BEPS Action Plan: Action 3 – Controlled foreign Foreign company Company (CFC) regimes

Although OECD Member States generally apply CFC regimes, the OECD has done little work on this area in the past. In this section we discuss the elements in OECD’s BEPS Action Plan focused on strengthening CFC rules.



14 July 2017

EU Member States are starting to implement the requirements of ATAD on CFC, including ….


29 May 2017

Japan has made significant changes to its existing CFC regime to ….

take account of the Action 3 recommendations. The new rules adopt an income based approach, applying economic activity tests with an effective tax rate test; consider whether it is a ‘paper’ company, a cash box or located in a ‘blacklist’ country; amend the definition of a CFC; and broaden the scope of passive income attributable.

See further our Japan Tax Update for May 2017.


1 March 2017

Shortly ahead of the introduction of its new CFC reporting regime, Russia has clarified ….

in letter No. 03-12-11/2/9197 of 17 February 2017 a number of outstanding points in 26 paragraphs of guidance, as set out in our Tax Flash Report for March 2017


14 November 2016

Taiwan is introducing a CFC regime and published draft regulations that provide details of how the law in Article 43-3 will work including …

The definition of a CFC, timing and scope of taxation, taxable income calculation method, and tax filing procedures, as set out in our Taiwan Tax Update for November 2016


29 June 2016

Within the EU, the new Anti-Tax Avoidance Directive (ATAD) requirement on CFCs will mean …

that the 14 or so Member States currently without CFC rules will need to introduce them and

As the OECD noted in the BEPS Action 3 report “because each country prioritises policy objectives differently, the recommendations provide flexibility to implement CFC rules that combat BEPS in a manner consistent with the policy objectives of the overall tax system and the international legal obligations of the country concerned”. There is some analysis included in that report about EU legality and CJEU case law, but it may warrant a more thorough review.

The double taxation safeguards in the EU measures are less clear than those included by the OECD given that the OECD recommended a credit for foreign taxes actually paid, including CFC tax assessed on intermediate companies. This is absent from the EU measures, unless it is intended to be implicit in the reference to the use of the parent company Member State rules. Specifically, it is uncertain whether a Member State would be allowed under ATAD to refrain from applying its CFC rules on low-taxed income of a sub-subsidiary if and insofar as the intermediate State also applies CFC rules (the wording regarding low taxation only refers to the State of the sub-subsidiary).

Note that the low level of taxation in the EU measures is now framed against the rate that would have been charged on the CFC rather than the parent’s effective tax rate as originally proposed by the EC or the average tax rate of Member States as in the common consolidated corporate tax base (CCCTB) proposal. This will give rise to different results based on the parent’s jurisdiction.

See further our Tax Policy Bulletin of 29 June 2016.


6 Feb 2016

Some countries have been migrating away from more rigorous CFC rules but in the EU...

where approximately half of the 28 Member States currently have CFC rules, the European Commission has proposed as part of an Anti-Tax Avoidance Directive a set of CFC rules that accommodate properly the treaty obligations imposed on the EU Member States.

On the basis of proposals published on 28 January, three principal criteria would have to be assessed before re-attribution would be required:

  • the parent’s interest in the entity, involving consideration of whether it (or with associated enterprises) has broadly more than 50% of the voting power, capital or entitlement to profits
  • the entity being subject to a low level of taxation (40% of the parent's effective rate) and
  • more than 50% of the entity's income falling within specified categories (broadly, passive income).

Note that the low level of taxation would be framed against the parent’s effective tax rate, rather than the average tax rate of Member States as in the CFC recommendations as they stood as part of the widely discussed common consolidated corporate tax base (CCCTB) proposals. This will give rise to different results based on the parent’s jurisdiction.

See further our Tax Policy Bulletin of 5 February 2016.


5 October 2015

No consensus was agreed in the final report on Action 3 on CFC rules, with the recommendations being...

in the form of the following six building blocks reflect the situation largely as previously reported, covering:

  • definition of a CFC
  • CFC exemptions and threshold requirements
  • definition of income
  • computation of income
  • attribution of income
  • prevention and elimination of double taxation.

The Report more clearly identifies that there are different policy drivers for CFC regimes. It also recognises that there is no ‘one size fits all’ solution even then, so provides only a more co-ordinated approach to countries looking to introduce CFC rules in the future.

Those with existing regimes are unlikely to introduce changes as a result solely of this Report.


5 May 2015

Our submission was one of 62 responses published by the OECD on Action 3.


