Controlled Foreign Corporation (CFC)

What Is a Controlled Foreign Corporation (CFC)?

A 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. Control of the foreign company is defined, in the U.S., according to the percentage of shares owned by U.S. citizens.

Controlled foreign corporation (CFC) laws work alongside tax treaties to dictate how taxpayers declare their foreign earnings. A CFC is advantageous for companies when the cost of setting up a business, foreign branches, or partnerships in a foreign country is lower even after the tax implications — or when the global exposure could help the business grow.

Understanding Controlled Foreign Corporations (CFC)

The CFC structure was created to help prevent tax evasion, which was done by setting up offshore companies in jurisdictions with little or no tax, such as Bermuda and the Cayman Islands, historically. Each country has its own CFC laws, but most are similar in that they tend to target individuals over multinational corporations when it comes to how they are taxed.

For this reason, having a company qualify as independent will exempt it from CFC regulations. Major countries, which comply with CFC rules, include the United States, the United Kingdom, Germany, Japan, Australia, New Zealand, Brazil, Sweden, and Russia (since 2015).

A company that is considered independent is exempt from CFC regulations.

Countries differ in how they define the independence of a company. The determination can be based on how many individuals have a controlling interest in the company, as well as the percentage they control. For example, minimums can range from fewer than 10 to over 100 people, or 50% of voting shares, or 10% of the total outstanding shares.

A report by the Institute on Taxation and Economic Policy highlights how 366 of the United States’ 500 largest companies maintain nearly 9,800 tax haven subsidiaries globally. These subsidiaries hold greater than $2.6 trillion in profits. Companies that top the list include:

Specifically, Apple was cited to have booked $246 billion, avoiding $76.7 billion during the process. Apple’s three tax subsidiaries are based in Ireland. This figure is actually significantly lower than many other U.S.-based multinational corporations.

Special Considerations

To be considered a controlled foreign corporation in the U.S., more than 50% of the vote or value must be owned by U.S. shareholders, who must also own at least 10% of the company. U.S. shareholders of CFCs are subject to specific anti-deferral rules under the U.S. tax code, which may require a U.S. shareholder of a CFC to report and pay U.S. tax on undistributed earnings of the foreign corporation.

These rules have been in effect since December 2017. Prior to this date, there was not downward attribution and constructive ownership of foreign corporation stock from a foreign person to a U.S. corporation, U.S. partnership, or U.S. trust.

U.S. shareholders with controlling interests in foreign corporations must report their share of income from a CFC and their share of earnings and profits of that CFC, which are invested in United States property.