Concept and Implementation of CFC Legislation

S. 1061. General introduction

Controlled Foreign Company or CFC (hereafter CFC) rules are relatively new in the history of taxes. In 1962, the United States of America (US) was the first country to enact CFC rules. The main purpose was to gather information about US companies overseas and to track foreign tax credits. The Tax Cuts and Jobs Act of 2017 implemented new rules that further curbed deferral and effectively expanded the scope of US worldwide taxation. Essentially, CFC rules aim to prevent individuals and corporations of stashing funds in CFCs to avoid domestic taxation.

CFC rules also aim to end possible tax abuse schemes. MNEs (Multinational Enterprise) are shifting profits from high tax jurisdictions to low tax jurisdictions. For example, CFC in low tax jurisdictions generate revenues from transactions with group companies outside the home State of the CFC. The CFC income in principle requires little or no substance in the State of residence. As long as the CFC does not distribute profits to the shareholders, a tax deferral can be realized. However, avoiding such deferral can be reached by CFC legislation and undistributed profits become taxable. CFC rules draw the line between...