Controlled Foreign Corporation

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Controlled Foreign Corporations (CFCs), are a legal construction of the tax authorities around the world. A CFC is a legal entity that exists in one jurisdiction but is owned or controlled primarily by taxpayers of a different jurisdiction. CFC laws were introduced to stop tax evasion through the use of offshore companies in low-tax or no-tax jurisdictions such as tax havens. It is rarely illegal to have a financial or controlling interest in a foreign legal entity; however, many governments require taxpayers to declare their interests and pay taxes on them, and CFC laws (combined with a no-tax jurisdiction or a double taxation agreement) sometimes mean that a company is only taxed in one jurisdiction.

Many countries' CFC laws are quite broad and make it infeasible to have an offshore company. Other countries target individuals owning offshore companies, but are more lax where corporations (particularly large multinationals) are concerned. Since many countries nowadays have made tax evasion a criminal offense, and with increased information-sharing among tax authorities, it is less desirable to take a risk of not declaring foreign financial interests.

Usually it is possible to get around CFC laws by having a sufficient number of people with an interest in the company, but the required numbers vary greatly between jurisdictions. In some countries, less than ten persons are required to own an offshore company before it is viewed as independent; in other countries, hundreds may be needed. Some countries, like Australia, also have an exception list of countries whose companies will not be classed as CFCs, usually because the taxes levied in those countries are equal to or higher than in the shareholders' country.

Sometimes it is advantageous to have a CFC despite having to pay tax in the parent's country. This could be because the cost of setting up a foreign company is considerably less than setting up a local company, or because a company situated in a particular country will be seen as more professional and worldly, or will benefit more directly from local resources, than one in the parent's own country.