Controlled Foreign Company Research Articles

The UK CFC State Aid Saga: Chronicle of a Death Foretold

The purpose of this article is to outline the key issues raised in the UK controlled foreign companies (CFC) case which is currently being litigated before EU Courts. This case involves the alleged grant of unlawful State aid by the United Kingdom to certain multinational companies via the group financing exemption included within CFC rules. This article describes the state of play in this ongoing State aid saga and argues that the ECJ should follow the Opinion of Advocate General Medina and conclude that State aid was not granted.

The Law Does Not Operate Retroactively: Take Controlled Foreign Company Regime as an Example to Illustrate

The Law Does Not Operate Retroactively: Take Controlled Foreign Company Regime as an Example to Illustrate

Share Sales under the German Controlled Foreign Company Taxation Regime – Areas of Concern and Legislative Solutions

In this note, the authors examine the implications of the German Anti-Tax Avoidance Directive Implementation Act and the new German Foreign Tax Act Application Decree for the treatment of strategic share sales under the German controlled foreign company taxation regime. The authors show that the approach taken by German lawmakers is far from perfect, and further amendments to the German controlled foreign company rules may be needed. To this end, possible legislative solutions are presented.

Application and Disputes of Offshore Trusts in Controlled Foreign Company

Application and Disputes of Offshore Trusts in Controlled Foreign Company

Belgian CFC Rules: Shift from a Transactional (Model B) to an Entity Approach (Model A) as from 2023

In December 2023, the Belgian federal Parliament adopted new rules to tax the non-distributed profits of a controlled foreign company (CFC). The previously applied Model B approach was replaced by the stricter Model A regime. The new Belgian CFC rules already apply as from the 2024 tax assessment year, i.e. fiscal years ending on or after 31 December 2023.

Italian resident individuals with interests in Liechtenstein entities: notes on Italian income taxes—Part 1

Abstract It is not uncommon for Italian resident taxpayers to resort to Liechtenstein entities to take advantage of the benefits that they can offer, like asset protection, confidentiality and favorable taxation. This article tries to address some of the Italian income tax implications that Italian resident individuals with interests in Liechtenstein entities should consider. Part 1, after providing an overview on the recent agreement for the elimination of double taxation stipulated between Italy and Liechtenstein, focuses on Liechtenstein foundations and establishments, also covering the potential advantages that may derive from the combination of the Italian lump sum tax regime with the use of these legal entities. Part 2 (to be published soon in 2024), will deal with Liechtenstein limited companies and “the Italian Controlled Foreign Companies regime”.

Italian resident individuals with interests in Liechtenstein entities: notes on Italian income taxes—Part 2

Abstract It is not uncommon for Italian resident taxpayers to resort to Liechtenstein entities for taking advantage of the benefits that they can offer, like asset protection, confidentiality and favorable taxation. After having dealt, inter alia, with Liechtenstein foundations and establishments in Part 1, Part 2 focuses on the holding of participations in Liechtenstein limited companies by Italian resident individuals. In this regard, the tax treatment of dividends, capital gains and “the Italian Controlled Foreign Companies regime” are addressed. Finally, a few remarks are made on some income tax planning opportunities and criticalities in light of the Italian tax legislative framework described in Part 1 and Part 2.

Precautions for Individual Declaration of Profit income from Controlled Foreign Company (CFC) for the Year 2024

Precautions for Individual Declaration of Profit income from Controlled Foreign Company (CFC) for the Year 2024

First-time Filing of Controlled Foreign Company (CFC) Income Tax Return: Are You Ready?

First-time Filing of Controlled Foreign Company (CFC) Income Tax Return: Are You Ready?

The Impact of Financial Instrument Classification on the Earnings Calculation of Controlled Foreign Company

The Impact of Financial Instrument Classification on the Earnings Calculation of Controlled Foreign Company

An Analysis of Controlled Foreign Company Rules, the OECD’s Pillar Two and Developing Countries

The author, in this article, discusses how developing countries could be affected by the developments initiated by the OECD by asking the following two research questions. How would developing countries be affected by adapting controlled foreign company regulations and Pillar Two? Are the interests of developing countries protected at all?

