To recognize its investment income based on its direct holding ratio and holding period of the shares or capital of a controlled foreign company, a profit-seeking enterprise shall deduct the legal reserve or restricted distributable earnings in accordance with the laws of the country or jurisdiction of the controlled foreign company, as well as the losses of past years assessed by the tax authority, from the earnings of the current year of a controlled foreign company under Paragraph 2, Article 2 herein, and such investment income shall be included in its taxable income of the current year.
The holding ratio and holding period of the profit-seeking enterprise in the preceding paragraph shall be calculated based on the actual holding of the shares or capital of the controlled foreign company, and the holding period with weighted average.
Starting from the year when the controlled foreign company becomes eligible, the profit-seeking enterprise may deduct the loss of a previous year from the controlled foreign company's earnings of the current year, in every year for a period of ten years, as set forth in the first paragraph, provided that, however, the profit-seeking enterprise has provided the financial statements or other documents of the controlled foreign company pursuant to Paragraph 6 of the preceding Article, and has calculated the losses of the controlled foreign company pursuant to Paragraph 5 of the preceding Article, and has filled out the forms required, and such losses have been assessed by the tax authority of the place of the profit-seeking enterprise. Where a controlled foreign company's earnings of the current year are exempt under Article 43-3 of the Income Tax Act pursuant to the Paragraph 1 of the preceding Article, the assessed losses of the previous years of such controlled foreign company shall be deducted in sequential order from its earnings of the current year.
Where a controlled foreign company files for capital reduction to make up its losses, the reduced capital amount and loss compensation amount shall be deducted from the assessed losses of previous years.