Glossary · SearchOffshore
What Is a Controlled Foreign Corporation (CFC)?
A Controlled Foreign Corporation (CFC) is a foreign company that is controlled by tax residents of a higher-tax country. Most major developed economies have CFC rules that can attribute the undistributed profits of such offshore companies to the controlling resident shareholders — requiring them to pay home-country tax on those profits even without a dividend distribution.
Why CFC Rules Exist
The Purpose of CFC Legislation
CFC rules are anti-avoidance provisions designed to prevent high-tax country residents from using offshore companies to indefinitely defer home-country tax on passive income — interest, dividends, royalties — by accumulating those profits in an offshore structure rather than distributing them. Without CFC rules, a UK-resident shareholder could receive dividends in a BVI company, invest the returns, and never pay UK tax unless and until the money was repatriated.
CFC rules typically operate by:
- Identifying offshore companies "controlled" by residents of the high-tax country (typically more than 50% ownership or voting control)
- Assessing whether the company earns "passive" or "mobile" income (interest, royalties, dividends from non-trading activities)
- Attributing a proportionate share of that undistributed income to the controlling shareholders
- Taxing the attributed income in the hands of the resident shareholders as if it had been distributed
By Country
CFC Rules by Jurisdiction
| Country | CFC Regime | Control Threshold | Key Features | Exemptions |
|---|---|---|---|---|
| United States | Subpart F / GILTI | More than 50% (US shareholders owning 10%+) | Subpart F taxes passive foreign income; GILTI taxes global intangible low-taxed income of CFCs with effective rate below 10.5% | Active business income; high-tax exceptions |
| United Kingdom | UK CFC Rules (ICTA/TIOPA) | More than 50% | Applies to UK companies with CFC subsidiaries. "Gateway" tests determine applicability; finance company exemptions available | Exempt period; excluded territories; low-profit exemption |
| Germany | Außensteuergesetz (AStG) | More than 50% | Applies to passive income in low-tax jurisdictions (below 25% effective rate) | Active income; EU/EEA substance exemptions |
| Australia | Australian CFC Rules | More than 50% | Attributable income rules for CFCs in unlisted country companies; complex passive income tests | Active income; comparable tax exemption |
| France | Article 209B CGI | More than 50% | Applies to entities in low-tax jurisdictions with passive income; rebuttable by demonstrating genuine activity | Genuine commercial activity; EU substance |
| Japan | Foreign Subsidiary Company (FSC) rules | 50%+ including related parties | Passive income attribution; paper company rules; tainted income concept | Active business; deemed dividends |
Implications for Offshore Structures
CFC Rules and Offshore Companies
CFC rules are among the most important tax considerations for individuals and corporations from high-tax jurisdictions who use offshore companies. Key practical implications include:
No Deferral of Passive Income
For US persons, GILTI and Subpart F effectively eliminate the ability to defer tax on passive income accumulated in offshore CFCs. The zero-tax environment of Cayman or BVI may provide little benefit for US-controlled passive income vehicles.
Active Business Exception
Most CFC regimes exclude genuinely active business income — trading companies with real operations typically are not subject to CFC attribution. This is why genuine economic substance in the offshore jurisdiction is important.
Interaction with Economic Substance
Entities that have genuine economic substance in their offshore jurisdiction are better positioned to qualify for active business exemptions from CFC rules — another reason why substance requirements and CFC planning interact.
US Citizens Particularly Affected
The US taxes citizens on worldwide income regardless of residency, and the US CFC rules (Subpart F and GILTI) are among the most extensive globally. US-connected offshore structures require specialist US tax advice.
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