What are the Controlled Foreign Corporation Rules?
The Controlled Foreign Corporation Rules, or CFC Rules, are regulations imposed by jurisdictions to avoid the artificial deferral of tax payment on income, as it taxes undistributed dividends and distributions, especially when the offshore company making the profit is a shell company without substance, like employees or office space, the jurisdiction of incorporation.
About the CFC Rules
Have you ever wondered if you can open an offshore company, operate through this entity, and keep the money in this entity without paying taxes where you reside as you won’t pay yourself distribution/dividends (unrealized taxable event)? The answer to this can be found, most of the time, in the Controlled Foreign Company rules.
Controlled Foreign Company (CFC) Rules are legislations that require tax residents to report certain income of Companies incorporated in a jurisdiction different than the CFC Ruled jurisdiction.
The purpose of CFC rules is to combat artificial deferral of tax by using offshore low taxed entities through profit shifting strategies.
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These rules vary depending of your country of tax residency, but in general they require you to report any interest or income from a company from which you hold certain percentage of ownership. The percentage may go from 10% ownership to 50%+.
Ways to avoid the CFC Rules
A way to avoid CFC Rules, in case your jurisdiction of Tax Residency has CFC Rules, is to divert and dilute ownership between individuals so you don’t meet the threshold to report this company under CFC Rules.
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Another way is to have substance in the jurisdiction of incorporation, this way earning this income through this offshore company will not be deemed as done for the sole purpose of avoiding or tax deferral.
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