Concept and Implementation of CFC Legislation

S. 601. Introduction

The principles of corporate taxation can be regarded as the separation principle and the transparency principle. In the former, the company and the shareholder are taxed separately, i.e. the profits of the company, on the one hand, and the income of the shareholder (dividends) on the other. Thus, taxation at the level of the company takes place irrespective of whether dividends are distributed. The transparency principle, unlike the separation principle, is not predominant in the taxation of corporations but in the taxation of sole proprietorships and partnerships. It considers them as non-income taxable entities which leads to the fact that profits and losses are only calculated at the level of the company but, at the same time, assumes that they would have accrued to the shareholders. As an exception to the foregoing, however, there are also countries that apply the transparency principle to corporations. This, therefore, raises the question that I address in my thesis of whether the CFC rules nevertheless apply to those countries that treat corporations as transparent or whether this is not feasible.

As it is discussable if transparent entities and permanent establ...