Controlled Foreign Company (CFC) rules are anti-avoidance tax laws that let a country tax its resident companies on certain profits earned by foreign subsidiaries they control, even when those profits have not been paid home as dividends. They exist to stop a multinational corporation from parking passive or easily moved income, such as interest and royalties, in a low-tax subsidiary and leaving it there indefinitely.
CFC rules sit alongside transfer pricing and withholding tax as one of the main tools governments use to protect their tax base. Unlike permanent establishment rules, which decide whether a foreign company is taxable in a country, CFC rules attribute a subsidiary's income upward to its owner at home. Most large economies now have such rules.
Controlled foreign company rules in plain terms
Picture a family business that keeps a savings jar at a relative's house in another town. Every month part of the shop's earnings goes into the jar, and because the cash never comes home, the family says there is nothing to declare. CFC rules are the tax office replying that the jar belongs to the family, so its contents count as the family's income this year, whether or not anyone brings them home.
The rules do not treat every foreign arm of a business as a hiding place. A real factory abroad, with staff, machines and customers, is usually left alone. The target is the jar: a company with little activity of its own whose main job is to collect income that could just as easily have been earned in the home country.
How CFC rules work
Most regimes are built from the same few parts:
- A control test. The foreign company must be controlled by residents of the taxing country, usually meaning they own more than half of its shares, votes or value.
- A low-tax test. Many regimes apply only when the subsidiary pays markedly less tax than it would at home, often judged by comparing effective rates.
- Tainted income. Rules usually target passive or mobile income, such as dividends, interest, royalties and profits from sales to related parties, rather than genuine trading income.
- Attribution. The caught income is added to the parent's taxable profit in proportion to its stake, in the year it is earned.
- Relief. Credits for foreign tax paid, and exemptions for later dividends, prevent the same profit from suffering double taxation.
Most regimes also carve out companies with real economic substance, small amounts of income, or activities that the law treats as active business. Without them the rules would catch ordinary foreign operations as well as the empty shell company they target.
History and the US regime
The US Revenue Act of 1962 created Subpart F of the Internal Revenue Code. It defines a controlled foreign corporation as one in which US shareholders, each owning at least 10 percent, together hold more than 50 percent, and taxes those shareholders currently on categories of passive and related-party income. Germany followed with its Foreign Tax Act in 1972 and the United Kingdom with its first regime in 1984.
The Tax Cuts and Jobs Act of 2017 added a broader layer called global intangible low-taxed income (GILTI), which taxed US shareholders on most CFC earnings above a deemed return on tangible assets. The One Big Beautiful Bill Act, signed in July 2025, renamed it net CFC tested income (NCTI) for tax years beginning after 31 December 2025, removed the tangible-asset carve-out and set a permanent deduction that gives corporations an effective rate of about 12.6 percent before foreign tax credits.
CFC rules in the EU and the UK
The OECD's 2015 report on Action 3 of its base erosion and profit shifting (BEPS) project set out building blocks for effective CFC rules, and the European Union made them mandatory. The Anti-Tax Avoidance Directive (Council Directive (EU) 2016/1164) requires every member state to apply CFC rules from 1 January 2019. Under its Articles 7 and 8, an entity is caught when the parent holds more than 50 percent and the tax actually paid abroad is less than half of what would have been due at home. States may tax either listed categories of passive income or income from non-genuine arrangements.
The United Kingdom replaced its 1984 regime with a new one in Part 9A of the Taxation (International and Other Provisions) Act 2010, which took effect for accounting periods beginning on or after 1 January 2013. It uses a "gateway" test to identify profits artificially diverted from the UK, with exemptions for low-profit, high-tax and excluded-territory subsidiaries.
Pillar Two and criticism
The OECD's Pillar Two global minimum tax of 15 percent works partly like a coordinated CFC rule: its income inclusion rule lets a parent's country collect top-up tax on low-taxed profits of foreign subsidiaries. In January 2026 the OECD/G20 Inclusive Framework agreed a "side-by-side" package under which groups headed in countries with a qualifying domestic regime, chiefly the United States, are largely spared those rules.
Critics argue that CFC rules are complex, costly and can disadvantage domestic groups against foreign competitors. They can also clash with free-movement rights: in Cadbury Schweppes (2006), the EU Court of Justice held that member states may apply CFC rules only to wholly artificial arrangements. Supporters reply that without them, any group could defer home tax indefinitely by routing income through a tax haven. The rules also shape where a holding company is placed and feed into the wider debate on tax avoidance versus tax evasion. Advisers weigh them together with tax residency rules and any double taxation treaty when designing a group.