based on the trade ratio of the shares 

 

Taxation Requirements
To meet both requirements below
1. For any individual and his/her related parties directly or indirectly holding 50% or more of shares or capital of a foreign enterprise registered in a low-tax jurisdiction, or having a significant influence on such a foreign enterprise
2. For any individual with his or her spouse and relatives within the second degree of kinship holding 10% or more of shares or capital of a CFC

Taxation Investment Income
CFC business income of individuals
= (The current year surplus earnings of the CFC –The losses of past years assessed by tax authority) 
   X  Direct holding ratio  X Holding period

Business Controlled Foreign Company (CFC) Rules

Exemption Threshold
1. The CFC carries out substantial operating activities
2. The current year surplus earnings of the CFC are less than NTD 7 million

 

Avoidance of Double Taxation
1. When actually receiving the dividends or earnings, the amount shall be included in taxable income again
2. Foreign tax credits may be applicable
3. When an enterprise dispose of CFC shares and calculates capital gains, the  CFC’s investment income recognized previously can be deducted based on the disposal ratio of the shares

CFC Definition
For any profit-seeking enterprise and its related parties directly or indirectly holding 50% or more of shares or capital of a foreign enterprise registered in a low-tax jurisdiction, or having a significant influence on such a foreign enterprise

 

Taxation Investment Income
CFC investment income recognized by profit-seeking enterprises
= (The current year earnings of the CFC – The losses of past year assessed by tax authority)
   X Direct holding ratio  X Holding period

 

Enforcement Date
Will be determined by the Executive Yuan

Reference List of Countries or Regions with Low Tax rate 

    The Ministry of Finance provides the below reference list of countries or regions with low tax rate, in accordance with Article 43-3 of Income Tax Law, Article 12-1 of Basic Tax Regulations, and For-profit Enterprises Recognized As Controlled Foreign Company.    

1. Andorra  2. Anguilla  3. Bahamas  4. Bahrain  5. Barbados  6. Bermuda  7.Bosnia and Herzegovina

8. British Virgin Islands  9. Bulgaria  10. Cayman Islands  11. Cyprus  12. Democratic Republic of Timor-Leste 

13. Guernsey  14. Hungary  15. Ireland  16. Isle of Man  17. Jersey  18. Kosovo  19. Kyrgyzstan

20. Macao  21. Macedonia  22. Marshall Islands  23. Mauritius  24. (Moldova  25. Montenegro

26. Nauru  27. Netherlands Antilles  28. Palau  29. Principality of Liechtenstein  30. Saint Vincent and the Grenadine

31.  Samoa  32. Slovenia  33. State of Qatar 34. The Federation of Saint Christopher and Nevis

35.  Paraguay  36. Turks and Caicos Islands  37. Vanuatu  38. Brunei Darussalam  39. Burundi 

40. Chad   41. Costa Rica  42. Democratic Republic of the Congo  43. Djibouti  44. El Salvador 

45. Eswatini  46. Federated States of Micronesia  47.  Gibraltar  48. Guatemala  49. Guinea-Bissau

50. Honduras  51. Hong Kong  52. Kenya   53. Malawi  54. Malaysia  55. Mali  56. New Caledonia

57. Nicaragua  58. Niger  59. Palestine  60. Panama  61. Plurinational State of Bolivia  62. Senegal

63. Seychelles  64. Singapore  65. State of Eritrea  66. State of Kuwait  67. Syrian Arab Republic 

68. United Arab Emirates

Please note the list was updated based on the announcement on October 2, 2018 and includes but not limited to the low tax rate countries and areas. 

More questions? Let us guide you further

You may find these useful guides in helping you make your decision: