The Impact of Controlled Foreign Corporation (CFC) Rules on Stock Market Reactions

Prior to 2023, Taiwan had not yet implemented Controlled Foreign Corporation (CFC) rules, allowing multinational corporations to establish paper companies in low-tax countries or regions to avoid domestic corporate income tax by retaining earnings offshore without repatriation. After the formal implementation of CFC rules in 2023, retained earnings in CFCs are now deemed as distributed and subject to taxation. Although the CFC rules are not considered additional taxation measures, deemed distribution of current-year earnings accelerates taxation, reduces corporate discretionary cash flow, and increases tax compliance costs. This study investigates the impact of CFC rules on the stock market through event study methodology and multivariate regression analysis. The empirical results reveal significant negative abnormal returns in the stock market following the implementation of CFC rules. Furthermore, companies in the electronics industry and family businesses experienced greater negative impacts from the CFC implementation. Companies audited by Big Four accounting firms were able to mitigate the negative impact of CFC implementation through earlier planning, as evidenced by a significant positive relationship between Big Four auditors and cumulative abnormal returns.