The Controlled Foreign Corporation Regime of Taiwan and Offshore Trusts
After the Controlled Foreign Corporation (CFC) regime is officially implemented in Taiwan in 2023, quite a few people start to wonder: what impact will the CFC regime have on offshore trusts?
There are many types of offshore trust structures. One common typical structure is that the trustee does not directly hold the trust property. Instead, an underlying company is established under the trustee to hold the trust property. This underlying company is often established in offshore jurisdictions such as the Cayman Islands, the British Virgin Islands, the Bahamas, Bermuda, or other overseas jurisdictions that are included in Taiwan’s CFC country list.
Now the question arises: will a underlying company in the typical offshore trust structure mentioned above be considered a CFC?
According to Article 12-1 of the "
Income Basic Tax Act," when it comes to determining whether a foreign corporation located in low-tax countries or regions constitutes a controlled foreign corporation in respect of an individual, the individual’s direct shareholding and, through his related enterprises and related persons, indirect shareholding, should be combined together for calculation purposes. According to Subsection 3, Paragraph 3, Article 3 of the "Regulations Governing Application of Income Calculation from Controlled Foreign Company for Individual, in a trust structure the trustee and the beneficiaries who are not a settlor are considered related persons of the settlor. As such, when calculating the shareholding of a foreign corporation held by a settlor, the equity held by the trustee must also be included. Based on such rule, therefore, in the typical offshore trust structure described above, the underlying company will be considered a CFC of the settlor.
However, the interpretation above may cause concern for many offshore trust holders. In addition to worrying about potential CFC tax risks, they are also concerned about whether it will be difficult or even impossible to calculate the taxes owed. For example, the settlor does not directly hold shares in the underlying company, so how should the settlor calculate his share of incomes from the CFC based on his share of the CFC, in particular when the trust is a discretionary one? Furthermore, all the discussions so far have focused on the settlor. Then what about the beneficiaries? Would the underlying company constitute a CFC for a beneficiary? If so, how should we determine the shares held by a beneficiary in the underlying company? Is that a double taxation if both settlors and beneficiaries must be taxed?
Indeed, many details have yet to be addressed in the current CFC regime. It is said that the Ministry of Finance is already preparing a Q&A document on trusts and CFCs, specifically dealing with issues related to calculating shareholding and income for trusts under the CFC regime. The Q&A document is expected to be released by the end of 2023.
Before the Q&A document is released, it is certain that the CFC system will include domestic and foreign trusts in the scope of CFC shareholding calculations. This does not mean that offshore trusts can no longer hold trust assets in the form of traditional underlying companies, but rather that trust holders and service providers must carefully evaluate the impact of the CFC regime, re-examine offshore trust structures, and then make suitable adjustments, if necessary, to minimize risks.
（本文僅一般狀況的介紹及描述，非正式學術文章，亦非對個案的法律建議。讀者如有個案的法律建議需求，仍應獨立尋求律師提供建議。）
