New CFC Taxation Ruling That Impacts Offshore Trustees A Backdoor to CRS? – Hubbis

By:

Michael Wong Special Senior Consultant Taipei Baker McKenzie

Peggy Chiu Partner Taipei Baker McKenzie

Daniel Chou Associate Partner Taipei Baker McKenzie

In Brief

In an unprecedented move, Taiwan's Ministry of Finance (MOF) issued a new ruling on 10 July 2024 that requires offshore trustees to register with Taiwan tax authorities when a Taiwan tax resident settler transfers the shares or capital of a Controlled Foreign Corporation located in a low-tax countries or regions outside of Taiwan (CFC) as trust assets. MOF indicates that this new ruling is to supplement the ruling dated 4 January 2024 that imposes Alternative Minimum Tax (AMT) on the settler/beneficiaries of offshore trusts when CFC is involved.

The new ruling stipulates that for those offshore trustees who are covered by this ruling they will need to prepare books, detailed income statements, distribution statement, etc. for all the trust assets (including CFC and non-CFC assets) owned by the trust pursuant to Taiwan's Income Tax Act (ITA). For offshore trustees with no presence in Taiwan, they will need to appoint a local agent for registration, obtain a tax identification number, and handle all relevant reporting and withholding procedures going forward.

As the new ruling has a retrospective effect and applies from 1 January 2024, there may be a risk of non-compliance even if an offshore trustee immediately terminates its current Taiwan engagements as a result of this new ruling.

In the past, Taiwan's tax laws were generally considered not applicable to offshore trustees as MOF did not have jurisdiction over them. With the implementation of the CFC taxation, MOF is eager to obtain information on offshore trusts as they may contain assets that generate Taiwan CFC income. Because Taiwan is not a full member of the CRS network, it can only achieve information exchange through bi-lateral negotiation and the progress has been slow (thus far only with respect to Japan, UK and Australia). If this unprecedented attempt to compel offshore trustees to voluntarily register in Taiwan becomes successful, this can vastly increase Taiwan government's visibility on offshore assets, in essence creating a "CRS backdoor."

This new ruling creates a number of difficulties for offshore trustees. They will obviously need to consider the scope, applicability and legality of the ruling and the potential penalties for non-compliance. But more fundamentally this also put them directly on the front line with respect to larger AML related issues, particularly if they know (or have reason to know) that their trust set-ups have Taiwan tax residents who are themselves non-compliant.

Actions To Do

Granted that the ruling is new and we expect further clarification from the MOF in the coming days, we believe there are some actions that may be considered immediately:

Offshore trustees: Please review your Taiwan client's offshore structure and assess the CFC risk immediately. The compliance team need to consider the non-compliance risk and how to be compliant going forward. While no planning / restructuring may be perfect, do-nothing may be the worst option in the long run.

rivate bankers: It's a good opportunity to open dialogue with your clients. Trusts are still good tools for succession planning, but a higher level of sophistication will be required.

Providers of other offshore solutions: You may consider your role in mitigating the CFC risks to make life easier for both trustees and their clients.

Family office: As we always maintain, when considering succession planning, please do not consider tax planning as your sole objective. Instead proper focus should be on legal enforceability, succession objectives, family mission and dynamics, with tax efficiency being the icing on the cake. Please discuss with your legal counsel whenever there is a new legal update, and work with your legal/tax counsel to discuss with your trustee on long term and more sustainable solutions.

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New CFC Taxation Ruling That Impacts Offshore Trustees A Backdoor to CRS? - Hubbis