CFC
Controlled Foreign Corporation
A controlled foreign corporation. If you are a tax resident of one country and own a company in another, that company profit may be taxed in your country of residence. The rules exist so income is not hidden in offshore jurisdictions.
- What it is
- A foreign company under your control: its profits may be taxed on you personally
- Where it applies
- Owning foreign companies while tax resident
- Control threshold
- Usually from a 25% stake (varies by country)
- What decides it
- Real presence (substance): office, staff, management
- Can you prepare
- Yes: work out your country’s CFC rules before creating a structure
In plain words
A CFC (controlled foreign corporation) is a foreign company under your control. Put simply: if you are a tax resident of one country and your company is in another, your tax authority may, under certain conditions, tax that company’s profits on you personally — even if you have not paid those profits out to yourself.
CFC rules were devised to stop income being hidden in companies in low-tax jurisdictions. The logic is this: since you control a foreign firm (usually from a 25% stake, though thresholds differ between countries) and it accumulates profit offshore, your country of residence says, “this profit is in substance yours — declare it and pay tax on it.” A key role is played by whether the company has real presence (substance): an office, employees, management on the spot. An empty shell company is the first to be hit by CFC rules.
For the client this means that a passport or an account abroad does not by itself protect you from CFC rules — everything is tied to tax residence. Before building a foreign structure, you need to work out how the CFC rules of your country of residence will view it; otherwise tax savings turn into additional assessments and penalties.
Where it matters
How CFC rules work
- A stake usually from 25%
- Actual control
- A foreign jurisdiction
- Undistributed profit
- At the rate of the country of residence
- On the controlling person
- A real office
- Employees
- Management on the spot
- To tax residence
- Not to citizenship
- A passport does not exempt you
How to account for CFC rules in a structure
- 01Determine residence and control
- 02Work out the country’s CFC rules
- 03Ensure substance
- 04Declarations and notifications
- 05A structure without additional assessments
What you need to know
- CFC rules are tied to tax residence, not citizenship
- Profits can be taxed on you even if no dividends were paid
- An empty shell company is the first to be hit by CFC rules
- Real presence (substance) can lift some of the rules
- A second passport or an account abroad does not protect you from CFC rules
Common mistakes
- Creating an offshore shell without real presence
- Assuming undistributed profit is not taxed
- Forgetting CFC notifications to your tax authority
- Thinking a second passport exempts you from CFC rules
- Building a structure without working out the rules of your country of residence
What this means for a BRIDGES client
BRIDGES GLOBAL helps build a foreign structure that takes account of the CFC rules of your country of residence: we calculate the tax consequences in advance, point out where real presence (substance) is needed, and choose the combination of residence and structure so that you do not face additional assessments.
Frequently asked questions
01 /If I have a second passport, will CFC rules leave me alone?
No, if you remain a tax resident of a country with such rules. CFC rules are tied to tax residence, not citizenship — a passport does not by itself exempt you.
02 /Do I have to pay tax if the company has not distributed its profit?
Under CFC rules, often yes. Many countries still require the undistributed profit of a controlled foreign company to be declared and taxed on the controlling person.
03 /What is substance?
A company’s real presence: an office, employees, management on the spot, genuine activity. Having substance can lift some of the CFC rules; its absence, on the contrary, attracts the tax authority’s attention.
04 /From what stake does control begin?
Most often from 25%, but the threshold and rules differ by country. The combined control of a family or related parties is also taken into account, not just a personal stake.
05 /Do I need to notify the tax authority of a CFC?
In many countries, yes — there is a separate duty to notify the tax authority of an interest in a controlled foreign company, apart from paying the tax. Deadlines and forms vary by country.
06 /How are CFC rules linked to tax residence?
Directly. CFC rules are applied by your country of tax residence. By changing residence physically and in accordance with the rules, you also change whose CFC rules apply to you.
See also
Read next
This material has undergone editorial review by BRIDGES.
Build a structure that accounts for CFC rules?
We will work out your country’s CFC rules, point out where substance is needed and choose a combination of residence and structure without additional assessments.