According to CFC rules, the profits of a foreign entity directly or indirectly owned by a local entity or individual should be declared and taxed in the fiscal year of accrual in the following cases.
- Trusts: When the trust is revocable, when the settlor is also the beneficiary, or when the resident individual or entity has full control of the trust
- When the foreign entity is not considered a tax resident of the jurisdiction where it is incorporated
- The local individual or entity directly or indirectly owns at least 50% of the capital of the foreign entity
- The foreign entity does not have sufficient structure to carry on its business or when at least 50% of the profits of the foreign entity are passive income
- The taxes paid by the foreign entity in the country where it is incorporated are less than the 25% of the income tax that would be payable in Argentina (this requirement is deemed as occurred if the entity is incorporated in a non-cooperative jurisdiction)
Under the controlled foreign company (CFC) rules, a resident entity may be subject to income tax on a current basis on "attributable income" of the entity's controlled foreign companies.
Controlled Foreign Companies (CFC) and thin capitalization
Beginning in January 2019, the Austrian government introduced a Controlled Foreign Company Rule. According to this rule, passive income of foreign subsidiaries in low-taxed countries (equal or below 12.5%) will be added to the income of the Austrian shareholder, if certain conditions are fulfilled. The CFC rule applies to foreign entities which are controlled by a domestic entity that holds more than 50% of the voting rights alone or together with its affiliated companies. In addition, general tax rules as the substance-over-form-principle, beneficial ownership concept and other anti-abuse rules remain.
Austrian tax law does not provide for specific thin capitalization rules. However, the Austrian courts have developed various principles to determine under which circumstances debt financing from shareholders is to be treated as equity for tax purposes (as a rough practical rule a debt-equity-ratio of 1:9 or 1:10 triggers, in general, questions during a tax audit). As regards an interest deduction, intra-group interest payments by Austrian companies to foreign connected low or non-taxed entities are not recognized for tax purposes.
A CFC-regime has been introduced as of January 1, 2019 (assessment year 2020) in compliance with the EU Anti-Tax Avoidance Directive 2016/1164 of July 12, 2016.
Subject to certain conditions, non-distributed profits stemming from foreign controlled artificial constructions will be attributed to the taxable base of the controlling Belgian entity.
As a general rule, profits of controlled foreign companies are taxable in Brazil every December 31, regardless of when profits are made available. Optional specific consolidation rules for direct and indirect controlled foreign companies may apply, including relief for foreign losses subject to certain conditions and limitations.
Under the foreign accrual property income (FAPI) rules, a Canadian-resident corporation may be subject to tax on a current basis in respect of "passive income" of a controlled foreign affiliate.
Under the offshore investment fund property (OIFP) rules, a Canadian-resident corporation may be subject to tax on a prescribed basis in respect of interests in certain non-resident entities.
The general anti-avoidance rule of the enterprise income tax law may be cited by the Chinese tax authorities to make adjustments on transactions that do not have reasonable business purposes.
If an offshore company is established in a low tax jurisdiction (with an effective income tax rate below 12.50%) and is "owned or controlled" by Chinese residents (enterprises and/or individuals), the Chinese resident shareholders must include in their taxable income the profits of the offshore company even if the offshore company has not actually distributed any profits without reasonable business needs.
If the ratio of debt-to-equity received by an enterprise from related parties exceeds the prescribed limit (currently two to one for non-financial enterprises and five to one for financial enterprises), the excess interest expense cannot be deducted for income tax purposes.
Under Colombian controlled foreign company (CFC) rules, domestic corporations or tax residents in Colombia that hold, directly or indirectly, a share percentage equal or greater to 10 percent of the total equity of the CFC or in its results, shall include in their income tax return the passive income obtained by such CFC.
A CFC is an entity that:
- Is controlled by a Colombian tax resident and
- Does not have tax residency in Colombia
CFC will include corporations, trusts, interest private foundations, investments funds or any other corporation or entity constituted or domiciled abroad, regardless of whether such entity is a legal entity or a disregarded entity for tax purposes.
The Colombian Tax Code sets forth a list of items of income that are considered as passive income. This list includes:
- Dividends and profit distributions
- Income derived from intangible assets
- Income obtained from the sale or lease of immovable property and
- Income derived from the performance of technical services, technical assistance, administrative, engineer, architecture, qualified scientist, industrial and commercial services in a jurisdiction different to where the CFC is located or it is a tax resident, among others
If a Colombian tax residents includes in its income tax return the passive income obtained by the CFC, the dividends distributed from the CFC will be untaxed in Colombia.
Under general anti-avoidance rules arrangements can be taxed based on their substance over the chosen form under strict criteria. The applicability of the rules is defined in case law.
Finnish CFC rules stipulate that a Finnish company can be taxed for its share in profit of a foreign legal entity as follows. As of Jnauary 1, 2019, due to implementation of the EU Anti-Avoidance Directive, CFC legislation is applied on a direct or indirect interest equal to at least 25% of the equity or voting rights in a foreign legal entity, which has a tax rate below 3/5 of the Finnish rate of tax. CFC legislation is not applied to entities within the European Economic Area (EEA) to the extent the entity has actual substance in that area and practices financial activity there. Entities outside the EEA should also not be included in the black list drafted by European Council if the relevant jurisdiction has an applicable international information exchange treaty, and the income of the entity in that jurisdiction is derived from industrial or corresponding production, related service rendering, shipping, related sales and marketing activity or intra-group trade with a group company within the same jurisdiction.
If a French company subject to corporate income tax in France has a foreign branch or if it holds, directly or indirectly, an interest (eg, shareholding, voting rights or a share in the profits) of at least 50% in any type of structure benefiting from a privileged tax regime in its home country (ie, effective tax paid that is 50% lower than the tax that would be paid in France in similar situations), the profits of such a foreign branch, entity or enterprise are subject to corporate income tax in France. Under certain conditions, the shareholding threshold is reduced to 5% if more than 50% of the foreign entity is held by French companies acting in concert or by entities controlled by the French company.
Low-taxed passive income (ie, tax rate of less than 25%) earned by a foreign corporation in which at least one German shareholder holds qualifying ownership interests (ie, an intermediary company) is imputed pro-rata to the German shareholders and is fully subject to German taxation unless the foreign corporation is based in the EU or EEA and carries out an economic activity therein, in which case a limitation may apply.
There is no controlled foreign corporation (CFC) regime in Hong Kong.
India presently has in place certain General Anti-Avoidance Rules (GAAR) or Specific Anti-Avoidance Rules (SAAR) pertaining to anti-deferral of taxes. GAAR will not apply in an arrangement where the tax benefit in the relevant assessment year does not exceed a sum of INR30,000,000 (Rs. 30 million).
Not applicable for this jurisdiction.
Under the Israeli controlled foreign company (CFC) rules, the undistributed passive income of certain nonresident corporations which was taxed at a rate less than 15%, will be subject to Israeli tax as if such passive income were distributed.
Israel also applies the anti-deferral regime of "professional foreign company" and to certain local, closely-held "service companies."
Income derived from controlled foreign companies (CFC) resident in a country with a privileged tax system is subject to taxation at the level of the Italian corporation under a tax transparency principle, unless the controlling company can demonstrate that
- the CFC carries out an effective business activity or
- the participation in the CFC does not result in the allocation of income in a privileged tax jurisdiction (for this purposes a specific ruling request might be filed with the Italian Tax Authorities).
As a general rule, a country is considered with a privileged tax system if it has a nominal level of taxation lower than 50% of the taxation level in Italy. Income derived from CFCs are specifically reported in the tax return of the controlling entities.
Specific CFC provisions also apply to passive "white-listed" CFCs (ie, CFCs resident in a "white-listed" country with an effective tax rate lower than 50% of the Italian tax rate and that derive more than 50% of their income from holding or investment in securities, participations, exploitation of intangible assets, etc).
General Anti-Avoidance Rule
Italian tax authorities may disregard any act put in place without a valid economic reason and for the sole purpose of gathering tax advantages otherwise not due.
The CFC Rules are subdivided according to the income tax rates levied on a foreign subsidiary as follows:
- when the tax burden on a foreign subsidiary is 30% or higher, the CFC Rules are not applicable. When the tax burden on a foreign subsidiary is between 20% and 30%, the CFC Rules are applicable to the domestic corporation if the foreign subsidiary falls into any of certain designated categories, such as a shell company, a cash-box company or a company located in blacklisted country or territory
- when the tax burden on a foreign subsidiary is under 20%, the CFC Rules are applicable to the domestic corporation if the foreign subsidiary does not satisfy certain requirements or if it earns passive income, such as income derived from interest, dividends, securities lending, leases of tangible property or excessive profits compared to capital
Luxembourg has introduced controlled foreign company (CFC) rules in the context of the transposition of the EU Anti-Tax Avoidance Directive 2016/1164 of July 12, 2016 (ATAD). The CFC rules are applicable from January 1, 2019. The CFC rules attribute net income to a Luxembourg taxpayer when its subsidiary or permanent establishment is located in a low-tax or no-tax jurisdiction, even if this income is not distributed. Such income will be subject to CIT at a rate of 17%.
A CFC must either be:
- A collective entity in which the Luxembourg taxpayer holds a direct or indirect participation of more than 50% or
- A permanent establishment
CFC rules will be triggered if the tax paid by the CFC is lower than the difference between the CIT that would have been paid on the same profits in Luxembourg and the actual CIT paid in the CFC state.
The CFC rules do not apply to a CFC whose profits do not exceed:
- EUR 750,000 or
- 10% of its operating costs within the tax period
If the CFC rules are triggered, the CFC's undistributed income will be taxed in Luxembourg provided that such income arises from non-genuine arrangements that are put in place essentially for the purpose of obtaining a tax advantage.
Mexican residents (and Mexican PEs of foreign residents) are required to pay income tax on income generated from investments in a jurisdiction with a preferential tax regime. For this purpose, an investment in a preferential tax regime is deemed to exist if the foreign entity is subject to an effective tax rate of less than 75% of the Mexican corporate tax rate or if the entity or vehicle is deemed to be fiscally transparent.
As a general rule, a Mexican taxpayer is not subject to income tax on earnings of a foreign subsidiary until the income is distributed. However, when the subsidiary or other investment vehicle is located in a preferential tax jurisdiction, such income must be reported as earned on a current basis, subject to certain exceptions.
Taxpayers are subject to tax on earnings from foreign investments that are generated, directly or indirectly, by foreign entities or legal organizations from foreign sources subject to preferential tax regimes in proportion to their participation in the capital of the entities or legal organizations.
For this purpose, income subject to a preferential tax regime is considered to be income not subject to tax outside Mexico or subject to income tax of less than 75% of the applicable income tax that would have been calculated and paid in Mexico. The income subject to this anti-deferral regime includes income in the form of cash, goods and services, or credit, as well as any presumed income determined by the tax authorities, even in those instances where the income has not been distributed to the Mexican taxpayer.
In addition, these anti-deferral rules are applicable to income generated directly or indirectly through fiscally transparent entities. For this purpose, foreign entities or organizations are deemed to be fiscally transparent when they are not considered income taxpayers in their country of incorporation or they are treated as residents for tax purposes but the income they generate is taxed not in their hands, but at the level of their members.
There are exceptions to these anti-deferral rules, when income from business activities is generated and no more than 20% of the income is passive income. The following are deemed to constitute passive income for these purposes: interest income, dividends, royalties, and gains from the sale of shares, securities or immovable property; income from the leasing of assets; and gratuitous income when such income is not generated through the carrying on of business activities.
As of January 1, 2019, CFC rules apply to Dutch corporate taxpayers holding a direct or indirect subsidiary or a permanent establishment that is established in a jurisdiction that is included on:
- A yearly published Dutch blacklist (ie, jurisdictions with a statutory corporate tax rate less than 9%) or
- The European list of noncooperative jurisdictions
The CFC rules only apply to direct or indirect subsidiaries if the Dutch shareholder, alone or together with an associated enterprise or person, holds an equity interest of more than 50% in the subsidiary. Certain exceptions may apply, including where the subsidiary or permanent establishment has "real economic activities."
