CFC rules: the owner's side of the tax
A controlled foreign company (CFC) is a foreign company controlled by a tax resident of another country. CFC rules let that country tax the company's undistributed profit in the owner's hands. That is why a zero-tax jurisdiction guarantees nothing on its own: thresholds, exemptions and deadlines are set where the owner is tax resident, and the company's own law has no say in them.
Where the rules come from
The OECD BEPS Action 3 report (2015) describes six building blocks, from the CFC definition and thresholds to computing income and avoiding double taxation. They are recommendations, so each country designs its own version. In the EU, Directive (EU) 2016/1164 (ATAD) makes a baseline mandatory.
European Union (ATAD, Article 7)
A foreign company is a CFC when both apply:
- the taxpayer, alone or with associated enterprises, holds more than 50% of votes or capital, or is entitled to more than 50% of profits;
- the tax the company actually pays is less than the difference between the tax it would pay in the taxpayer's country and the tax actually paid, roughly under half of the home tax.
Each member state sets the income categories and exceptions.
Russia (Tax Code, Articles 25.13–25.15)
A controlling person holds more than 25%, or more than 10% when all Russian residents together hold over 50% (for individuals, counting spouses and minor children). CFC profit enters the owner's base above RUB 10,000,000.
| Obligation | Deadline | Penalty |
|---|---|---|
| Notice of participation in a foreign organisation | 3 months from when it starts, changes or ends | RUB 50,000 per organisation |
| CFC notification | 30 April of the following year | RUB 500,000 per CFC |
| CFC financial statements (and audit report if any) | with the notification | RUB 500,000 |
Individuals can instead pay tax on a fixed profit, RUB 34,000,000 since 2021, regardless of how many CFCs they hold.
Canada
A taxpayer with a foreign affiliate files Form T1134 for each one, within 10 months after the reporting entity's tax year end (for years starting after 2020). Under FAPI, a share of a controlled foreign affiliate's passive income is included in the owner's income every year, even if nothing was distributed.
Ukraine
CFC rules sit in Article 39-2 of the Tax Code; controlling persons file a CFC report. Check thresholds and deadlines against the current code and State Tax Service guidance.
Preparing as an owner
- Fix each owner's tax residency, including moves during the year.
- Count interests through ownership chains, and with family members where the law requires.
- Keep company accounts to a standard the owner's tax authority will accept.
- Put notification dates in the calendar with a named person responsible.
The company's own tax residency is a separate test: a company managed from the owner's country can become resident there.
Example. An owner of a BVI holding company is about to move countries. Before the move, CFC status, notification dates and tax on future dividends need recalculating, because the new country's rules apply from the change of residence.
Source: CFC rules for a foreign company · related: company tax residency · international holding company