Updated
GL-C-04
Glossary · Taxes and residency
CFC - your foreign company's profit that you pay tax on
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.
01 / In 30 seconds
The short answer
- 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
02 / In plain words
What CFC means
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.
A case from practice
A person remains a tax resident of their own country and owns 100% of a company in Cyprus that earned €400,000 in a year and kept it in the account. Under CFC rules, their country may require them to declare this profit and pay tax on it at the local rate — even though they paid no dividends to themselves. If the company has a real office and staff, some of the CFC rules may not apply.
Where it matters
- Owning a foreign company
- International tax planning
- Holding and offshore structures
- Accumulating profit abroad
- Changing tax residence
- Investing through foreign firms
03 / What it covers
How CFC rules work
Control
- A stake usually from 25%
- Actual control
- A foreign jurisdiction
What is taxed
- Undistributed profit
- At the rate of the country of residence
- On the controlling person
Substance
- A real office
- Employees
- Management on the spot
Link
- To tax residence
- Not to citizenship
- A passport does not exempt you
04 / How it works
How to account for CFC rules in a structure
Determine residence and control
Where you are tax resident and what stake you hold in the company.
Work out the country’s CFC rules
The threshold, exemptions and rate under your country's rules.
Ensure substance
An office, staff and management on the ground.
Declarations and notifications
CFC notifications and declaring the profit on time.
A structure without additional assessments
Tax is calculated in advance, with no surprise assessments.
05 / Key facts
What you need to know
01What it is
A controlled foreign company
A company in another country controlled by a tax resident. Its profit may be taxed in that person's hands.
02No dividends
Tax still arises
Many countries tax a CFC's undistributed profit even if the owner paid nothing out.
03Control threshold
Often from 25%
The threshold and rules vary by country. Family and related-party stakes are counted too.
04What matters
Residence and substance
The rules are applied by your country of tax residence. A real office and staff can switch off some of them.
Common mistakes
Setting up an offshore shell with no substance
Give the company a real office, staff and local management.
Thinking a second passport exempts you from CFC rules
Look at tax residence: CFC rules depend on it, not on citizenship.
Forgetting to notify the tax authority
File the CFC notification on time, separately from paying the tax.
06 / Expert advice
How to prepare in advance
Before creating a foreign structure, work out how the CFC rules of your country of residence will view it: the control threshold, tax on undistributed profit, substance requirements and the duty to notify. Where necessary, ensure the company has real presence. Then the structure works to save tax rather than turning into additional assessments and penalties.
What we do for you. 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.
Dmitry NagyTax consultant, international taxation and compliance (ex-Big4)
07 / Questions
Frequently asked questions
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.
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.
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.
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.
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.
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.
Related terms
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