Controlled foreign corporation

Controlled Foreign Corporation (CFC) is a corporate entity that is registered and conducts business in a different jurisdiction or country than the residency of the controlling owners. The concept of a CFC is primarily used in the context of taxation and international business to prevent tax evasion and profit shifting by multinational corporations.

Overview

A Controlled Foreign Corporation is typically established in a low-tax or no-tax jurisdiction to take advantage of favorable tax laws. The primary purpose of CFC regulations is to curb the deferral of income tax by U.S. taxpayers and other residents of high-tax countries through the use of foreign subsidiaries.

CFC Rules

CFC rules are part of the tax code in many countries, including the United States, the United Kingdom, and Australia. These rules require the shareholders of a CFC to include in their taxable income their pro-rata share of the CFC's income, even if it has not been distributed as dividends. This is to ensure that the income earned by the CFC is taxed in the shareholder's home country.

United States

In the United States, CFC rules are governed by Subpart F of the Internal Revenue Code. Under these rules, certain types of income earned by a CFC, known as Subpart F income, must be included in the gross income of the U.S. shareholders. This includes income such as foreign base company income, insurance income, and income from countries under sanctions.

United Kingdom

The United Kingdom's CFC rules are designed to prevent UK-based companies from shifting profits to subsidiaries in low-tax jurisdictions. The rules require UK companies to pay tax on the profits of their CFCs if those profits are artificially diverted from the UK.

Australia

Australia's CFC rules are part of the Income Tax Assessment Act 1936. These rules require Australian residents to include in their assessable income their share of the CFC's attributable income, which includes passive income and income from related party transactions.

Tax Planning and Compliance

Multinational corporations often engage in tax planning to minimize their tax liabilities. However, CFC rules are designed to limit the benefits of such planning by ensuring that income earned by foreign subsidiaries is subject to tax in the parent company's home country. Compliance with CFC rules requires careful planning and documentation to avoid penalties and ensure that all income is properly reported.

Related Concepts

• Transfer pricing
• Base erosion and profit shifting
• Tax haven
• Double taxation
• Foreign tax credit

See Also

• Subpart F
• Internal Revenue Code
• Tax avoidance
• International taxation
• Multinational corporation