Critical Review Of The Atad Implementation: The Implementation of the ATAD in Finland

In this article, the authors provide an assessment of the Finnish implementation of the European Union (EU) Anti–Tax Avoidance Directives (ATAD I and II) in consideration of the EU primary law and secondary law requirements. It is focused on examining the conformity between the Finnish implementation rules and the fundamental freedoms arising out of the Treaty on the Functioning of the European Union (TFEU). Although Finland already had an extensive anti-avoidance framework in place before implementing the ATAD I and ATAD II, Finland had to make some adjustments in almost all areas covered by the Directives. What is perhaps most interesting is that the Finnish general anti-abuse rule (GAAR) in section 28 of the Act on Assessment Procedure has retained the exact same textual form that it had decades previously. The essential question is as follows: Has the actual content of the general clause changed based on ATAD Article 6 and, if affirmative, in what way? Anti-Tax Avoidance Directive (ATAD), Base Erosion and Profit Shifting (BEPS), tax avoidance, anti-avoidance, controlled foreign company (CFC), exit taxation, general anti-abuse rule or general anti-avoidance rule (GAAR), hybrid mismatches, interest limitation rule, EU law, implementation

South African Controlled Foreign Companies' Rules and the Digital Economy

South Africa's controlled foreign company ("CFC") rules were enacted more than two decades ago before most of today's business models existed. These are anti-avoidance rules that ensure the South African taxation of profits diverted offshore by South African residents. In terms of the CFC rules, the profits of a non-resident company may also be subject to tax in South Africa at the hands of its South African resident shareholder if such non-resident company is considered to be a CFC. Advances in technology developments and the use of information communication and technology ("ICT") have given rise to what is referred to as the digital economy. The term refers to economic activities hinged on the use of ICT and the internet. Digitalisation has made it possible for a business to carry on economic activity without the need for a multitude of offices, staff, equipment, and other resources. As a result, new business models like Uber and Shien have emerged. This paper argues that the current South African CFC rules have not kept pace with these new business models and do not effectively regulate the new business models and the digital economy. This paper recommends that the CFC rules be updated to address the digital economy and new business models by amending the rules, incorporating the provisions of Electronic Communications and Transactions Act 25 of 2002 into the rules, using country-by-country reporting, and even considering implementing a regime alternative to CFC rules.

An analysis of controlled foreign company (CFC) rules of Mauritius; a comparative study with the UK and US

PurposeNumerous policies are established in Mauritius to attract foreign direct investment, but at the same time, severe concerns were raised concerning the erosion of Mauritian tax base, which is witnessed by the decrease in the percentage of tax revenue to gross domestic product in recent years. To avoid these issues, in 2019, the Mauritian legislator has domesticated the Organisation for Economic Co-operation and Development (OECD) BEPS 2013 Action 3 on controlled foreign company (CFC) in its income tax legislation. As such, the purpose of this study is to critically assess the implications of CFC rules of Mauritius to reduce tax avoidance in the light of international tax competition.Design/methodology/approachTo achieve the research objective, this study will adopt a black letter approach by analysing the rules and regulations of various jurisdiction as well as international standards on CFCs and other tax avoidance legal provisions. A comparative analysis will be conducted between Mauritian laws on CFCs and the corresponding legislation of the UK and the USA, which are selected to assess the developed world’s position on strict CFC rules.FindingsA hasty implementation of CFC rules leads to various complexities like interpretation issues and diminishing the competitiveness of the country to multinationals. In this respect, there is the risk of a trade-off between tax collected and foreign direct investment in the country. Consequently, the research recommends that Mauritius reforms its CFC legislation by extending the scope of tax exemptions for intra-group financing income, for the first year of CFC’s operation with the possibility of offsetting foreign taxes and for the Mauritius Revenue Authority to establish detailed guidelines on the determination of CFC income and its attribution for tax purposes in Mauritius.Originality/valueExisting literature has to a great extent focused on the role of CFC rules as a tax avoidance measure and on the divergence or convergence between domestic CFC legislation against the OECD recommendations (Dourado, 2015; Xu, 2018; Beebeejaun et al., 2023). However, limited literature is available on the evaluation of the purpose of CFC rules enacted by a developing country being Mauritius in the context of the global competitive market, to which this research aims at filling the gap.

