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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.
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