For any profit-seeking enterprise and its related parties directly or indirectly holding 50% or more of shares or capital of a foreign affiliated enterprise registered in a low-tax burden country or jurisdiction, or having a significant influence on such a foreign affiliated enterprise, except in accordance with one of the following provisions, the surplus earnings of the foreign affiliated enterprise shall be recognized as the profit-seeking enterprise’s investment income which is calculated according to the ratio and holding period of the shares or capital, and such investment income shall be included in taxable income of the current year：
1.The foreign affiliated enterprise has substantial operating activities in its country or jurisdiction.
2.The current year surplus earnings of the foreign affiliated enterprise are below a standard. However, if the total amount of aggregating the current year’s surplus earnings of all foreign affiliated enterprises which are held by the same profit-seeking enterprise exceeds such standard, the investment income of the aforesaid foreign affiliated enterprises shall still be included in the taxable income of the current year.
The term "a low-tax country or jurisdiction" as mentioned in the preceding paragraph refers that the tax rate of profit-seeking enterprise income tax or similar tax in the country or jurisdiction where a foreign affiliated enterprise is located is not more than 70 percent of the tax rate set in Items 2 of Paragraph 5 of Article 5, or a country or jurisdiction which only taxes on a territorial basis.
From the current year in which the foreign affiliated enterprise is in accordance with provisions of Paragraph 1, if the losses of each year incurred in the foreign affiliated enterprise have been duly certified by a certified public accountant in a local country or jurisdiction or in the Republic of China, then filed by the profit-seeking enterprise, and verified by the tax authority, such losses may be deducted from surplus earnings of the foreign affiliated enterprise within ten years, and the investment income of the profit-seeking enterprise shall be calculated in accordance with the provisions of Paragraph 1.
When the profit-seeking enterprise receives the dividends or surplus earnings from the foreign affiliated enterprise, it shall not be included in taxable income within the range of the investment income which has been recognized according to the provisions of Paragraph 1; the excess amount shall be included in taxable income of the receiving year. In case income tax has been paid on dividends or surplus earnings in accordance with the tax act of the source country of that income, such tax paid may, upon presentation by the taxpayer of evidence of tax payment issued by the tax office of said source country and attested by an overseas agency of the Republic of China or other organizations recognized by the Government of the Republic of China in the said locale, be deducted from the amount of tax payable by the taxpayer within five years from the date following the expiration date of the statuary period for filing the tax return in the year of recognizing investment income; to the extent that such deduction shall not exceed the amount of tax which, computed at the applicable domestic tax rate, is increased in consequence of inclusion of investment income.
The regulations governing the scope of related parties, affiliated enterprises, a significant influence, recognized investment income, substantial operating activities, a standard of the current year surplus earnings, the deduction of losses, and foreign tax credits; the relevant calculation method; required documents; and other requirements specified in the preceding four Paragraphs shall be prescribed by the Ministry of Finance.
If an affiliated enterprise specified in Paragraph 1 is subject to Article 43-4, it is not subject to the provisions of the preceding five Paragraphs.