The new see-through rule applies to income tax only. Although this rule reinforces the preference to hold Taiwan real estate through individual title from income tax perspective, wealth planners should review existing structures and consider various angles for planning in the future, in particular on criminal risk assessment of trustees and insurance companies.
When a structure is used to hold Taiwan real estate, we also see growing interest recently in putting the holding company in an offshore trust or an offshore insurance policy. Given the imminent application of the CFC rules and the above Amendment, additional analysis (and future regulatory scrutiny) may highlight some additional questions, which we summarize below:
Can an offshore trustee/insurance policy still hold Taiwan real estate?
Yes, subject to prudent assessment on criminal risk.
Double-layer holding structure (i.e., holding through both offshore holding company and onshore holding company) requires additional Taiwan regulatory approval regardless of whether it is under a trust or an insurance policy. In such approval the regulator will require information of the ultimate beneficial owner (UBO). If a Taiwan individual retains control but on the document it only shows the insurance company or a secretariat company being the only UBO, after CFC and the Amendment we believe this might cause misstatement, tax avoidance and even document forgery risk. We have seen a handful cases in the past in this area. However, to deal with CFC issues we see a trend to promote more of these UBO structure. This may invite scrutiny from the regulator not only to current but also to previous cases.
What are the tax implications for an offshore trustee/insurance policy holding Taiwan real estate?
Calculation of holding period and basis step-up are important.
The applicable tax rates on real estate trading (from 20% to 45%) are determined by the holding period and holding structure. In order to calculate the holding period, we need to determine whether settling such real estate into a trust or insurance policy will re-calculate the holding period. For planning purpose we should avoid the re-calculation. Trustees or insurance companies should also obtain a legal opinion as to whether the real estate has basis step-up at various timings (e.g., death of policy holder/settlor, distribution to beneficiaries) to avoid unfavorable tax implications on heirs as opposed to not settling the real estate into trusts/insurance policies.
How the Amendment and CFC together would affect estate planning for Taiwan residents?
An important takeaway is that wealth planners should not only focus on tax advice but also legal advice if the planning includes Taiwan regulatory approvals.
Taiwan promulgates new rules on real estate and CFC, but it did not reinvent the wheel. It basically follows US taxation on real estate holding company (e.g., FIRPTA) and CFC, and just like one needs to deal with IRS and DOJ in the US, in Taiwan the most risky area is never the tax authority but the Taiwan Ministry of Justice Investigation Bureau and the judicial system.
