Newsletter
Taiwan Ministry of Finance (MOF) issued new tax ruling on trustee's obligations and procedures to report CFC trust income
Taiwan Ministry of Finance (MOF) issued new tax ruling on
trustee's obligations and procedures to report CFC trust income
Frank Lin/Alvin Chen/Daniel Chang
Key Points
On July 10, 2024, the Taiwan Ministry of Finance (the
"MOF") issued a tax ruling (Tai-Cai-Shui-Zhi No. 11304525870; the
"Ruling") to provide guidance on controlled foreign corporation (the
"CFC") reporting procedures and obligations of onshore and offshore trustees. The
Ruling provides supplementary clarifications on matters related to trustees' reporting requirements
and obligations on the settlor or the beneficiary's CFC trust income starting from fiscal year
2024.
Background
On January 4, 2024, the MOF issued a tax ruling
(Tai-Cai-Shui-Zhi No. 11204665340) to provide guidance and a calculation method for CFC reporting.
This ruling pertains to any settlor using shares or capital of a foreign affiliated enterprise
registered in a low-tax burden country or jurisdiction (the "Shares of Foreign
Enterprise in low-tax
burden countries") and
places reporting obligations on the trustee by Article 92-1 of the Taiwan Income Tax Act. On this
basis, the Ruling further clarifies the trustee's obligations and procedures for reporting the trust
income generated from the Shares of Foreign Enterprise in low-tax burden countries under the
trust.
Application
1.
Trustee's reporting obligation
The trustee must report trust income to the MOF in accordance with the
relevant regulations under the following circumstances:
(1) If the settlor uses Shares of Foreign Enterprise in low-tax burden countries
as a trust asset; and
(2) If the settlor or beneficiaries of such trust are subject to relevant CFC tax
rulings on the Shares of Foreign Enterprise in low-tax burden countries under the trust (e.g., Article
43-3 of the Income Tax Act and Article 12-1 of the Income Basic
Tax Act)
2.
Reporting documents
The trustee should file a trust income report for all trust assets of
the same trust (please note that this only applies to the trusts with Shares of Foreign Enterprise in
low-tax burden countries). The trustee must report the property inventory of the trust, revenue and
expenditure statements, the statement of trust benefits accrued and payable to trust beneficiaries,
and other related documents (Articles 6-2, 89-1, and 92-1 of the Income Tax Act). It is important to note that while all trust property must
be reported, only trust income for CFC is taxed in advance, while taxation of the remaining trust
property is still subject to a “cash basis.” To L&L's understanding, the MOF may
announce the CFC filing form for trustee in the near future, and the trustee will be required to use
such filing form as the basis for reporting.
3.
Reporting period
The trustee should report the trust income of the settlor or the beneficiary
of the trust starting from the fiscal year 2024 and for subsequent years. The reporting period for the
trustee to report the trust income for the previous year is by the end of January each year. That is,
the trustee should report the trust income for fiscal year 2024
by the end of January 2025. Offshore trustees who cannot file the report themselves may appoint an
agent to assist them.
4.
Reporting method
The trustee should apply to the tax authorities for the issuance of a uniform
tax ID number to facilitate the reporting of trust income. The following is a list of the tax
authorities to which different kinds of trustees should apply:
|
Status of trustee
|
Designation of tax authorities
|
|
Individual residing in Taiwan (R.O.C.)
|
• With
household registration: the tax authorities at the place of the household registration
• Without
household registration: the tax authorities where the individual resides
|
|
Trustee having its head office within the territory
of Taiwan (R.O.C.)
|
The
tax authorities of the place of registration of the head office
|
|
Trustee having its head office outside the territory
of Taiwan (R.O.C.) but having a fixed place of business within the territory
of Taiwan (R.O.C.)
|
• Profit-seeking
enterprise having only one (1) fixed place of business:
the tax authorities of the place of registration of the fixed place of business
• Profit-seeking
enterprise having more than two (2) fixed places of business:
the tax authorities of the place of registration of the fixed place of business designated by the trustee |
|
Trustee having its head office outside the territory
of Taiwan (R.O.C.), without a fixed place of business but having a business
agent within the territory of Taiwan (R.O.C.)
|
The
tax authorities of the place of registration of the business
agent
|
|
Trustee other than those listed above
(e.g., trustee having its head office outside the
territory of Taiwan (R.O.C.), without a fixed place of business or a business
agent within the territory of Taiwan (R.O.C.))
|
• Voluntary
filing: tax authorities of the place of central government
• Entrusted
agent filing: tax authorities of the place of entrusted agent
The trustee shall fill out a power of attorney and attach identification documents, and report to and be approved by the tax authorities of the place of entrusted agent. The qualifications of the agent are as follows: - Individual residing in Taiwan (R.O.C.),
or
- An enterprise, institution, group, or
organization with a fixed place of business in Taiwan (R.O.C.).
|
5. Risks for failure to report
A trustee who fails to comply with the reporting obligations under Article
92-1 of the Income Tax Act, the CFC rules, and the Ruling will be subject to the penalty under Article
111-1 of the Income Tax Act. Trustees found to have under-declared or omitted to declare any revenue
accrued on the trust property or made a false declaration will incur a fine equal to 5% of the
under-declared or evaded income of the trust beneficiaries or the incorrectly reported income of such
beneficiaries. However, the amount of the fine must not exceed NT$ 300,000 or be less than NT$
15,000.
