A controlled foreign company (CFC) is a foreign company controlled by a tax resident of another country; CFC rules allow that country to tax the company's undistributed profit in the hands of its owner. So an offshore jurisdiction's zero tax does not, on its own, guarantee any savings for the owner. Control thresholds, exemptions and notification deadlines are set by the country where the owner is tax resident; the law of the company's country of incorporation has no effect on them.
Where CFC rules come from
The general approach is described in the OECD report on BEPS Action 3 (2015): six building blocks, from the definition of a CFC and thresholds to the computation of income and the elimination of double taxation. The OECD framed them as recommendations without minimum standard status, so each country designs its rules in its own way. In the European Union, the baseline rules are mandatory for all member states under Directive (EU) 2016/1164 (ATAD).
European Union: the ATAD directive
Under Article 7 of ATAD, a foreign company is treated as a CFC if two conditions are met:
- the taxpayer, alone or together with associated enterprises, holds more than 50% of the voting rights or capital, or is entitled to receive more than 50% of the profits;
- the profit tax actually paid by the company is lower than the difference between the tax it would have paid in the taxpayer's country and the tax actually paid. Put simply, less than half of the "home" tax.
Each EU country sets the specific categories of taxable income and the exceptions in its own law.
Russia: Tax Code of the Russian Federation, Articles 25.13–25.15
According to a Federal Tax Service (FTS) guidance note, a controlling person of a foreign organization is:
- a person with a participation interest of more than 25%;
- a person with an interest of more than 10%, if the combined interest of all Russian tax residents in the company exceeds 50% (for individuals, interests are counted together with spouses and minor children).
A CFC's profit is included in the controlling person's tax base if it exceeds RUB 10,000,000. The main obligations of an individual:
| Obligation | Deadline | Penalty for breach |
|---|---|---|
| Notification of participation in a foreign organization | 3 months from the date participation arises, changes or ends | RUB 50,000 per organization |
| CFC notification | by April 30 of the year following the tax period | RUB 500,000 per CFC |
| CFC financial statements (and the auditor's report, if an audit is mandatory or has been carried out) | together with the CFC notification | RUB 500,000 |
Documents in a foreign language are filed with a Russian translation. For individuals there is an alternative: paying tax on a fixed profit, which since 2021 has been RUB 34,000,000 regardless of the number of CFCs.
Canada: the T1134 return
A Canadian taxpayer with a foreign affiliate files Form T1134 for each of them. For tax years beginning after 2020, the deadline is 10 months after the end of the reporting entity's tax year. Under the FAPI (foreign accrual property income) rules, a Canadian owner includes a share of a controlled foreign company's passive income in their own income every year, even if the company has distributed nothing. The structure is worth assessing before registration.
Ukraine
CFC rules are set out in Article 39-2 of the Tax Code of Ukraine; controlling persons file a CFC report. Check the thresholds and deadlines against the current version of the code and the guidance of the State Tax Service (STS).
How to prepare
- Determine the country of tax residency of each owner, including if they move during the year.
- Calculate interests taking into account chains of ownership, spouses and children, if the country's law requires it.
- Set up the company's accounting and annual financial statements to a standard the owner's tax authority will accept. Accounting requirements in different jurisdictions are covered in our article on accounting and audit for a foreign company.
- Put the notification deadlines in a calendar and assign a responsible person.
CFC rules for a foreign company concern its owner. The tax residency of the company itself is assessed separately: a company managed from the owner's country may be recognized as a resident of that country. See our article on a company's tax residency.
A business scenario
An entrepreneur owns a holding company in the British Virgin Islands and is moving to a new country. CFC rules, notification deadlines and tax on future dividends need to be recalculated before the move: after the change of residency, the new country's rules apply, and decisions on distributing profit are best agreed with a tax advisor in advance. How holding structures are built is covered in our article on an international holding company.
Common mistakes
- Assuming there is no tax as long as the profit has not been taken out: a controlling person may have an obligation even without any dividend payment.
- Missing the participation notification when a company is set up or sold.
- Preparing CFC financial statements at the last minute, without primary documents.
How Offshora helps
The tax authority of the owner's country receives information on the foreign company's accounts and its controlling persons under the CRS if that country takes part in the exchange; see CRS 2026: a note for the owner of a foreign company. How CFC rules change the benefit of an offshore company compared with an onshore one is explained in offshore or a regular foreign company.
Offshora selects a jurisdiction and structure based on the owners' tax residency and organizes accounting that can substantiate the company's profit. For a preliminary assessment, submit a request and state the owners' country of residence and the composition of the structure.
Tell us about your task, and we will propose a jurisdiction, the scope of services and the order of work.
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