Concept and Implementation of CFC Legislation

S. 3561. Introduction

The first country in Europe to recognize the negative effects of international profit shifting was West Germany. By attributing income to low-tax foreign subsidiaries, internationally operating companies were able to shift income away from Germany and achieve deferral, meaning that the income was not subject to the domestic taxation until the profits were repatriated. In order to effectively counteract such practice, the German legislator, based on rules first introduced in the 1960s in the United States, developed a concept to prevent abuse beyond their borders, hence the first controlled foreign company (CFC) legislation was introduced in Europe. Other countries, such as France in 1980 and the United Kingdom in 1984, followed and introduced similar legislation. It is worth noting that many other EU countries such as Austria, Belgium, or the Netherlands as well as many Eastern European countries have had, until recently, no experience with CFC legislation.

In 2013, the OECD in cooperation with the G20 adopted a 15-point action plan to combat base erosion and profit shifting that included, inter alia, CFC legislation. Some of the participating countries had already im...