Taiwan's Taxation of Offshore Trusts: Key Developments
Bottom Line Up Front
In 2024, Taiwan introduced major reforms mandating offshore trustees to register with the Taiwan tax authorities and report income from controlled foreign corporations (CFCs), starting January 1. This marks a notable shift from the previous policy, where offshore trustees generally were not governed by Taiwan's tax laws.
Core CFC Rules (Effective January 1, 2023)
Taiwan's CFC regulations, implemented on January 1, 2023, under Article 43-3 of the Income Tax Act, are designed to prevent offshore tax evasion.
These rules are applicable when:
- A Taiwan individual and related parties directly or indirectly hold 50% or more of the shares or capital of a foreign company in a low-tax jurisdiction, or have control over such a company.
- The foreign company is located in a low-tax jurisdiction.
- The income is liable for the Alternative Minimum Tax (AMT).
Major 2024 Developments
- January 2024 Ruling: The Ministry of Finance issued a ruling on 4 January 2024, imposing the AMT on settlors and beneficiaries of offshore trusts when CFC is involved.
- July 2024 Ruling: On 10 July 2024, the MOF issued an unprecedented ruling requiring offshore trustees to register with Taiwan tax authorities when a Taiwan tax resident settlor transfers CFC shares or capital as trust assets.
Registration and Reporting Requirements
For Offshore Trustees
- Registration with the Taiwan tax authorities is required to obtain a uniform tax ID number.
- Anyone lacking a physical presence in Taiwan is required to appoint a local agent for registration.
- Must prepare detailed books, income statements, distribution statements, and other records for all trust assets, including both CFC and non-CFC assets.
Reporting Timeline
- Trust income reports must be filed by the end of January each year for the preceding financial year.
- The initial report for fiscal year 2024 must be submitted by 31 January 2025.
Retroactive Application
The ruling is effective retroactively from January 1, 2024, which could render offshore trustees non-compliant even if they stop their Taiwan activities right away. This retroactive application has created substantial compliance challenges for the industry.
Penalties and Enforcement
Trustees who fail to fulfil reporting responsibilities are subject to penalties under Article 111-1 of the Income Tax Act, which include fines of 5% of the unreported trust income, up to NT$300,000, and a minimum fine of NT$15,000.
Alternative Minimum Tax (AMT) Implications
Taiwan applies an AMT at a flat rate of 20% to tax residents, including expatriates who reside in the country for 183 days or more annually. Foreign-sourced income is included in AMT calculations if the individual is a Taiwan tax resident and the foreign earnings reach or exceed TWD 1 million, provided the basic income surpasses TWD 7.5 million.
Strategic Implications
- Information Exchange: Because Taiwan isn't fully part of the CRS network and can only exchange information bilaterally—currently with Japan, the UK, and Australia—this regulation essentially establishes a "CRS backdoor" to enhance government oversight of offshore assets.
- Trust Restructuring: The modifications have generated increased interest in alternative trust jurisdictions, as entities consider moving to places like New Zealand and the UK, which offer greater regulatory certainty.
Practical Challenges
- Mixed Beneficiaries: When trusts have beneficiaries who are both Taiwan and non-Taiwan tax residents, and trustees cannot verify their tax residency, they are required to report all beneficiaries and their income to the MOF.
- Discretionary Trusts: For discretionary trusts, CFC income must be allocated on an average basis according to the number of beneficiaries.
- Compliance Complexity: The ruling poses challenges for offshore trustees in assessing scope, applicability, legality, and potential penalties for non-compliance, while also addressing AML-related issues.
Conclusion
These changes represent the most significant updates to Taiwan's trust taxation system in recent years, fundamentally transforming the environment for offshore trust arrangements involving Taiwan tax residents.
Get In Touch
For more information please contact Michael Velten.
michael@veltenadvisors.com
+6590687547
391B Orchard Rd, Level 22, Ngee Ann City Tower B, Singapore 238874
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