Concept and Implementation of CFC Legislation

S. 361. Introduction

Controlled foreign corporation (CFC) rules usually are applied and introduced in domestic tax systems as anti-avoidance measures that may secure the national tax base by limiting the tax privilege. The privilege or benefit in terms of tax to be paid in the country in which the parent company is situated can be achieved by shifting the passive income to a CFC in a low tax country. In other words, the CFC rules in most of the cases are intended to be prophylactic instead of raising tax revenues.

Thus, CFC rules are mostly relevant for multinational companies that are incorporated in a high tax country. The income of a foreign subsidiary generally is not subject to tax in the country of the shareholder because of the generally accepted separate-entity approach even if the foreign corporation would be subject to full taxation on foreign income earned by the shareholder corporation directly. Thus, by setting-up a foreign corporation, a taxpayer (shareholder, parent company) can, absent special rules, defer taxation of foreign income until it is repatriated, for example, as a dividend.

Furthermore, if the country in which the parent company is situated applies the exemption ...