Concept and Implementation of CFC Legislation

S. 3281. Introduction and scope

In recent years, policy makers and practitioners around the world have paid a lot of attention to controlled foreign company (CFC) rules in consideration of the key role that such rules play in the business, economic, and financial international arenas. In particular, CFC rules play a paramount role when addressing aggressive tax planning challenges by multinational enterprises.

Following the work of the OECD/G20 on base erosion and profit shifting (BEPS) and the related recommendations concerning the design of CFC rules, the European Commission has decided to focus its efforts – inter alia – on the introduction of appropriate CFC regulation or the tightening of already existing CFC guidelines in the European Union Member States. As a result, in 2016, the anti-tax avoidance directive (ATAD) was issued including minimum requirements for the design of CFC rules (Articles 7 and 8). As a consequence, the ATAD has required Member States to implement or amend accordingly the CFC regulation in their national tax systems.

In essence, CFC rules provide that shareholders should be reattributed CFCs’ diverted income if they are deemed to benefit from low-tax regimes. Th...