What Is a Controlled Foreign Corporation (CFC)?

What does CFC mean?

The term “Controlled Foreign Corporation (CFC)” literally means “controlled foreign corporation.” This means that the company operates in a foreign jurisdiction but is controlled by residents of another country. For example, let's imagine a Ukrainian entrepreneur who owns an offshore company: this firm can automatically be considered a CFC, since control is exercised by a Ukrainian resident. 

Controlled foreign company definition

From a tax perspective, a CFC is defined by established control thresholds. Typically, a company is considered controlled if a large share of its ownership or voting rights is held by residents of a country. For example, in the US, a foreign company is a CFC if more than 50% of its voting shares or capital value is owned by US shareholders, with each such shareholder holding at least 10% of the shares. In Ukraine, a CFC is determined by a similar principle: residents must have significant control over the foreign legal entity. Thus, the definition of a CFC consists of a clear indication of the control criterion (share of ownership) and the foreign status of the company.

Key features of a CFC

A controlled foreign corporation has several distinctive features. First, it is a legally separate business abroad—for example, an offshore or foreign branch of your company. Second, it is controlled by residents of the parent company's country: most often, these are individuals or legal entities that own a critical share of the stock (usually more than 50%). Third, a CFC mainly receives passive income—for example, dividends, interest, royalties, rental payments, and other income that can be easily transferred between jurisdictions. It is precisely this type of passive income that is usually subject to taxation under CFC rules. Finally, CFCs are subject to special taxation: the law provides that a certain portion of their income will be considered earned by the owner and will be taxed in their country.

Controlled Foreign Corporation Rules

How CFC rules work

The Controlled Foreign Corporation rules were introduced to counter tax avoidance through offshore companies. Essentially, if a parent company receives profits through its foreign subsidiary, the tax authorities can tax those profits as if they had been distributed to the parent company in its country of registration. For example, if a German company has set up a subsidiary in Jersey (with zero tax), German tax authorities may require its income to be taxed in Germany. In other words, CFC rules force owners of domestic companies to include foreign profits in their tax base and pay taxes on them “at home.”

Jurisdictions with CFC regulations

Controlled foreign company laws are in effect in many countries around the world. These include the US, the UK, Germany, Japan, Australia, New Zealand, Brazil, Sweden, and others. Each country has its own rules, but the overall goal is the same: to prevent opaque profit transfers through low-tax jurisdictions. In Ukraine, CFC rules were introduced relatively recently. Under the current Tax Code of Ukraine, every Ukrainian tax resident who controls or owns a foreign company or foreign establishments without the status of a legal entity is required to notify the tax authorities of their share in it and report on its activities. Thus, CFC rules apply to both natural persons and legal entities who own foreign branches.

CFC Taxation Explained

How CFC income is taxed

CFC rules require that part of a foreign company's income be included in the tax base of its controllers. This mainly concerns passive income: dividends, interest, royalties, rent payments, etc. For example, in the US, under Subpart F rules, undistributed passive income of a CFC is included in the taxable income of its owners. Thus, even if the company has not paid dividends to its shareholders, they still pay tax in the US on its profits. In general, many countries have the following scheme: CFC income is either taxed at the rates of the controlling owners' country or deducted from tax credits to avoid double taxation. For example, in the US, a CFC owner must report their share of undistributed profits and pay tax on it at ordinary income rates.

Common anti-avoidance measures

CFC tax regimes contain additional restrictions to prevent evasion; in particular, they usually apply strict ownership (control threshold) and disclosure requirements. In the US, for example, tax authorities require CFC owners who hold at least 10% of the shares to file a special Form 5471 detailing the foreign company's income and retained earnings. Many jurisdictions also establish an “economic substance” test: if a CFC conducts genuine economic activity abroad or pays taxes there at a level comparable to that in its home country, its profits may be exempt from CFC rules. In addition, there may be minimum income thresholds (de minimis) below which CFC regulations do not apply. Taken together, these measures are intended to make it more difficult to use CFCs solely for tax avoidance purposes.

What Is a CFC License?

When a license is required

When establishing or controlling a foreign company, you must comply with the requirements of the country where it is registered. For example, if the company is engaged in banking, insurance, telecommunications, etc., it may require appropriate licenses in that jurisdiction. However, CFC or CFC status itself does not require a separate license. Such companies are licensed like any other foreign enterprise, depending on the type of business. In other words, there is no such thing as a “CFC license” as a separate document: only the usual licenses for operating abroad are required, if they are provided for by local law.

Difference between CFC license and registration

The registration of a foreign company and its licensing permits are two different things. Registration means the creation of a company in a foreign jurisdiction (obtaining a registration number, articles of association, etc.). A license is a special permit to carry out certain activities (if such activities are licensed in the country of registration). Therefore, in international business, a company must be registered in the chosen country and then obtain all the necessary licenses under its laws. The term“CFC” itself does not add any new licensing requirements: it simply means that the registered company is subject to the tax rules for controlled companies.

CFC in International Business

CFCs in multinational corporations

CFC structures are common in multinational corporations (MNCs). They arise when a multinational company establishes subsidiaries in different countries. If residents of one country control a foreign company (often as a subsidiary), that company may be considered a CFC. For example, a Ukrainian holding company may have a subsidiary in Cyprus or Latvia: this foreign affiliate will potentially be a CFC under Ukrainian law. For MNCs, this means additional tax implications: they must take into account the regulations of different jurisdictions, as the foreign company they control may be subject to local CFC rules.

Compliance challenges

Compliance with CFC rules creates difficulties for large corporations. First, each country sets its own requirements for CFC registration, reporting, and taxation. For example, corporations must keep records of ownership interests, income details, and “maintain evidence” of control. Second, there is a need to file reports in multiple jurisdictions simultaneously, which increases the administrative burden. In the US, such a report is made using Form 5471, which is filed annually by CFC owners. Other countries have their own types of reports. Third, differences in rules (different thresholds, income concepts, etc.) can lead to double taxation or inconsistencies. As a result, international companies often spend a lot of resources on tax compliance and planning to avoid penalties and impartially comply with all CFC regime requirements.

FAQ about Controlled Foreign Corporations

What is CFC in simple terms?

A controlled foreign corporation (CFC) is simply a foreign corporation controlled by a resident of your country. In simple terms, it is a foreign branch or subsidiary owned or controlled by local owners. It differs from a regular offshore company in that the law requires the owner to report it and pay taxes on its income as if that income had been earned at home.

What does CFC mean in taxation?

In a tax context, CFC refers to a company that is subject to special tax rules. This means that some of its income (usually passive income such as dividends or royalties) is “prescribed” in the tax return of the resident owner of that company. In other words, CFC is a mechanism that allows governments to tax the profits of foreign companies owned by their citizens or businesses, even if the profits are not directly transferred home.

What is a CFC license used for?

There is no such thing as a “CFC license” as a separate instrument. If you come across this term, it usually refers to something like a permit or confirmation of a company's status, such as a certificate of registration in a jurisdiction. However, from a tax perspective, a CFC license is not used. There are no specific licenses or certificates just because a company is a controlled foreign corporation. CFC tax status does not require special permission but only compliance with reporting and taxation rules.