The Controlled Foreign Company Rules are features of a tax system designed to limit the artificial deferral of taxable income by using offshore companies with low or no imposition of tax. They originated since international tax norms followed a general tendency where the income of a company was not taxed until it was not paid as dividends. Consequently, it was common for a local company to have subsidiaries in jurisdictions having low or no imposition of tax and then profits, interest, proceeds, royalties, payments and other income were transferred to these subsidiaries from the local company and therefore avoiding the payment of dividends by using a system of loans for shareholders that are never declared. In this sense, the CFC Rules operate with an imposition of tax over all kinds of income for the shareholder, regardless of the nature thereof, i.e. regardless of the dividend distribution.
Tax avoidance as well as tax evasion have become a global problem that has demanded a lot of work from countries that are looking for solutions to the problem. It is important to note that the low or no imposition of tax on its own is not a problem; the concern arises when it is associated to practices that artificially generate income that due to their nature are subject to tax. For this reason, in 2013 the OECD developed the Action Plan on Base Erosion and Profit Shifting (BEPS) that contains the implementation of the CFC Rules in its Action number 3.
The functioning of this new tax norm the international community is tending to use varies depending to the specific country. Generally, they consist on imposing tax over all kinds of income received by the offshore company, regardless of their nature. This norm also intends to avoid double taxation on amounts already taxed by another jurisdiction that has incorporated the CFC Rules. Likewise, the norm is not applicable to tax residents that have a minority interest in the offshore company.
The incorporation of the CFC Rules, among other norms focused on fighting tax avoidance and tax evasion, have had as a consequence an ineludible path towards the development of a sustainable economic growth and the international tax transparency.
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