APAC Tax Matters: 13th edition

Taiwan

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At a glance

  • Amendments to anti-avoidance rules yet to be enacted
  • Plan to establish free economic pilot zones

The Controlled foreign company (CFC) and place of effective management (PEM) proposals yet to be enacted

On 1 April 2013, Taiwan’s Legislative Yuan passed the first review of the Income Tax Act (“ITA”) amendments to introduce the anti-avoidance tax rules in respect of controlled foreign company (“CFC”) and the place of effective management (“PEM”) with effect from 1 January 2015.  The CFC and PEM bills are expected to be formally enacted in Q4 2013.

CFC rule

A Taiwanese company that is investing in overseas companies is currently taxed when earnings are repatriated back to Taiwan as dividends. In order to prevent Taiwanese entities from retaining profits of subsidiaries overseas to avoid Taiwanese income taxes, the Ministry of Finance (MOF) has proposed to implement the CFC rule effective in taxable years beginning in 2015.

Pursuant to the draft amendment to Article 43-3 of the ITA, the Taiwanese parent company must recognize as taxable income the profits of CFCs that fall under specific criteria. However, when the earnings are actually distributed back to the Taiwanese parent company, such earnings will not be taxed again in the hands of the Taiwanese parent company. Once the CFC rule is enacted, the MOF is authorized to promulgate the relevant details for the tax rule.

PEM rule

According to the draft amendment to Article 43-4 of the ITA, a foreign company with its place of effective management in Taiwan must be deemed as tax resident in Taiwan and subject to relevant income taxes in Taiwan, such as being taxed on its worldwide income. Once the PEM rule is enacted, the MOF is authorized to promulgate relevant details, such as the criteria for a foreign company to be treated as a Taiwanese tax resident.

The Free Economic Pilot Zones (FEPZs) Plan

On 27 March 2013, Taiwan’s Council for Economic Planning and Development (the “EPD Council”) of the Executive Yuan released a plan to establish free economic pilot zones (FEPZs). The plan is intended to build a fully liberalized and internationalized business and trading environment for Taiwan by significantly deregulating the current restrictions on the flow of goods, talents and capital as well as developing high-end industrial activities such as smart logistics services, international medical services and value-added agricultural services.

The plan includes some corporate income tax incentives for entities set up in the FEPZs relating to:

  • Repatriation of earnings to foreign shareholders
  • Acquisition of patents
  • Conducting research and development activities; and set-up of operating headquarters

The FEPZ plan is expected to be implemented through a phased approach:

  • Phase 1: the FEPZs will be implemented by developing the current free trade zones together with the nearby science parks by revising the related administrative regulations. Meanwhile, the competent governmental agencies will work on the enactment of the Statute of Free Economic Pilot Zones (the “FEPZ Statute”).
  • Phase 2: After enactment of the FEPZ Statute, a FEPZ may be established in other places which are deemed suitable by the government.

According to the plan, it is expected that the draft amendments to relevant administrative rulings and the draft bill for the FEPZ Statute will be submitted to the Executive Yuan for review in Q3 2013.