The National Taxation Bureau of Taipei, Ministry of Finance, stated that the Controlled Foreign Company (CFC) system has been in effect since 2023. When calculating the investment income of a CFC for the current year, profit-seeking enterprises shall not deduct the accumulated losses recorded in the CFC's accounts prior to the implementation of the CFC system.

The Bureau explained that, in accordance with Paragraph 1, Article 8 of the Regulations Governing Application of Recognizing Income from Controlled Foreign Company for Profit-Seeking Enterprise, to recognize its investment income based on its direct holding ratio and holding period of the shares or capital of a CFC, a profit-seeking enterprise shall deduct the legal reserve or items of restricted distribution of surplus earnings in accordance with the laws of the country or jurisdiction of the CFC, as well as the losses of past years assessed by the tax authority, from the current-year earnings of the said CFC, and such recognized investment income shall be included in its taxable income of the current year. Moreover, in accordance with Paragraph 3 of the same Article, when reporting a CFC's losses of past years, a profit-seeking enterprise shall submit the CFC's financial statements and other required supporting documents within the income tax filing deadline. A profit-seeking enterprise may sequentially deduct assessed losses of previous years from the CFC's current-year earnings for up to ten years, starting from the year following the one in which the loss occurred, provided that, such losses have been calculated in accordance with the relevant regulations, filed in the required format, and assessed by the tax authority of the enterprise's location. Therefore, the accumulated losses recorded in the CFC's accounts incurred in the year 2022 and prior years shall not be deducted from the CFC's current-year earnings.

The Bureau provides the following example: When Company A filed its 2023 Profit-Seeking Enterprise Income Tax Return, Company A reported the CFC investment income of NT$7,000,000. According to the investigation, prior to the year 2022, Company A held 100% of the shares of Company B in Mauritius, which met the definition of a CFC (hereinafter referred to as CFC B). Company A reported that CFC B's earnings for the year 2023 amounted to NT$9,000,000 and declared NT$2,000,000 as “legal reserve or items of restricted distribution of surplus earnings.” The NT$2,000,000 consisted of NT$1,100,000 used to compensate accumulated losses incurred in the year 2022 and prior years and NT$900,000 appropriated as legal reserve in accordance with local laws. However, the NT$1,100,000 used to compensate accumulated losses incurred in the year 2022 and prior years did not meet the definition of “losses from prior years assessed by the tax authority” and therefore could not be deducted from CFC B's current-year earnings. The Bureau accordingly assessed that the investment income of Company A should be NT$8,100,000 【(CFC B's current-year earnings of NT$9,000,000 - NT$900,000 appropriated as legal reserve in accordance with local laws) × 100% shareholding ratio】. As a result, the taxable income of Company A was assessed to be increased by NT$1,100,000 (NT$8,100,000 – NT$7,000,000), and Company A was required to pay additional tax of NT$220,000.

The Bureau would like to remind profit-seeking enterprises that when filing the CFC's current-year earnings, they should pay special attention to the deductible items prescribed in the applicable regulations. Profit-seeking enterprises must correctly calculate the investment income to be recognized and include it in the taxable income of the current year, so as to avoid any tax adjustments or additional tax payments for violations.

(Contact: Mr. Chen, Head of Profit-seeking Enterprise Income Tax Division; Tel: +886-2-2311-3711 ext. 1308)