Taiwan has recently passed The Code of Management, Use and Taxation of Returning Offshore Funds (Code). The impetus for the Code is the recognition by the Taiwan government that there is a large pool of money offshore owned by Taiwan taxpayers, some of which is connected with international trade and the historical investments made by Taiwan taxpayers into China through third-country holding companies.
Much of this money is now seeking a new home, due to the trade wars, increasing compliance and disclosure requirements in many countries and under the Common Reporting Standard (CRS). Taiwan currently has only two reportable jurisdictions under CRS. Most of this money is also undeclared in Taiwan. Although the name of the Code does not suggest an amnesty to avoid criticism, the Code is supervised by the tax authority, which indicates that it is indeed driven by amnesty purposes.
While it wishes to encourage this money to be repatriated back into Taiwan, the Taiwan government is sensitive to two tensions: how the repatriation could be taxed in Taiwan and its impact on the current tax structure, and how to ensure that this money does not violate anti-money laundering (AML) rules.
What Does the Code Say?
Applicants of the Code
The applicants of the Code include individuals who repatriate offshore money including that from the People’s Republic of China (PRC), or corporates who repatriate offshore investment proceeds derived from an invested entity over which they have control or substantial influence.
Scope of Amnesty
The funds repatriated are exempt from income tax resulting from PRC-sourced income and the income tax arising from the alternative minimum tax (AMT) scheme, which means the gift tax or other taxation is not waived by the Code.
The applicants have to apply with the tax authority for a preview, and with the banks for the required AML check. When the preview and check are completed, the applicants can then open a “designated foreign currency account” with the bank.
Use of Funds
No funds can be used for real estate-related investment. Twenty-five percent of the funds can be used to buy financial products through a trust account or discretionary securities account, and 5% of the funds can be freely used. The other funds can be used for direct investments approved by the Ministry of Economic Affairs (MOEA). One third of the funds not used or used for financial investments can be withdrawn in the sixth year, seventh year and eighth year respectively.
Lower Income Tax Rate
The repatriated funds are subject to 8% and 10% income tax rates for the first year and second year respectively. Half of the paid tax could be refunded if the direct investment is approved by the MOEA with a completion certificate.
Funds not compliant with the above are subject to a 20% tax rate, which is the usual AMT rate, but still lower than the highest normal individual income tax rate of 40%.
When Does the Code Come into Effect?
The Code has been passed by the Legislative Yuan. However, applicants might not be able to file an application until detailed procedures are announced by the tax authority, with regard to the filing procedures, the MOEA, with regard to direct investments, and the Financial Supervisory Commission, with regard to the scope of the financial investments.
What is the Impact of the Code?
The Code was passed with a condition that the Controlled Foreign Corporation (CFC) legislation, which was passed in 2016 but has not yet come into effect, should be implemented after the Code has been effective for one year. This means the amnesty legislation is paired with the CFC legislation. Specifically, if Taiwan taxpayers do not repatriate the offshore money within one year, their offshore money could be subject to the CFC legislation, in which the earnings from an offshore company controlled by the taxpayers will likely be deemed dividends.
Taiwan’s banks have opened their arms to embrace the funds through different investment portfolios. Not all banks have the channels for direct investments, but direct investments will reduce the costs of fund repatriation. Therefore, banks are trying to partner with venture capital (VC) or angel funds. That said, the banks need to consider how to fulfill the AML check. Fintech solutions for compliance, know your customer and AML are likely to seize the greater proportion of demand.
For political and tax reasons, Taiwan investors have for many years invested in the PRC through a tax haven, and kept most of the profits within the tax haven. Although 8% and 10% tax rates have been criticized as still high, the trade war, the economic substance requirements in tax havens, and the expected implementation of CFC legislation, all together make the Code seem more attractive.
Taiwan’s presidential election will be held in early 2020. Therefore, the government is being aggressive about attracting fund repatriations and hopes that the Code will have an immediate effect on Taiwan’s economy.
What Challenges Can be Foreseen for the Code?
If no direct investments are made, the repatriated funds will be seen as an investment insurance policy with a lock-up term of seven years, which means at the eighth year, the investor can withdraw all the funds. However, it is a challenge to find investment products with a return of more than 8%, so that the investment could offset the initial cost of the fund repatriation.
There are still many good investment opportunities outside Taiwan with better returns. If Taiwan banks do not have attractive investment portfolios, the Code will be unable to attain its goal of attracting offshore funds. Therefore, foreign banks and traditional wealth management planners should also act more actively towards their Taiwanese clients. In addition, offshore wealth planners should also consider the forthcoming CFC effect on estate planning.
Only the income tax being waived may not be attractive enough for fund repatriation purposes. Taxpayers are concerned whether their application for the Code will subject them to a greater exposure risk of other taxes such as a gift tax or estate tax they originally had not paid for offshore assets.
- For local Taiwan banks, this is a good chance to seize the funds, because once they are repatriated into the designated accounts, they cannot be easily moved out for at least five to seven years.
- For offshore banks, planning for CFC and CRS is more important now and they should also more actively approach their Taiwan customers.
- For Taiwan taxpayers, the determination of whether to use the Code will depend on whether they have an immediate risk to their offshore funds, about which they will need to consult their professional advisers.
- For Taiwan Fintech players, this is a good time to promote Regtech solutions because compliance burdens will be heavier if the banks intend to embrace the funds.
- For Taiwan companies waiting for investments or merger opportunities and related ecosystem players, this is a good time for VC firms to partner with banks and find good investment targets for these fresh Taiwan funds.
Michael Wong is a Senior Executive Consultant and Peggy Chiu is an Associate Partner at Baker McKenzie, Taiwan