Applicability of Taiwan CFC Rules to Trusts
Taiwan's Controlled Foreign Corporation (CFC) regulations apply to trust structures when a Taiwanese tax resident (individual or company) is involved as a settlor, beneficiary, or is otherwise linked to the trust holding shares or capital in a CFC.
Shares Held via Trusts Count Toward CFC Thresholds
When a trust (offshore or otherwise) holds shares or capital of a foreign company in a low-tax jurisdiction, those shares are aggregated to determine whether the CFC control or ownership thresholds are met.
Trustee Reporting Obligations
- Both offshore and onshore trustees must report relevant trust assets to Taiwan’s Ministry of Finance (MOF) if a Taiwanese person is a settlor or beneficiary and the trust holds CFC shares.
- Trustees must register with Taiwanese tax authorities, obtain a tax ID, and prepare income statements, distribution statements, and other documents for all trust assets, including CFCs.
- Reporting begins for the 2024 fiscal year, with filings required by the end of January of the following year.
- Penalties are applied for non-compliance, and offshore trustees without a presence in Taiwan must appoint a local agent for reporting.
How Tax Is Assessed
- Even if the trust is discretionary (where beneficiaries might not know their potential distribution in advance), the CFC income is allocated among relevant beneficiaries, generally on an average basis unless more specific information is available.
- Taxpayers can be taxed on their share of undistributed CFC profits through the trust, even before any actual cash distribution is received.
Retroactive Application
- The rules and related rulings apply retroactively to trusts established before the CFC’s implementation if they hold applicable CFC assets.
Practical Implications
- Comprehensive compliance required: Trustees, especially offshore, must undertake significant compliance work and closely coordinate with Taiwanese beneficiaries or settlors to ensure all reporting obligations are fulfilled under the new CFC regime.
- Strategic Planning Needed: The rules reduce the appeal of using offshore trusts to avoid CFC taxation and expand Taiwan's ability to tax overseas income routed through trusts.
- Potential issues for discretionary trusts: Timing mismatches may arise between when CFC income is taxed and when (or if) it is distributed to beneficiaries.
Summary Table: Trusts and Taiwan CFC Rules
Aspect | Requirement/Explanation |
Trust-held CFC shares | Included in CFC control/ownership calculations |
Reporting agent | Trustee must register and appoint a local agent if offshore |
Required filings | Financials, asset and income statements, beneficiary allocation |
Beneficiary allocation | Generally averaged among Taiwanese tax resident beneficiaries of discretionary trusts. |
Retroactive effect | Applies to pre-existing trusts from 2024 onward |
Penalties for non-compliance | Fines and required corrective filings |
In summary, trusts, including offshore discretionary trusts, are subject to Taiwan’s CFC regime if they hold significant CFC assets and involve Taiwanese tax residents as settlors or beneficiaries. Trustees must comply with extensive reporting requirements, and CFC income may be taxed even before distributions are made to beneficiaries.
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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