Tax issues regarding related-party transactions have always been at the core of tax planning. While, like most countries, dividends received by a parent company from its subsidiaries may enjoy certain tax exemptions, various tax laws in Taiwan prevent taxpayers from obtaining undue tax benefits through related-party transactions.

Owning 90% of a subsidiary's shares is a key criteria 

When a parent company acquires more than 90 percent of the shares of a subsidiary through mergers, divisions or acquisitions, or when a financial holding company holds more than 90 percent of the shares of a Taiwanese subsidiary, they can file consolidated tax returns. By doing so, parent and subsidiary companies which are effectively a single entity economically would be treated as a single entity for tax purposes. This prevents the parent company from facing increased tax burdens because of the establishment of multiple subsidiaries and maintains tax neutrality. Additionally, various transactions between parent and subsidiary companies under the mechanism can offset each other, thereby relieving related companies from the burden of transfer pricing and enforcement costs. However, in practice, tax authorities in Taiwan have at times disallowed certain cost deductions under the circumstance of consolidated tax returns, resulting in additional unexpected tax liabilities.

Taiwan has implemented CFC regime

Taiwan implemented the CFC regime after 2016 and has subsequently refined related legal provisions. Under the CFC regime, profits generated by subsidiaries in low-tax jurisdictions, even if not distributed, must be included in the taxable income of the Taiwanese parent company. Unless the subsidiary meets one of the following exemptions: (1) it engages in substantial operating activities; or (2) its annual surplus earnings are less than NT$7 million.

CFC's impact to tax planning in Taiwan

The implementation of the CFC regime has profoundly impacted tax planning in Taiwan. Previously, Taiwanese companies often established subsidiaries in tax havens and reinvested in other countries (mostly, Mainland China), not only for tax reasons but also to circumvent certain Taiwanese investment regulations. However, with the implementation of the CFC regime, there is no longer a tax incentive to establish companies in overseas tax havens, and there may even be risks of penalties from tax authorities because of improper reporting of profits from overseas subsidiaries. Therefore, Taiwanese companies are facing the process of restructuring overseas investments and reallocating funds.

Domestic intercompany transactions

Dividends or earnings obtained by Taiwanese PSEs from their investments in other domestic PSEs are exempt from taxation. This is a significant tax planning factor for holding companies or investment companies.

However, in most cases, Taiwanese tax laws aim to prevent enterprises from reducing their tax burdens through transactions between related parties. Apart from general transfer pricing rules, the deductibility of certain types of expenditures to related parties would be limited by numerous anti-avoidance rules.

International intercompany transactions

Taiwan's tax laws primarily address the issue of shifting profits to low-tax jurisdictions by employing transfer pricing regulations. Since 2004, Taiwan's transfer pricing regime has been gradually implemented and continuously refined. In 2017, Taiwan further adopted recommendations from the BEPS Action Plan 13, which require multinational enterprise group members to disclose information such as master file reports, local files (i.e., transfer pricing reports) and country-by-country reports for PSEs within the group.