Controlled Foreign Corporation: CFC Rules in Europe

Businesses world wide usually function in a couple of nation, making them topic to a number of tax jurisdictions. To forestall companies from minimizing their tax legal responsibility by making the most of cross-country variations, nations have carried out varied anti-tax avoidance measures, such because the so-called Controlled Foreign Corporation (CFC) guidelines.
Controlled Foreign Corporation guidelines apply to sure earnings generated by international subsidiaries of a home agency. For instance, if a enterprise headquartered in France (with a mixed company earnings tax price of 28.4 %) has a subsidiary in the Bahamas (which doesn’t tax company earnings), French tax authorities could, in some circumstances, assert the precise to tax the earnings earned by the Bahamian subsidiary. These guidelines intention to disincentivize shifting earnings to low-tax jurisdictions by subjecting companies that achieve this to home tax on that earnings, thus defending the home tax base.
Controlled Foreign Corporation guidelines, though complicated, usually observe the identical fundamental construction. First, an possession threshold is used to find out whether or not an entity is taken into account a Controlled Foreign Corporation. Most European nations contemplate a international subsidiary a Controlled Foreign Corporation if a number of associated home firms personal at the very least 50 % of the subsidiary.
Second, as soon as a international subsidiary is taken into account a Controlled Foreign Corporation, there’s a take a look at to find out whether or not the subsidiary’s earnings ought to be taxed domestically. Most European nations deem a subsidiary’s earnings taxable to the home father or mother if the subsidiary’s earnings is taxed at a price beneath a sure threshold, or a sure share of the subsidiary’s earnings is passive. Passive earnings consists of non-traditional manufacturing actions, akin to curiosity, dividends, rental earnings, and royalty earnings.
Third, as soon as a international subsidiary is taken into account a Controlled Foreign Corporation and its earnings is taxable domestically, a rustic defines what earnings earned by the international subsidiary is topic to tax. As the accompanying map exhibits, this varies considerably among the many European nations coated. While some nations tax solely a Controlled Foreign Corporation’s passive earnings, others tax all earnings of international subsidiaries (energetic and passive). Countries might also select to tax all earnings related to non-genuine preparations, that are preparations established to acquire a tax benefit for the father or mother firm.

Nine of the 27 nations coated in this map tax solely a CFC’s passive earnings: Austria, the Czech Republic, Denmark, Germany, Greece, Lithuania, the Netherlands, Slovenia, and Spain.
Ten nations tax each energetic and passive earnings earned by a CFC: Finland, France, Iceland, Italy, Norway, Poland, Portugal, Sweden, Turkey, and the United Kingdom.
Seven nations tax all earnings related to non-genuine preparations: Belgium, Estonia, Hungary, Ireland, Latvia, Luxembourg, and Slovakia.
Switzerland is the one nation coated that has not enacted CFC guidelines.
Most nations have varied exemptions to their CFC guidelines. For instance, many EU member states don’t apply their CFC guidelines to subsidiaries positioned in different EU nations. The following desk gives a fundamental define of the CFC rule exemptions utilized by the nations coated in the map. More particulars could be discovered right here.

Controlled Foreign Corporation (CFC) Rules in European OECD Countries, as of 2021

Country
Covered Type(s) of Income
CFC Rule Exemptions

Austria (AT)
Passive
CFC with substantive financial actions exempted

Belgium (BE)
All earnings related to non-genuine preparations
None

Czech Republic (CZ)
Passive
CFC with substantive financial actions exempted

Denmark (DK)
Passive
Foreign subsidiaries are exempt if lower than 1/3 of their earnings is passive earnings

Estonia (EE)
All earnings related to non-genuine preparations
CFC exempt if income beneath €750,000 or passive earnings beneath €75,000; CFC positioned in nations which are Estonian Tax Treaty Partners

Finland (FI)
All Income
CFC exempt if i) positioned in EU or EEA and never a synthetic association; ii) industrial, manufacturing, and transport enterprise; or iii) Finland has a double-tax treaty with the international nation (excluding tax treaty nations talked about in a “blacklist”)

France (FR)
All Income
CFC exempt if positioned in EU and never a synthetic association, or if CFC carries out buying and selling or manufacturing exercise

Germany (DE)
Passive
CFC exempt if positioned in EU or EEA and never a synthetic association

Greece (GR)
Passive
CFC exempt if positioned in EU or EEA nation with trade of knowledge settlement and never a synthetic association; CFC shares traded on a regulated market

Hungary (HU)
All earnings related to non-genuine preparations
CFC exempt if i) actual financial exercise; ii) beneath sure revenue threshold and ratio; or iii) positioned in nation with treaty permitting for an exemption

Iceland (IS)
All Income
CFC exempt if positioned in EEA nations or has a double-tax treaty with Iceland and never a synthetic association

Ireland (IE)
All earnings related to non-genuine preparations
CFC exempt if i) beneath sure revenue and earnings thresholds; ii) switch pricing guidelines apply; or iii) passes the important function take a look at

Italy (IT)
All Income
CFC with substantive financial actions exempted

Latvia (LV)
All earnings related to non-genuine preparations
CFC exempt if income beneath €750,000 or passive earnings beneath €75,000 and CFC just isn’t based mostly or integrated in a tax haven

Lithuania (LT)
Passive
CFC exempt if nation included in white record and never receiving particular tax therapy

Luxembourg (LU)
All earnings related to non-genuine preparations
CFC exempt if i) not a synthetic association or ii) accounting income beneath €750,000 or lower than 10% of working prices

Netherlands (NL)
Passive
CFC exempt if not a synthetic association

Norway (NO)
All Income
CFC exempt if positioned in EEA nation and never a synthetic association or positioned in tax treaty nation and never primarily passive earnings

Poland (PL)
All Income
CFC exempt if not a synthetic association

Portugal (PT)
All Income
CFC exempt if positioned in EU and EEA nations and never a synthetic association; different exemptions can apply

Slovak Republic (SK)
All earnings related to non-genuine preparations
Substantive actions exemption

Slovenia (SI)
Passive
Substantial financial actions exemption

Spain (ES)
Passive
CFC exempt if positioned in EU and never a synthetic association

Sweden (SE)
All Income
CFC exempt if positioned in EEA and never a synthetic association or positioned in white record nations

Switzerland (CH)*
N/A
N/A

Turkey (TR)
All Income
CFCs with gross income lower than TRY 100,000 are exempt

United Kingdom (GB)
All Income
Various exemptions can apply

Note: *Switzerland doesn’t apply CFC guidelines.
Source: Deloitte, “Tax Guides and Highlights,” https://www.dits.deloitte.com/#TaxGuides; Bloomberg Tax, “Country Guides: Anti-Avoidance Provisions – Controlled Foreign Company (CFC) Rules,” https://www.bloomberglaw.com/product/tax/bbna/chart/3/10077/347a743114754ceca09f7ec4b7015426; and PwC, “Worldwide Tax Summaries: Corporate – Group taxation,” https://www.taxsummaries.pwc.com/australia/corporate/group-taxation.

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