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Definition: Controlled Foreign Corporation
These are corporation that are established in countries other than the owner’s homeland. The ownership status is determined by the percentage of shares owned. In this case if the owner has more that 50 percent of the shares in the foreign corporation then they would fall under CFC’s in the owner home country. They are established with tax gains in mind and every country has its own laws to regulate such companies. Some of the major countries having CFC’s are United states, Germany, Japan, Sweden ,new Zealand and each are distinct in their own way. Other than tax, countries with viable economic condition and easy access to resources and technology are also prime reasons for setting up a CFC’s. With regards to taxation there are separate laws to prohibit tax deferral using offshore low taxed companies.
The shareholder is taxed on the dividends they receive. Now the reason for the corporation to set up a subsidiary abroad in tax havens was that they could easily transfer wealth, income, royalty payments abroad without being taxed. The companies in those countries paid dividends without declaring them and thus were not subject to taxation. They delayed dividend declaration indefinitely and camouflaged the payments as a kind of loan. To avoid such tax evasion countries have introduced CFC’s to control such practises.
The section F of the CFC’s rule demarcate the income from foreign subsidiary that can be taxed, some of the classifications are:
• Income from investment abroad encompassing rents, royalties ,interest and dividends.
• Income from purchase or selling of goods for goods outside the country.
• Income from such passive business.
Every country has its own rule to deal with it but the overall structure are more or less the same.
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