It is extremely common these days for businesses operating globally to have companies incorporated in multiple countries. It has also been possible to maximise tax savings by operating businesses in this way however it is essential to be mindful of Controlled Foreign Corporation (CFC) regulations that apply. CFC rules apply to certain income generated by foreign subsidiaries of a domestic firm. In essence, the rules mean that a company incorporated in Germany, for example, where the corporate tax rate is 30%, operating a subsidiary company in the Seychelles, where no corporate tax is levied, may have the profits of the Seychelles subsidiary taxed in Germany. These rules are designed to disincentivise businesses from moving their income to low or zero tax jurisdictions.
CFC regulations are complex and vary jurisdiction to jurisdiction however they generally follow a similar basic structure. The Ownership structure of the entity is the first consideration. Most European countries consider a foreign subsidiary a CFC if one or more related domestic corporations own at least 50 percent of the subsidiary. In the UK the shareholding needs only be 26% to be considered a CFC.
The second consideration is that of the nature of the subsidiary’s income and level of tax levied in the subsidiary’s jurisdiction. Most European countries determine a subsidiary taxable if their incorporate jurisdiction levies a tax rate below a certain percentage and/or a certain share of the subsidiary’s income includes non-trading (passive) incomes, such as interest, dividends, rental income, and royalty income.
The amount and type of income (whether it is passive or trading income subject to domestic tax significantly varies country to country. In the UK there are a number of other exemptions to CFC tax liability including:
- A relief for corporate restructuring.
- A low profits exemption where profits in a fiscal year do not exceed £200,000 or £500,000 if non-trading profits are £50,000.
- An excluded territories exemption in cases where the income tax rate applied to a CFC exceeds 75% of the UK corporate rate.
- A low profit-margin exemption that exempts from charges CFCs when their profits are not more than 10 percent of the relevant operating expenditure.