Limiting Base Erosion

S. 2731. Introduction

1.1. CFC rules: preliminary remarks

Controlled Foreign Companies (CFC) regulations are considered a legal instrument foreseen by domestic tax law to counteract the fictious shifting abroad of income, typically to low-tax jurisdictions with the aim to postpone sine die the taxation of such income. The purpose of these rules, i.e. the CFC rules, is to avoid in such situations tax deferral.

It is important to mention that in an imputation system, tax advantages gained by transferring income abroad are only transitional. In contrast, a dividend exemption system offers a permanent tax advantage allowing a tax-free repatriation of income. For this reason, an effective CFC legislation has to be coordinated with the tax treatment of dividends and other rules on the taxation of business profits.

1.1.1. BEPS Action 3: Strengthening CFC rules

The OECD Base Erosion and Profit Shifting (BEPS) Final Report (Final Report) is composed of fifteen different action plans. Most of them are discussed in other contributions in this volume. BEPS Action 3 (Action 3), divided into seven chapters, focuses on the use of CFC rules to prevent profit shifting and long-term deferral of tax. The OECD e...