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Meaning of Controlled Foreign Corporation
A foreign business entity registered and carrying out its business function in a country other than its resident country is termed as a Controlled Foreign Corporation (CFC). In the US, a controlled foreign corporation is defined as per the shares held by the citizens of their country.
Since a CFC is a foreign company, it means that the company should not be a tax resident in the foreign country in which it is operating. Let us understand more about CFC and its taxability.
Controlled Foreign Corporation and Taxability
The introduction of CFC concept was mainly to prevent evasion of tax. There was a time when many forge companies were set up in tax havens to claim tax benefit. CFC structure overcomes this flaw. The CFC structure of each country now looks at the taxation of each company and diversion of their earnings. This structure targets the MNCs and its individuals to keep a check on their tax filings. With the establishment of CFC structure, the tax evasion has come down significantly in different countries. Visit “Types of Foreign Exchange Exposure” and “International Finance Management”.
After globalization, the multinational groups have always been looking for business beyond their geographical boundaries. They look for establishing a business in countries where there is less jurisdiction for taxation. This has often led to tax evasion by such multinational firms. To curb this wrong practice the concept of CFC was introduced. Each country has its own CFC structure. In addition, most of the countries are successful in implementing it. The tax department of different countries is now more active towards the controlling interest of a business and the individuals associated with it. To sum up, CFC structure has been successful in preventing tax evasion and in future, the structure is going to get stronger.1–3