国际税收（双语）：chapter8. CFC rules

1、international taxation1 Chapter 8. Controlled Foreign Corporation(CFC) Rules A.Controlled Foreign Corporation(CFC) B.Controlled Foreign Corporation(CFC) Rules C.Rules in different countries international taxation2 What Does CFC Mean? A corporate entity that is registered and conducts business in a d

2、ifferent jurisdiction or country than the residency of the controlling owners. Control of the foreign company is defined, in the U.S., according to the percentage of shares owned by U.S. citizens. international taxation3 USA A foreign corporation whose voting stock is more than 50% owned by US stock

3、holders, each of whom owns at least 10% of the voting power. international taxation4 UK A CFC is defined as an overseas company that is controlled by UK residents and which pays less than three quarters of the tax that it would have paid on its income had it been resident in the UK. international ta

4、xation5 What Does CFC Mean in China? CFCs as cited in Article 45 of the EIT Law refers to foreign enterprises which are controlled by resident enterprises and/or individual residents of the PRC and established in a country (or a region) where the effective tax rate is 50% lower than the tax rate pre

5、scribed by Paragraph 1 of Article 4 of the EIT Law, and which do not distribute profits or reduce profit distribution without reasonable business needs. international taxation6 CFCs role Used to avoid tax The UK has Controlled Foreign Company (CFC) rules to prevent multinationals from avoiding UK ta

6、x by diverting profits to tax havens and preferential regimes. international taxation7 B. Controlled Foreign Corporation Rules-General CFC rules: rules that require the passive income and certain other tainted income of foreign corporations controlled by resident shareholders to be included in the i

7、ncome of those shareholders, whether or not such income is distributed. The reason of this problem: deferral. When a CFC or foreign trust established in a tax haven, this problem would be serious. international taxation8 B. Controlled Foreign Corporation(CFC) Rules-General The resident corporation d

8、erives the benefit of deferring the resident country tax on the income earned by the CFC until dividends are received from the CFC or shares in the CFC are sold. Under CFC rules, the resident shareholders of the CFC are taxed on their proportionate share of some or all of the CFCs income. internatio

9、nal taxation9 B. Controlled Foreign Corporation(CFC) Rules-General USA CFC rules: initiated in 1962. Controversial: lThe deferral should be eliminated or only with respect to passive investment income? lUS-based multinationals: CFC rule results in a competitive disadvantage lCommentators: extend the

10、 rules to all of the income of CFCs. international taxation10 B. Controlled Foreign Corporation(CFC) Rules-General Members of the CFC club, about 30 New Zealand CFC rules: eliminate deferral of all foreign corporations controlled by New Zealand residents, except for 7 listed countries. international

11、 taxation11 B. Controlled Foreign Corporation(CFC) Rules-Definition of CFC General standards lNonresident entities lCorporations or similar entities taxed separately from their owners lControlled by domestic shareholders or in which domestic share holders have a substantial interest. international t

12、axation12 B. Controlled Foreign Corporation(CFC) Rules-Definition of CFC How to define “Controlled”? lMore than 50% of outstanding voting shares lMore than 50% of the total value of outstanding shares lAustralia and New Zealand: more than 40% of voting shares lPortugal and Denmark: More than 25% own

13、ership interest lFrance: more than 10% of ownership interest lTo prevent fragmenting the ownership of the shares among related persons: more than 25% (Germany) lConcentrated ownership requirement: Australia, Canada, New Zealand require that less than 5 residents control CFC. international taxation13

14、 B. CFC Rules-Designated Jurisdiction or Global Approach Designed Jurisdiction Approach: under this approach, a country identifies certain countries as low-tax countries for purposes of applying its CFC rules to CFCs resident in those countries. Global Approach: An approach for applying CFC rules un

15、der which the CFC rules apply to CFCs whether or not they set in tax havens. (USA and Canada) international taxation14 B. CFC Rules-Designated Jurisdiction or Global Approach Designated jurisdiction approach: llower compliance and administrative burden lstill tax avoidance leaks lMay be accused of a

16、ttaching discriminative label Global approach: opposite to the above international taxation15 B. CFC Rules-Designated Jurisdiction or Global Approach It is crucial for designated jurisdiction approach to develop an appropriate list of tax havens lComparison of domestic and foreign tax rate Nominal t

17、ax rates Average effective tax rates The actual foreign tax paid by a particular CFC international taxation16 B. CFC Rules-Designated Jurisdiction or Global Approach Nominal tax rates lProblematic lLow cost Average effective tax rates (Finland, Germany, Spain) lDifficult to determine lGermany: effec

18、tive tax rates less than 25% lFinland, Portugal: effective tax rates less than 60% of those of the two countries international taxation17 B. CFC Rules-Designated Jurisdiction or Global Approach The actual foreign tax paid by a particular CFC lTheoretically correct lOnerous(艰巨的) burden lFrance and No

19、rway: actual tax is less than 2/3 of what CFC would pay a domestic tax international taxation18 B. CFC Rules-Definition and Computation of Attributable Income Entity approach: under entity approach, CFC rules usually provide an exemption for certain CFCs that are engaged primarily in genuine busines

20、s activities. lLower cost lLess precise Transaction approach: each transaction must be analyzed to determine whether it produces tainted income. only tainted income derived by a CFC are attributable to its domestic income. Tainted income: passive investment income and base company(基地公司) income inter

21、national taxation19 B. CFC Rules-Definition and Computation of Attributable Income What is passive income? lDividends, interests, rents, royalties, capital gains Is the above income usually considered passive income necessarily passive income? lNo! sometimes they are active income The distinction be

22、tween active income and passive income is quite amorphous international taxation20 B. CFC Rules-Definition and Computation of Attributable Income What is base company income? lIncome derived by a CFC from transactions with related parties that occur outside the country in which the CFC established.

23、lWhether the income is passive income is irrelevant. international taxation21 B. CFC Rules-Nature and Scope of Exemptions Aim for the exemptions: limit the scope of CFC rules for some genuine business, i.e., those businesses can enjoy deferral. Exemption for genuine business activities lHow to defin

24、e the genuine business activities: lExceptional: Sweden, New Zealand Distribution exemption: if a CFC distributes 50% of profits (UK) De minimis(最小) exemptions: exemption for those CFCs whose income a minimum amount. (Canada, Australia) international taxation22 B. CFC Rules-Nature and Scope of Exemp

25、tions Other exemptions: lFor CFCs whose shares are publicly traded on a stock exchange (UK) lMotive exemption: for CFCs that are not used for the purpose of avoiding tax international taxation23 B. CFC Rules-Domestic Taxpayers Subject to Tax CFC rules levy CFCs undistributed income on shareholders pro rata (按比例分摊)share at the end of the taxable year. lArgument: u