The trustee who fails to file accurate tax withholding returns or to prepare
and issue the relevant documents, withholding certificates, withholding free certificates, or other
relevant certificates or receipts will incur a fine of NTD 7,500. Additionally, the trustee
will be required to make supplemental filing or issuing within a given time limit. Failure to do so
will result in a fine equal to 5% of the revenue accrued on the trust property in the then-current
year. However, the fine must not exceed NT$ 300,000 or be less than NT$
15,000.
Lee and Li viewpoints
1.
Offshore trustees must properly handle CFC
issues
As the Ruling further explains the specific methods of reporting trust income
for both onshore and offshore trustees, offshore trustees will be subject to the relevant reporting
obligations. In the past, due to the fact that Taiwan was not fully engaged to the CRS network, the
MOF could only obtain foreign tax information through bilateral negotiation (but up to now only with
Japan, UK and Australia). However, after the release of the Ruling, offshore trustees are now required
to review their Taiwan client's offshore asset structure, and assess the relevant CFC risk and their
own reporting obligations to avoid any risk of non-compliance.
2.
Trust income for the first half of fiscal year
2024
Since the Ruling was issued on July 10, 2024, it is questionable whether the
trustee should still be required to report the trust income for the first half of 2024 if the trust
relationship between the settlor and the trustee was terminated immediately after the Ruling was
issued. Preliminary discussions with the MOF indicate that if the trustee terminates the trust
relationship after July 10 and a successor trustee takes over the trust, it is unlikely that the
previous trustee will be penalized for violating Article 92-1 of the Income Tax Act if the successor
trustee (i.e., the trustee as of December 31, 2024) is already reporting the trust income for 2024.
Nonetheless, the implications are subject to the trustee's filing form and relevant clarifications to
be announced by the MOF in the near future.
3.
Determination of whether a beneficiary is a Taiwan
tax resident
If the beneficiaries of the same trust include both Taiwan tax residents and
non-Taiwan tax residents, and the trustee is unable to confirm the tax residency status of the
beneficiaries, the trustee should report all of the beneficiaries and their respective trust income to
the MOF. The beneficiaries will be responsible for filing their own tax returns for overseas income
according to their status.
4.
Enforcement in the event of a violation
It remains to be seen how the MOF will enforce the penalty if a foreign
trustee without a fixed place of business or a business agent in Taiwan fails to comply with the CFC
reporting obligation.
5.
Special purpose trust
Since there will not be any specific beneficiary under special purpose trust,
there is uncertainty about whether such an offshore trustee of a special purpose trust is required to
declare the trust property. According to the MOF's tax ruling (Tai-Cai-Shui-Zhi No. 09404509000) of
February 23, 2005, “The Types of Trust Deeds and their Taxation Principles,” if the
beneficiaries of a trust are not specified and the settlor does not reserve the right to designate the
beneficiaries and to distribute or dispose of the trust's benefits, the trustee should report the
trust's assets in accordance with Article 5-1 of the Estate and Gift Tax Act (gifts by natural
persons) or Article 3-2 of the Income Tax Act (gifts by profit-making enterprises). The trustee is
subject to income tax on income derived from such trust property under Paragraph 3, Article 3-4 of the
Income Tax Act. Therefore, if the settlor establishes an offshore special purpose trust and meets the
conditions in the above ruling, and there is income generated during the term of the trust, then
none of the beneficiaries should be viewed as tax residents of Taiwan, and the trustee should
not be obligated to report under such special purpose trust.
To properly address the trust income reporting issues related to CFCs, a
thorough analysis of the CFC's financial information, identity of the beneficiaries, and details of
the trust property is necessary. Therefore, it is advisable to consult professionals for assistance in
CFC filings to avoid penalties for failing to make the required declarations. Lee and Li's tax team
consists of experts who hold both domestic and foreign attorney and accountant licenses and have an
in-depth understanding of tax practice. We are up-to-date with the latest developments in domestic and
international tax laws and work closely with our affiliate CPA firm, L&L, Leaven & Co., CPAs.
If you have any questions about the new CFC tax system, please feel free to contact our tax team at
any time.