Under the CFC rules, certain categories of undistributed (passive) income of such CFCs will be included in the corporate tax base of the Dutch corporate taxpayer.
In addition to these CFC rules, a shareholding of 25% or more in a low taxed portfolio investment with more or equal to 90% "bad assets" should be revalued annually at the fair market value.
General ANTI-avoidance rul
Wholly artificial constructions which are not in line with the purpose and scope of the law, resulting in a lower taxation, may be restricted under the general anti-avoidance rule.
The CFC rules states if Norwegian resident taxpayers hold or control at least 50% of the shares or equity in certain "low taxed" foreign entities, the Norwegian resident taxpayers will be subject to taxation on a current basis for its proportionate share of the foreign entity's profits. A foreign legal entity is considered "low taxed," if the entity is subject to less than 2/3 of the Norwegian tax on the same income (ie, 14.67% in 2019).
The CFC rules does not apply if Norway has entered into a tax treaty with the relevant country and the income is not of a mainly passive nature. The same applies to entities resident in EEA-countries, provided that real business activities are carried out in the relevant jurisdiction.
Under the CFC rules, a domestic corporation may be subject to tax at the rate of 19% on the income of a foreign subsidiary if certain criteria apply. This includes where the ownership of the foreign company is at least 50% and the so-called passive income threshold of 33%.
Profits or income derived by an entity resident in a black-listed jurisdiction or in a jurisdiction where it is subject to an effective tax rate equal to or lower than 60% of the Portuguese standard CIT rate, are imputed to the Portuguese taxpayer, provided it holds, directly or indirectly, at least 25% of the share capital (10% if more than 50% of the capital is held by Portuguese taxpayers), voting rights, or rights to income or assets of that entity.
CFC rules also apply if the controlled entity is held by a Portuguese entity through a legal representative, fiduciary, or intermediary.
CFC rules do not apply if the CFC is resident in another EU country or in an EEA member state (bound to administrative cooperation on tax matters), provided that there are valid economic reasons underlying the incorporation and running of such company and it carries out agricultural, commercial, industrial, or services activities.
Under the controlled foreign corporation (CFC) rules, a Romanian tax resident shall include in its taxable basis the non-distributed revenues of an entity or a permanent establishment qualifying as a CFC, proportionally to the taxpayers' participation in said CFC.
Exit taxation rules
Under the exit taxation rules, corporate tax resident involved in transfers of assets to or from the head office or a permanent establishment for which Romania loses the taxation right is liable to pay standard corporate income tax on the difference between the market value and the fiscal value of those assets.
General Anti - Abuse Rules (GAARs)
Under the GAAR, non-genuine arrangements or series of arrangements, meaning those that do not have valid commercial reasons which reflect economic reality, carried out for the main purpose of obtaining a tax advantage, will be disallowed by the tax authorities when computing the tax liability of a taxpayer.
A CFC shall be a foreign organization, in which so-called "controlling persons" are Russian entities or individuals recognised as tax residents of the Russian Federation.
A CFC for Russian tax purposes also includes an unincorporated foreign structure (such as a fund, partnership, trust and similar entities) whose controlling persons are organisations or individuals which are recognised as tax residents of the Russian Federation.
Such a Russian resident (both an organisation or individual) must include in its taxable income the profits of the foreign company treated as CFC (subject to certain exemptions) even if the foreign company has not actually distributed any profits.
The taxpayers which are recognised as tax residents of the Russian Federation must serve notifications of their participation interest in both:
- Foreign organisations and unincorporated structures and
- All CFCs in which they are recognised to be controlling persons
Notification on the CFC shall be served not later than on March 20 of the year following the tax period in which the relevant share of profit in the hands of the controlling person shall be declared.
Russian tax residents owning foreign subsidiaries through a foreign public company are generally not subject to the Russian CFC taxation of foreign profits, provided that two conditions are met: (i) more than 25% of its the foreign company are publicly traded on a foreign stock exchange in an OECD member state that is not "blacklisted" by the Russian Federal Tax Service, and (ii) the Russian tax resident investor directly or indirectly owns 50% or less in such a publicly traded company.
