CFC-Regels
CFC Rules
Controlled Foreign Company (CFC) rules prevent the artificial diversion of profits to low-taxed foreign subsidiaries. They attribute passive or intercompany income of a controlled foreign entity back to the parent company for taxation in the parent jurisdiction.
What Are CFC Rules?
CFC rules target situations where a resident taxpayer controls a foreign entity that is subject to little or no tax. The rules operate by attributing the income of the foreign entity to the controlling resident shareholder, ensuring it is taxed at the domestic rate.
The primary policy objective is to prevent base erosion through the shifting of mobile income — such as passive investment returns, intercompany charges, and IP royalties — to jurisdictions with low effective tax rates.
ATAD Art. 7-8
The Anti-Tax Avoidance Directive (ATAD) establishes minimum CFC standards for EU Member States under Articles 7 and 8. Member States must include in the tax base of a parent company the non-distributed income of a controlled entity where:
Control Test
The taxpayer holds (directly or indirectly) more than 50% of voting rights, capital, or profit entitlement in the foreign entity.
Tax Test
The actual corporate tax paid by the foreign entity is lower than the difference between the tax that would have been charged under the parent's domestic rules and the actual tax paid.
Domestic Implementations
ATAD provides two models for Member States to implement CFC rules. Each jurisdiction has adopted one or a combination of both approaches:
Model A — Transactional Approach
Attributes specific categories of income (interest, royalties, dividends, financial leasing, insurance, etc.) earned by the CFC to the parent. Focuses on the nature of the income rather than the entity as a whole.
Model B — Entity Approach
Attributes the entire undistributed income of the CFC to the parent if that income arises from non-genuine arrangements designed to obtain a tax advantage. Requires an assessment of economic substance.
Income Categories
Under the transactional approach, the following categories of CFC income are typically subject to attribution:
Passive Income
Interest, royalties, dividends, capital gains from shares, and income from financial leasing or immovable property.
Intercompany Income
Income from goods or services sold to or purchased from associated enterprises, where little or no economic value is added by the CFC.
Insurance & Financial
Income from insurance, banking, and other financial activities where more than one-third of the income derives from transactions with associated enterprises.
Exemptions
Most CFC regimes provide exemptions to avoid taxing genuinely active foreign operations:
Substantive Economic Activity
The CFC is exempt if it carries on a substantive economic activity supported by staff, equipment, assets, and premises in the jurisdiction of residence.
ETR-Based Exemption
Some jurisdictions exempt CFCs where the effective tax rate on the income already exceeds a specified threshold (often linked to the domestic rate).
Accounting Threshold
De minimis rules may exempt CFCs with profits below a certain amount or where the CFC's accounting profit does not exceed a specified percentage of operating costs.
Pillar 2 Interaction
The introduction of Pillar 2 (GloBE rules) creates a new layer of interaction with CFC regimes. CFC taxes paid by a parent entity are treated as covered taxes for purposes of computing the effective tax rate under Pillar 2, which can increase the ETR of the low-taxed jurisdiction and reduce or eliminate any top-up tax.
Conversely, QDMTT (Qualified Domestic Minimum Top-up Tax) paid by the CFC jurisdiction itself may also reduce the need for CFC attribution in the parent jurisdiction, though the interaction depends on domestic law design.
Important
CFC rule implementations vary significantly between EU Member States — always check domestic law specifics.