Controlled Foreign Corporation

Controlled foreign corporation (CFC) is a corporate entity that is registered and conducts business in a different jurisdiction than the residency of the controlling owners.

Controlled foreign corporation (CFC) rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities. The rules are required for the income of an entity that is not currently taxed to the owners of the entity. The basic mechanisms of the rules are different in each jurisdiction. In general, certain categories of taxpayers should include in their income currently certain amounts earned by foreign entities that they control. A set of rules defines the types of owners and entities affected the types of income or investments subject to current inclusion, exceptions to inclusion, and means of preventing double inclusion of the same income.

Controlled foreign corporation (CFC) laws work alongside tax treaties to dictate how taxpayers declare their foreign earnings. A CFC is advantageous for companies when the cost of setting up a business in a foreign country is lower even after the tax implications, or when the global exposure could help the business grow.

The Controlled Foreign Corporation (CFC) structure was created in order to help prevent tax evasion, which was done by setting up offshore companies in jurisdictions with little or no tax. Each country has its own Controlled Foreign Corporation (CFC) laws, but most are similar in that they tend to target individuals over multinational corporations when it comes to how they are taxed. For this reason, having a company qualify as independent will exempt it from Controlled Foreign Corporation (CFC) regulations.

Moreover, each country defines the independence of a company differently. The determination can be based on how many individuals have a controlling interest in the company, as well as the percentage they control.

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