
CFC, expanded: how profits get pulled back home
Core idea
Parking profits in a low-tax foreign company does not defer tax at home if CFC rules apply. If you control the entity, it’s low-taxed, and a material share is passive income, your home country can tax those profits even without dividends.
What gets checked — in human terms
- Your tax home. Where you file taxes decides which CFC law applies.
- Who runs the show. Own the votes, sign the orders, or pull the strings → you control it.
- How low is “low.” If the effective rate is below the local threshold, it’s low-taxed.
- Money type. Interest, royalties, portfolio dividends, intra-group “IP/services” = passive. Sales with a team = active.
- Real life on the ground. Office, payroll, decisions taken there, third-party customers, clean books. A mailbox is not substance.
Five-step decision path
- Are you tax-resident in Country X? → Country X’s CFC applies.
- Do you control the foreign company? → legal or factual control = yes.
- Is its ETR below the home threshold? → low-taxed = yes.
- Is a material share of profit passive? → if yes, risk spikes.
- Is there real substance abroad? → if no, attribution likely.
Cases with numbers
Case 1 — Offshore box with passive income
- Structure: You own 80% of a foreign company. ETR = 5%. Revenue is intra-group royalties and interest.
- Profit: $300,000. Passive share: 70% ($210,000).
- Result: $210,000 is exposed to CFC inclusion at home. No dividends needed.
- Why: control + low ETR + passive income − substance.
Case 2 — Real operations abroad (op-co)
- Structure: Foreign subsidiary with 8 employees, leased office, contracts signed locally, third-party customers, ETR = 22%.
- Profit: $300,000 from product sales and support.
- Result: Typically outside CFC (or passes an exemption).
- Why: active income + normal ETR + proved substance.
Case 3 — Split: operating company + IP holdco
- Structure: Op-co in Country A sells to customers; IP holdco in low-tax Country B charges a 6% royalty on turnover.
- Numbers: Op-co profit $150,000; IP holdco profit $200,000 (ETR 5%), all royalties from affiliates.
- Result: Op-co usually fine; IP holdco likely caught by CFC (passive royalties + low ETR).
- Side note: transfer pricing and CFC apply in parallel; one не заменяет другое.
Case 4 — Service boutique with one foreign “invoice box”
- Structure: Founder invoices all consulting from a foreign single-member company, no local staff, all work done from home country, ETR abroad 0–5%.
- Profit: $180,000, “management fees” from related party.
- Result: High CFC risk and/or reclassification as domestic PE/management location; profits pulled home.
- Why: no substance, related-party services, low ETR.
Evidence that decides outcomes
- People: employment contracts, payroll slips, time sheets, org chart.
- Place: lease, utilities, fixed assets register, server location if relevant.
- Decisions: board minutes, signatory logs, delegated authorities.
- Market reality: third-party customers, non-token revenue, independent pricing.
- Books: audited financials, local compliance, tax returns, transfer-pricing files.
Red flags
- Mailbox/virtual office only.
- Related-party revenues dominate, especially royalties/interest/“management fees.”
- Directors on paper abroad, but all agendas, calls, signatures from home country.
- ETR engineered far below mainstream rates without business justification.
- No separate systems, contracts, or banking; cash pooled and directed from home.
Mitigation menu (principle, not advice)
- Raise substance: hire locally, lease space, shift real decision-making, document it.
- Re-characterize flows: reduce passive streams; charge for real services at arm’s-length.
- Normalize ETR: accept standard incentives vs ultra-low regimes.
- Simplify structure: avoid IP/finance boxes unless you can evidence substance.
- Keep files ready: minutes, TP documentation, customer mix, audit trail.
If profits live in a low-tax box but control lives with you, tax follows you. Without real people, place, decisions, and third-party income abroad, expect profits to be taxed at home. Build only what you can prove on paper and in practice. If you can’t show it, you don’t have it.