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 items of restricted distribution of surplus 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 current-year earnings of the said controlled foreign company, and such recognized investment income shall be included in its taxable income of the current year.
The holding ratio and holding period of the profit-seeking enterprise mentioned in the preceding paragraph shall be calculated based on the proportion of its holding of the shares or capital of the controlled foreign company relative to the total issued shares or total capital of the controlled foreign company, with the weighted average over the holding period.
From the year a foreign affiliated company qualifies as a controlled foreign company, the profit-seeking enterprise may sequentially deduct assessed losses of previous years from the controlled foreign company’s current-year earnings for up to ten years, starting from the year following the one in which the loss occurred, as prescribed in the first paragraph, provided that, the profit-seeking enterprise has provided documents within the deadline as prescribed in Subparagraphs 1 to 4 of Paragraph 1 of Article 10, and has calculated the losses of the controlled foreign company as prescribed in Article 6 and the preceding article, and has filed them in the required format and such losses have been assessed by the tax authority of the enterprise’s location. For controlled foreign companies exempt from compliance with Paragraph 1 under the criteria of Paragraph 1 of Article 5, the said assessed losses of previous years shall still be deducted from the current-year earnings of the controlled foreign company.
Where a controlled foreign company carries out a capital reduction to compensate the assessed losses mentioned in the preceding paragraph, the amount of loss compensated accordingly shall be sequentially deducted from the assessed losses of previous years.