Controlled foreign corporation rules – Part 3

Select jurisdictions CFC rules

CFC legislation is adopted in many countries although with some differences. It is important to analyse the practices followed by different state and to understand the similarities and differences in measures opted by different countries.

CFC rules were first introduced as ‘Subpart F’ legislation in the United States in 1964. Germany followed in 1972 using the US rules as a blue print. In 2013, more than 30 countries worldwide used CFC rules to limit profit shifting by multinational corporations[1] . The number of countries introducing CFC rules has been growing since then.

A bird’s eye view of the CFC rules of some of the jurisdictions has been tabulated below

Country Description
United states CFC rules were initially enacted in 1960 with the purpose of gathering information about U.S. companies overseas

Under the U.S. rules, a foreign entity is considered a CFC, if 50 percent or more of vote or value is controlled by U.S. shareholders

A U.S. shareholder is a U.S. person who owns 10 percent of more of vote or value in the company

Once an entity is categorized as a CFC, income that falls into one of the categories as Subpart F income must be included in the gross income of the parent company and taxed at the U.S. rate. CFC income is determined at the entity level and then attributed to a U.S. shareholder to be taxed in the U.S.
Germany CFC rules were initially enacted in 1972

Under the German regime, a CFC is a foreign company where its capital or voting rights are either directly or indirectly majority-owned by German residents at the end of its fiscal year. The rules apply if the company generates passive income, and its income is taxed below the 25 percent threshold

German CFC rules apply if a German company directly or indirectly holds 50% or more of the voting rights in a foreign affiliate and if this affiliates faces an effective tax rate of less than 25% (being calculated according to German tax base measures). If the foreign company earns passive income, that passive income is immediately included in the corporate tax base of the German parent company and taxed at the German tax rate – no matter where the passive income effectively accrued    
France CFC rules were initially enacted in 1980, France was the fourth country after the U.S., Germany and Canada to incorporate such rules into its tax system

France enacted CFC rules as a legislative response to the abusive use of its participation exemption regime

CFC Rules in France apply to foreign subsidiaries or permanent establishments of a French company that are controlled by a French parent company
United Kingdom – France’s enactment of CFC rules was followed by the UK in 1984

The initial purpose of the rules in the UK was apparently due to the creation of offshore money boxes—paper regimes that led to capital exports, while allowing business to otherwise carry on unaffected
China Enacted in 2008, to be considered a CFC, the company must be effectively controlled by one or more Chinese residents by ownership, capital, business operations, or authority over purchase and sales-related matters

– The rules were created to prevent Chinese multinationals from leaving profits in low-tax jurisdictions through various arrangements without business substance, but the application of the rules is not common
Japan Brought up in 1978, CFC status is determined either by an equity ownership test or a de facto control test

The control requirement to categorize a foreign resident company (FRC) as a CFC is 50 percent of direct or indirect control of the Japanese shareholders over the company. A Japanese shareholder is a company or any associated person that holds 10 percent or more of the outstanding shares of the CFC
Dutch The country did not have a CFC regime until it was made mandatory by anti-tax avoidance directive (ATAD) for 2019  

A foreign company or a permanent establishment is considered a CFC for Dutch law purposes when the entity is a tax resident in a jurisdiction without a corporate income tax, or tax resident in a jurisdiction with a statutory corporate income tax rate of lower than 9 percent, or tax resident of a jurisdiction included in the EU blacklist of non-cooperative jurisdictions   
 
A foreign entity is considered a CFC if a Dutch corporate taxpayer has a direct or indirect interest of more than 50 percent in a low-taxed foreign subsidiary or PE

[1] See KPMG (2008) for a brief survey of institutional details. Lang et al. (2004) offer a detailed discussion of CFC rules from a legal perspective.

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