• English
  • Français
  • Deutsch
  • Español
  • Italiano
  • Русский
CFC, expanded: how profits get pulled back home

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

  1. Are you tax-resident in Country X? → Country X’s CFC applies.
  2. Do you control the foreign company? → legal or factual control = yes.
  3. Is its ETR below the home threshold? → low-taxed = yes.
  4. Is a material share of profit passive? → if yes, risk spikes.
  5. 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.

Mathieu Fiscalis