Taiwan Issues New Guidelines on Trustee Reporting Obligations – Introduction
On 10th July 2024, Taiwan’s Ministry of Finance (MOF) issued a new tax ruling which clarifies the obligations and reporting procedures for both onshore and offshore trustees concerning Controlled Foreign Corporation (CFC) trust income.
This ruling supplements previous guidance by outlining the responsibilities of trustees regarding the settlor or beneficiary’s CFC trust income, starting from the 2024 fiscal year.
Background
Earlier, on 4th January 2024, the MOF had issued a tax ruling which provided a calculation method and guidance for CFC reporting.
This guidance applies to any settlor using shares or capital of a foreign-affiliated enterprise based in a low-tax jurisdiction (the “Shares of Foreign Enterprise in Low-Tax Countries”).
Under Article 92-1 of the Taiwan Income Tax Act, trustees are required to report such holdings.
The latest Ruling further elaborates on the specific procedures trustees must follow when reporting income from such trust assets.
Implementation
Trustee Reporting Obligations
Trustees are now required to report trust income to the MOF under the following conditions:
- If the settlor uses Shares of Foreign Enterprise in low-tax jurisdictions as trust assets; and
- If the settlor or beneficiaries are subject to CFC-related tax rulings, such as those found in Article 43-3 of the Income Tax Act and Article 12-1 of the Income Basic Tax Act.
Required Reporting Documents
Trustees must submit a comprehensive report of all trust assets, including but not limited to the property inventory, revenue and expenditure statements, and the statement of trust benefits accrued and payable to beneficiaries.
This requirement pertains specifically to trusts that include Shares of Foreign Enterprises in low-tax jurisdictions.
It’s important to note that while all trust property must be declared, only the CFC trust income is taxed in advance.
The taxation of other trust property remains on a “cash basis.” The MOF is expected to release a CFC filing form for trustees, which will become the standard format for such reports.
Reporting Timeline
Trustees are required to begin reporting the trust income of settlors or beneficiaries from the fiscal year 2024 onwards.
The report for each fiscal year must be submitted by the end of January of the following year, meaning the first report, covering fiscal year 2024, is due by 31st January 2025.
Offshore trustees who are unable to file the report themselves may appoint an agent to assist with the process.
Method of Reporting
Trustees must apply for a uniform tax ID number from the tax authorities to facilitate the reporting process.
Specific instructions on which tax authorities trustees should apply to will be provided.
Consequences of Non-Compliance
Trustees who fail to meet their reporting obligations under Article 92-1 of the Income Tax Act, the CFC rules, or the new Ruling will face penalties under Article 111-1 of the Income Tax Act.
These penalties include fines amounting to 5% of the under-reported or undeclared trust income, with a maximum fine of NT$ 300,000 and a minimum of NT$ 15,000.
Additionally, trustees who fail to accurately file tax withholding returns or issue the necessary documents and certificates will incur a fine of NT$ 7,500.
They must also submit corrected filings within a specified timeframe to avoid further fines, which are calculated as 5% of the current year’s trust property income, subject to the same fine limits.
Potential implications
Implications for Offshore Trustees
The new Ruling has significant implications for offshore trustees, who are now required to adhere to Taiwan’s reporting obligations.
Previously, Taiwan’s participation in the Common Reporting Standard (CRS) network was limited, making it difficult for the MOF to access foreign tax information, except through bilateral agreements with countries such as Japan, the UK, and Australia.
Following this Ruling, offshore trustees must review their Taiwanese clients’ offshore asset structures and assess their CFC risks to ensure compliance.
Reporting for the First Half of 2024
There is some uncertainty about whether trustees need to report income for the first half of 2024, particularly if the trust relationship is terminated shortly after the Ruling’s issuance.
Preliminary discussions with the MOF suggest that if a trust is terminated after 10th July 2024, and a successor trustee takes over, the previous trustee may not be penalised, provided the successor trustee reports the income for the entire year.
Further clarification from the MOF is anticipated.
Determining Beneficiary Tax Residency
If a trust has beneficiaries both in and outside of Taiwan, and the trustee cannot confirm the beneficiaries’ tax residency status, they must report all beneficiaries and their respective income to the MOF.
Each beneficiary is responsible for declaring their overseas income based on their residency status.
Enforcement Against Foreign Trustees
How the MOF will enforce penalties against foreign trustees without a physical presence or business agent in Taiwan remains to be seen.
Special Purpose Trusts
There is some ambiguity regarding whether offshore trustees of special purpose trusts need to declare the trust property, especially when no specific beneficiaries are designated.
According to an earlier MOF ruling , if a trust has no specified beneficiaries and the settlor does not retain the right to designate them, the trustee is responsible for reporting the trust’s assets under Article 5-1 of the Estate and Gift Tax Act.
The trustee would also be subject to income tax on the income derived from such trust property.
Thus, if a settlor establishes an offshore special purpose trust that meets these conditions, and there is no income generated during the trust’s term, none of the beneficiaries should be treated as Taiwanese tax residents, and the trustee would not be required to report the trust property.
Taiwan Issues New Guidelines on Trustee Reporting Obligations – Conclusion
The recent MOF Ruling on CFC trust income reporting necessitates careful attention to compliance.
Trustees must thoroughly analyse the financial details of the CFC, identify the beneficiaries, and review the trust property to ensure accurate reporting.
It is recommended that anyone potentially impacted by these changes should engage professional assistance.
Final thoughts
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