Concept Of Cfc

J U L Y 1 1 , 2 0 1 0

BY: CA.GAURAV GARG

JGARG ECONOMIC ADVISORS

Concept of CFC

Agenda

What is CFC?

Different Approaches

Different Exemptions

CFC regulations vs. DTAA

Glimpse of CFC regulation in some countries

Examples of other anti-avoidance rules in some countries

Disclaimer: In the presentation the speaker has also touched upon the CFC regulation and other anti-avoidance rules in other countries, the same is based upon the information available in the public domain and the same are not vetted by the practitioner of those countries. Accordingly, we (Speaker, JGarg Economic Advisors Pvt. Ltd., any Director, any Employee and any Consultant) takes no responsibility of any decision taken based on the information available in this presentation.

JGarg Economic Advisors

What is CFC?

A Controlled Foreign Company („CFC‟) is a company resident of State other than the home State of the taxpayer that controls/ owns it

As per revised discussion paper on DTC

“Foreign company which is directly or indirectly controlled by resident in India”

The goal of CFC regulation is to avoid the loss of tax revenue because of domestic companies allocating their profits to companies resident in low tax countries or tax havens

Eliminate the deferral of taxation of the income of CFCs

Concept of income arises vs. income distributed


Different Approaches

Two common approaches for establishing taxing rights:

Jurisdictional vs. Global Approach

Entity vs. Transactional Approach

Two common approached for taxing:

Treating the income as fictitious dividend

Taxing at shareholder level


“Passive income earned by a foreign company which is controlled directly or indirectly by a resident in India and where such income is not distributed to shareholders resulting in deferral of taxes, shall be deemed to have been distributed”


Different Exemptions

The distribution exemption – the CFC repatriate substantial percentage of its chargeable income.

The active income exemption – the CFC engaged in real commercial transactions with unconnected parties.

The public traded exemption – the CFC is listed on a stock exchange.

The motive exemption – sound business and economic reasons for using the CFC.


CFC regulations vs. DTAA

According to CFC regulation the domestic shareholders are taxed on the income of the CFC

Question of compatibility between CFC regulations and DTAA

As per OECD commentary on MTC, CFC are not contrary to the articles


DTAA will not have preferential status over the domestic law when CFC provisions are invoked


CFC Regulations in Australia

Criteria for CFC

Five or fewer Australian residents control or own more than 50% of the foreign entity; or

When one Australian resident owns 40% or more of the foreign entity

Shareholder means

Resident shareholder with stake equal to 10% or more

Foreign earning subject to current taxation

Pro-rata share of passive earning



Additional features of CFC rule

CFCs resident in “listed” countries (Canada, France, Germany, Japan, New Zealand, UK and US) have fewer types of income that may be attributed to domestic corporation

Credit for foreign taxes

Foreign income taxes paid by a CFC in relation to attributable amount

Australian taxes

Withholding taxes paid by CFC

Attributed income not taxed again

Dividend from previously attributed amounts is treated as exempt income



De minimis exemption, no attribution if attributable income is less than:

AUD 50,000, or

5% of the CFC‟s gross turnover, whichever is less


CFC Regulations in Canada

Criteria for CFC

Five or fewer Canadian residents control or own more than 50% of the foreign entity

Shareholder means

Resident shareholder with stake equal to 10% or more


Pro-rata share of passive earnings


Credit mechanism available


Dividend from previously attributed amounts is allowed as deduction


CFC Regulations in France

Criteria for CFC

Foreign entity is located in a country with an effective tax rate that is 50% or less than that of France;

French residents control or own more than 50% of the foreign entity;

Shareholder means

Who directly or indirectly hold 50% or greater


Pro-rata share of all earnings




CFC Regulations in France


Dividend from previously attributed amounts is exempt upto95%

Additional features of CFC rules

CFC rule do not apply if the foreign subsidiary is located in another EU country and does not exist solely to avoid French taxation


CFC Regulations in Germany

Criteria for CFC

German residents own 50% or more;

The foreign entity earns passive income; or

Passive income is taxed at an effective rate less than 25%

Shareholder means

Any level of ownership


Pro-rata share of passive earnings taxed at the level of shareholder




CFC Regulations in Germany


For corporate - dividend from previously attributed amounts is exempt upto 95%

For individual - dividend from previously attributed amounts is exempt upto 100%

Additional features of CFC rules

CFC rule do not apply if the foreign subsidiary exist in another EU or European Economic Area country and conducts genuine economic activities


CFC Regulations in US

Criteria for CFC

US shareholder own more than 50% of the voting power or value in the foreign corporation

Shareholder means

Resident shareholder with stake equal to 10% or more of voting stoke


Pro-rata share of passive income, income from certain sales between related parties, certain services performed by CFC outside it country of incorporation for/ on behalf of related parties, certain oil related income


CFC Regulations in US




Dividend from previously attributed amounts is treated as exempt income


Other Anti Avoidance Rules

Australia – Foreign Investment Fund Rule

Certain Australian shareholders are subject to annual taxation on a deemed return on their pro rata shares of foreign investment funds if:

The foreign company or trust is not controlled by Australian residents; and

The taxpayer‟s shareholding is more than 10% of the total value of the taxpayer‟s interest in foreign companies and trusts; and

The foreign company or trust engages in “blacklisted” activities such as certain financial intermediary, insurance and banking transactions; and

The taxpayer holds the interest at the end of the taxable year



Canada – Offshore Investment Fund (OIF)

Canadian shareholders of an OIF are taxed currently on an imputed return basis where the investment in the OIF is established to be motivated by tax avoidance

France – Abuse of Law doctrine

General anti-avoidance law that permits the tax authorities to take action against legal arrangements or particular transaction when those arrangements and transactions were fictitious or undertaken for solely tax reasons



Germany – General Anti-Avoidance Rule

General anti-avoidance rule rewritten in 2007, that prevents taxpayers from establishing legal forms or structures for the sole purpose of obtaining a tax advantage.

Tax authorities may disregard structures for tax purpose in these situations.

Netherlands – Low-Taxed Passive (LTP) Shareholding

The Dutch shareholder that holds 25% or more, alone or together with an affiliate, of the shares in a foreign entity has to value its shareholding at market value in case the following conditions are met:

At least 90% of the assets of the subsidiary are, directly or indirectly of the portfolio nature;



Netherlands – Low Taxed Passive (LTP) Shareholding

The foreign tax paid on profits is less than 10% of tax on profits if calculated under Dutch tax law; and

More than 50% of the carrying value of its property is not investment properly

United States – Passive Foreign Income Companies (PCIF)

A foreign corporation is a PCIF if:

75% of the corporations income is passive income; or

50% of the corporations assets (by value) are held for production

of passive income


Clarification required?

What is the meaning of “Passive Income”?

Applicability of CFC rules – grey list/ white list or all countries?

Any safe harbor or exemptions from attribution for e.g. if active income of the CFC is more than 80% no attribution required or if the CFC distributes 75% of its passive income then no need of further attribution under CFC rule?

What is the meaning of control (direct/ indirect)?

What is the meaning of shareholder?

How to compute the income of CFC – Accounting and Tax principles?

CFC‟s rule would be applicable on all the passive income earned by the CFC or only on the passive income available for distribution to shareholders?

Computation of attributable income?

FTC mechanism on tax paid by CFC?

What would happen when CFC will actually distribute the income?

Treatment of sale of share of CFC?

Information/ documents required to be kept and maintained?


Thank You

CA. Gaurav Garg

JGarg Economic Advisors Pvt. Ltd.Email: [email protected]: +91 9899994934


mailto:[email protected]

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Concept Of Cfc