Interest charged under a controlled debt (generally, a loan granted to a Russian organisation by a related party) will be fully or partially re-classified as dividends for tax purposes if the amount of controlled debt exceeds the net assets by more than three times (12.5 times for banks and leasing companies). A sister company debt is also captured by the controlled debt concept. If the taxpayer has negative net assets, then the whole amount of interest will be treated as dividends for taxation purposes (ie, they will be non-deductible and subject to withholding tax).
Foreign debts are not subject to Russian thin capitalization rules if all of the following conditions are met:
- Debt received is used exclusively to finance the Russian debtor's investment project in Russia. An investment project is defined as development of Russian manufacturing facilities for the production of goods and/or provision of services newly commissioned after January 1, 2019
- The debt is long-term that anticipates repayment of the principal amount of the debt not earlier than after five years from the grant
- The cumulative share of direct and indirect foreign participation in the Russian debtor's entity owned by the qualifying participant does not exceed 35%
- The foreign creditor is a registered and is tax resident in a tax treaty country with Russia
Not applicable for this jurisdiction.
SA has complicated CFC Legislation. The aim of this legislation is now not only to prevent the avoidance of taxation on investment income, but also to prevent the avoidance of taxation on all foreign income and capital gains earned by a CFC. Where residents of SA holds more than 50% of the participation rights in a foreign company which is non-resident, the resident must include a proportional ownership percentage of the net income earned by the foreign company in their income (subject to various exclusions).
Not applicable for this jurisdiction.
Generally, CFC rules apply when a controlled entity resident outside of the EU is subject to a tax rate below 75% of the effective Spanish Corporate Income Tax rate and obtains certain passive income, which shall be allocated to the Spanish controlling entity.
The controlled foreign corporation (CFC) rules state that a Swedish shareholder with a direct or indirect interest equal to at least 25% of the equity or voting rights in certain low taxed foreign legal entities is subject to immediate taxation on its proportionate share of the foreign legal entity's profits. A foreign company is considered low taxed if its income is taxed at a rate below 11.77% (2019), calculated under Swedish rules. The rate will be reduced to 11.33% in 2021.
Shareholders in companies resident in "approved" countries are, however, not subject to CFC taxation. Approved countries are included in a "white list," which is part of the Swedish Income Tax Act.
Switzerland does not have anti-deferral rules such as controlled foreign corporation (CFC) rules. Note, however, that under recent Swiss court decisions, passive companies located in offshore jurisdictions have been treated as Swiss tax resident, resulting in taxation in Switzerland similar to CFC taxation.
On 12 July 2016, the Taiwan government amended the Income Tax Act and introduced the controlled foreign company (CFC) and the criteria for determining a foreign company’s place of effective management (PEM) rules. However, the effective date of these new rules has not been announced by the Taiwan government.
Under the Turkish Controlled Foreign Company (CFC) rules, taxes paid by a foreign affiliate (such as income tax and corporate tax) can be set off against the taxation of the non-resident company's earnings.
Not applicable for this jurisdiction.
Not applicable for this jurisdiction.
United Arab Emirates
Not applicable for this jurisdiction.
Under the UK controlled foreign company (CFC) rules, a UK resident company may be taxed on the income of its foreign subsidiary. The scope of these rules is intended to be limited to situations where UK-source income has been artificially diverted into an overseas, low tax jurisdiction, particularly tax havens.
Under the controlled foreign corporation (CFC) rules, a domestic corporation may be subject to tax on a current basis on Subpart F income of a foreign subsidiary. A domestic corporation may also be subject to tax on a current basis on the GILTI income of a foreign subsidiary.
Under the passive foreign investment company (PFIC) rules, a foreign corporation may be treated as a PFIC if the percentage of its gross income or assets that are treated as passive exceeds certain thresholds. A shareholder of a PFIC may be subject to current US tax and other unfavorable tax consequences on gain from the sale of PFIC stock and on certain distributions from a PFIC.
Not applicable for this jurisdiction.