Group enterprises meeting certain criteria under the Financial Holding Company Act and Business Mergers & Acquisitions Act may file consolidated tax returns for the Taiwan parent and its first tier Taiwan subsidiaries. For other enterprises, group taxation is not permitted. The Taiwan parent is eligible to file consolidated tax returns if it continuously holds over 90% of the shares of the subsidiaries for 12 months in a tax year.
Transfer pricing regulations were established to constrain multinational corporations from leaving their profits in countries with lower tax rates. For applicable companies, the disclosure of related-party transactions in the CIT return and the preparation of a transfer pricing report is required. Upon request, the transfer pricing report will have to be submitted to the Taiwan tax authority within one-month of notice. The transfer pricing report must demonstrate the company’s good faith effort to comply with the assessment rules. Without proper reason, failure to comply with such rules will result in additional tax payable and financial penalties. The types of transactions governed by these regulations include the following: transfer of tangible assets, use of tangible assets, transfer of intangible assets, use of intangible assets, rendering of services, use of funds, business restructuring, and other types of transactions prescribed by the MoF.
If related-party transaction amounts exceed certain thresholds laid out below, an advance pricing agreement (APA) with the tax authority may be obtained to eliminate risk of inter-company prices being challenged. The criteria for applying for an APA are as follows:
- The total amount of the controlled transaction covered under the APA is at least TWD 500 million or the annual amount of such controlled transaction is at least TWD 200 million.
- There has been no significant act of tax evasion in the past three years.
- The required documentation for the APA application has been well prepared, including the transfer pricing report.
- Other criteria specified by the MoF are satisfied.
Three tier transfer pricing documentation
In addition to a transfer pricing report, corporations also need to provide a Master File and a Country-by-Country Reporting (CBCR) file.
The Master File is to contain information on the corporation’s group’s value chain analysis, description of intangible assets, and financing activities. The threshold for being exempted from needing to prepare a Master File is each individual Taiwan local entity's total net operating revenues and non-operating income being less than TWD 3 billion, or over TWD 3 billion but with total absolute value of cross-border controlled transaction(s) amounting to less than TWD 1.5 billion in the current year.
The CBCR file is to contain information relating to the allocation of the corporation’s group’s profit/loss, resources, taxes paid, and primary activities performed by each entity. The threshold for being exempted from preparing a CBCR file is the corporation’s group's consolidated group revenues and non-operating income being less than TWD 27 billion (approximately equal to the OECD's threshold of 750 million euros [EUR]) in the preceding year. Moreover, for Taiwan entities under a multinational enterprise (MNE) group headquartered outside of Taiwan, even if the parent company or the surrogate company (as the case may be) is required to submit a CbCR file according to its country's regulations, the Taiwan entities shall be exempted from submitting a CbCR file to Taiwan tax authorities as long as it is exempted from Master File submission.
Deductible interest expense on inter-company loans is capped at a prescribed debt-to-equity ratio of 3:1. The thin capitalisation rule generally applies to profit-seeking enterprises, except banks, credit cooperatives, financial holding companies, bills finance companies, insurance companies, and securities companies.
Controlled foreign companies (CFCs)
Currently, profits of overseas subsidiaries held by Taiwan companies are not subject to 20% CIT in Taiwan until such profits are repatriated to Taiwan as dividend income. However, under the new CFC mechanism expected to take effect in the future, qualified investment income will be deemed distributed and taxable in Taiwan in advance, even if profits have not actually been distributed.
Place of effective management (PEM)
Under the new tax regime, if a foreign company meets all three criteria triggering PEM definition, including (i) decision making location, (ii) record keeping and maintenance location, and (iii) actual operating location are all in Taiwan, the foreign enterprise will be deemed as having its head office in Taiwan and will be subject to tax assessment in accordance with Taiwan Income Tax Act and other tax regulations. A foreign enterprise may voluntarily apply to be subject to the PEM taxation mechanism, or the tax authorities may determine whether the PEM taxation mechanism should apply after conducting appropriate audits.