In a ruling earlier in July, Taiwan's Ministry of Finance said that offshore trustees must register with the jurisdiction's authorities when a tax resident settlor moves shares or capital into a Controlled Foreign Corporation based in an offshore hub, or somewhere outside Taiwan.

Offshore trustees could be caught out by an “unprecedented” move by Taiwan authorities over share or capital transfers involving a Controlled Foreign Corporation (CFC) located outside the Asian jurisdiction.

According to a briefing note issued last seek from law firm Baker McKenzie, Taiwan's Ministry of Finance (MOF) issued a new ruling on 10 July that requires offshore trustees to register with Taiwan tax authorities when a Taiwan tax resident settlor transfers shares or capital of a CFC located in low-tax countries or regions outside Taiwan such as trust assets. 

The new ruling operates retrospectively from 1 January 2024, Baker McKenzie said. “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,” it said. 

Taiwan isn’t a full member of the Common Reporting Standard – a framework for exchange of information between jurisdictions that was developed over a decade ago to foil forms of tax avoidance, and evasion. 

Because it is not a full CRS member, Taiwan can only achieve information exchange through bi-lateral deals. So far, Baker McKenzie said that progress has been slow, chalking up deals with Japan, UK and Australia.

If this unprecedented attempt to compel offshore trustees to voluntarily register in Taiwan becomes successful, this can increase the Taiwan government's visibility on offshore assets, in essence creating a "CRS backdoor", Baker McKenzie said.

The ruling means that for those offshore trustees who are covered by this ruling, they must prepare books, detailed income statements, distribution statements, and other material for all the trust assets (including CFC and non-CFC assets) owned by the trust pursuant to Taiwan's Income Tax Act (ITA), it said.

For offshore trustees with no presence in Taiwan, they must appoint a local agent for registration, obtain a tax identification number, and handle all relevant reporting and withholding procedures.

The ruling changes the game of offshore trustees, the law firm said. 

“In the past, Taiwan's tax laws were generally considered not applicable to offshore trustees as MOF did not have jurisdiction over them,” it said. However, the ministry is “eager” to obtain information on offshore trusts because they may contain assets that generate Taiwan CFC income, it continued. 

Baker McKenzie said the ruling creates a headache for offshore trustees. They will need to consider the scope, applicability and legality of the ruling and the potential penalties for breaching the rules.

“But more fundamentally this also puts 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 setups have Taiwan tax residents who are themselves non-compliant,” it added.