What is a controlled foreign corporation rule (CFC)?

Many countries apply the controlled foreign corporation (CFC) rule as the main rule designed to fight tax avoidance.

If the person is a tax resident in country A and they own a company in country B, then the income of the company in country B, in order to be considered tax-transparent, must be reported in the country A.

Controlled foreign corporation applies if the person in control is a tax resident in a high tax country and owns a company in a low tax country (in a jurisdiction with low or no corporate income tax).

Approach to the controlled foreign corporation rule differs depending on the country. For example, some countries apply the CFC rule if a foreign-controlled corporation is established in a blacklisted jurisdiction only or is subject to a low tax rate (lower than 75% of domestic corporate income tax rate). CFC rule applies if an individual owns a significant part of the company (more than 25% of total shares).

European Union requires all Member States to have the CFC rule implemented. Nevertheless, the practical application of CFC is very different. Moreover, certain counties apply the CFC rule to companies, but not individuals, in which case the CFC is only relevant for an entity which controls another entity in a low tax country.

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