Geographic distance and tax fundamentals: An empirical analysis of location choice of Japanese firms’ outbound mergers and acquisitions

AbstractThe deterrent effect of geographic distance on international expansion has been extensively examined in extant literature; however, little is known about whether tax‐related firm‐level characteristics could moderate the deterrent effect although both merger and acquisition (M&A) location decisions and tax‐related decisions involve considerable managerial judgments. Results using data on Japanese firms’ outbound M&A from 2010 to 2020 after Japan shifted from a worldwide tax system to a territorial tax system show that the deterrent effect of geographic distance is moderated by high tax avoidance, use of a tax consolidation regime, and a high level of deferred tax asset (DTA) balance. Additionally, we find that the 2017 Tax Reform on Japanese controlled foreign company (CFC) rules reduced the moderating effect of use of a consolidation regime, whereas it enhanced the moderating effect of a high level of DTA balance. These results call for a radical change in further research on various distances to incorporate insight from a tax perspective.

A Study on Impact of Controlled Foreign Company (CFC) Rule on Income Tax

A Study on Impact of Controlled Foreign Company (CFC) Rule on Income Tax

Substance carve-out and function-risk analysis in the ATAD’s CFC rule as two sides of the same coin: Strengths and limits of a uniform concept of abuse

When the European Union lawmakers introduce two implementation options for a mandatory anti-abuse rule – as they have done under the controlled foreign company (CFC) rule of the Anti-Tax Avoidance Directive (ATAD) – there is a real risk that these provisions will be attributed materially different abuse tests. This could call into question the assumption of a uniform EU concept of abuse materializing in the general principle of prohibition of abuse, and sow the seeds for additional forms of undesirable tax planning strategies. This article shows that the abuse tests of both implementation options of the ATAD’s CFC rule prescribe an identical abuse test and that beyond the limits of the harmonization effect, a single concept of abuse applies to all CFC situations as long as the scope of EU corporate tax law is affected. Anti-Tax Avoidance Directive, controlled foreign company rule, uniform concept of abuse

“Two’s Company, Three’s a Crowd” – The Triad of Controlled Foreign Company Rules and the Two-Sided Income Inclusion Rule under the OECD’s Pillar Two Global Minimum Tax Proposal

This article analyses multiple issues and offers recommendations regarding the overlap between standard controlled foreign company rules and the income inclusion and qualified domestic minimum top-up tax rules of the OECD’s Pillar Two Global Minimum Tax proposal.

Reform of the Control Concept under the German CFC Rules – Problem Areas and Open Questions

In this article, the authors provide an overview of amendments made to the German controlled foreign company (CFC) regulations by the ATAD Implementation Act. In particular, the article focuses on the new definition of “controlling interest” and certain key problem areas and questions that remain unanswered despite the reform.

Intellectual Property Income as “Per Se” Passive Income: A Comparative Analysis of Controlled Foreign Company Rules in the European Union before and after the Implementation of the Anti-Tax Avoidance Directive (2016/1164)

This article analyses the treatment of intellectual property income under EU controlled foreign company rules before and after the implementation of the Anti-Tax Avoidance Directive (2016/1164). It addresses the lack of common, operationalizable criteria to realize equality for digital businesses, and provides reform options, including the consideration of the OECD’s Pillar Two.