A controlled foreign corporation (CFC) is a corporate entity that is registered and conducts business in a different 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.
Controlled foreign corporation (CFC) laws work alongside tax treaties to dictate how taxpayers declare their foreign earnings. A CFC is advantageous for companies when the cost of setting up a business, foreign branches or partnerships in a foreign country is lower even after the tax implications, or when the global exposure could help the business grow.
BREAKING DOWN ‘Controlled Foreign Corporation – CFC’
The CFC structure was created to help prevent tax evasion, which was done by setting up offshore companies in jurisdictions with little or no tax. Each country has its own CFC laws, but most are similar in that they tend to target individuals over multinational corporations when it comes to how they are taxed. For this reason, having a company qualify as independent will exempt it from CFC regulations.
Countries differ in how they define the independence of a company. The determination can be based on how many individuals have a controlling interest in the company, as well as the percentage they control. For example, minimums can range from fewer than 10 to over 100 people, or 50% of voting shares, or 10% of the total outstanding shares.