1 May 2015

In our response to the discussion draft on BEPS Action 3, we refer to concerns in relation to the Discussion Draft as regards...

clarifying the overall aim of the Action and the Discussion Draft, as well as the huge potential for increased complexity, administrative burden and unrelieved double taxation which could arise under badly implemented CFC rules and the inadequately thought-through interactions with the other BEPS Actions.

In brief:

  • it may go too far and in particular we have concerns over both the scope of the CFC rules outlined in the document and the suggestion that a “secondary rule” be introduced
  • it is a potential extension to source country taxation rights and hence seems to be beyond what Action 3 was tasked with considering
  • the proposals appear to be far too broad to achieve consistency amongst nations (in particular the potential for CFC rules to challenge ‘foreign-to-foreign’ shifting) which may leave many territories with strict CFC rules and others with none and even more competition between nations (especially between OECD and non-OECD nations)
  • the interactions with the other Actions may lead to an unworkable international tax system
  • there could be a significant amount of double taxation arising as a result of interactions between the CFC rules, the CFC rules of non-member territories and the output from other Actions
  • we broadly agree with most of the ‘building blocks’ which are set out in the Discussion Draft but have particular concerns from a policy perspective in identifying the appropriate income to be apportioned to the parent territory (full inclusion and excessively broad partial inclusion systems go beyond what is necessary to prevent BEPS and furthermore, may ultimately impact negatively on international trade and growth)
  • the position for EU/EEA Member States is complex and we cover it in detail in an Appendix


7 April 2015

In a new discussion draft published over the Easter weekend, the OECD notes that many countries already have CFC rules but...

it suggests that these rules do not always counter BEPS in a comprehensive manner though they could reduce the incentive to shift profits to a third, low-tax country.

Harsher CFC rules will in principle lead to inclusion of more income in the residence country of the ultimate parent but a high level proposal to add a secondary form of taxation in another jurisdiction would add further complexity if it is taken forward.

This discussion draft considers all the constituent elements of CFC rules and breaks them down into the building blocks necessary for effective CFC rules. The building blocks include:

  • Definition of a CFC
  • Threshold requirements
  • Definition of control
  • Definition of CFC income
  • Rules for computing income
  • Rules for attributing income
  • Rules to prevent or eliminate double taxation

As with the discussion draft as a whole, the approaches to defining CFC income do not reflect a consensus view and there are clearly some material concerns from a tax competitiveness perspective.

One proposal MNEs will want to consider carefully is the an ‘excess profits’ approach under which income attributable under the CFC rules would be the profits in excess of a ‘normal return’, being a specific rate of return on the equity properly to be regarded as utilised in the business of the CFC.


2 September 2013

There are CFC regimes in all G20 member states, with the exception of four developing countries, two of which have announced an intention to adopt...

a CFC regime. The taxation of foreign income, derived directly or derived via a foreign subsidiary, is a key aspect of the fiscal policy of national governments to encourage economic growth, competitiveness and foreign investment. That is one of the main reasons why CFC rules vary so much between jurisdictions. It’s very unlikely that a common position on CFC rules can be achieved when sovereign nations have chosen such different ways to encourage economic activity. The best we are likely to see is some narrowing of practices on CFC rules.

For example, while it’s common for unrelated party passive income for example (relating to third party investments, etc.) to be subject to inclusion in amounts attributable back to the home territory, certain countries like the UK, US and Canada have an exemption for related party passive income. A proposed relaxation of Australian CFC rules to facilitate exemption for related party passive income has been deferred indefinitely. There is also continuing political debate in the US as to whether the check-the-box and ‘look through’ concessions to the CFC rules should be withdrawn.


7 August 2013

There are potential EU issues with extending CFC rules, given the Cadbury Schweppes decision that within the EU the concept can apply only to...

wholly artificial arrangements. While those outside the EU suggest change in this area should be considered, the prospect of getting agreement to a change at EU Treaty level is daunting.


19 July 2013

The comments in the Action Plan on the topic of strengthening CFC rules are very short. The Plan notes that the OECD has done no significant work...

in this area (presumably because it has been seen as a purely domestic issue). The indication is that the OECD wishes to see uniform CFC rules to counter BEPS in a more comprehensive manner. The Plan expressly refers to the positive “spill-over” effects of CFC rules due to the result that taxpayers would have a much reduced incentive to shift profits into a low tax jurisdiction.

The action point is to develop recommendations regarding the design of CFC rules. The work is due to be completed within two years.