What CFC rules are
A company is a separate taxpayer, so profit it keeps abroad is normally taxed where it is resident, and its owner pays personal tax only when a dividend arrives. A controlled foreign company rule closes that gap for foreign companies its residents control.
When the rule applies, the owner's country adds the company's profit to the owner's own tax base for the year it was earned, paid out or not. For a founder with a company in a zero-tax registry, it is often the rule that decides the outcome.
Most CFC rules ask the same 3 questions:
- Control. Do you, alone or with related persons, hold enough of the company?
- Low tax. Does the company pay less tax than a set share of what it would pay in your country?
- Income. Is the profit the kind the rule targets, usually passive or easily moved income, and does the company lack real activity of its own?
A company that fails 1 of them is outside most rules, and the thresholds are where countries differ.
The US is the main exception: a foreign corporation more than 50% owned by US shareholders of 10% or more is a CFC whatever it earns, and its active profit is still included as net CFC tested income unless its controlling US shareholders elect to exclude income taxed above 18.9%, or 90% of the 21% US corporate rate (26 CFR 1.951A-2(c)(7)). Uruguay's rule has no low-tax test either (IRPF Title 7, article 21).
How the CFC test works
Control: the stake that brings you in
The EU minimum is article 7 of the Anti-Tax Avoidance Directive: a member state treats a foreign entity as controlled when its taxpayer, together with associated enterprises, holds more than 50% of the votes or capital or is entitled to more than 50% of the profits. Article 3 makes that a minimum level of protection, so national rules can reach further, and several do.
Source: The Uruguay, Portugal and Italy statutes, PwC for Colombia, the EU directive, HMRC and the IRS, all listed under Sources Colombia's 10% applies to a foreign entity Colombian residents control. The US counts each US shareholder of 10% or more toward a more-than-50% total.
Show the numbers
| Stake | |
|---|---|
| Uruguay (individuals, passive income) | 5% |
| Colombia (individuals) | 10% |
| United States (each US shareholder) | 10% |
| Portugal (individuals) | 25% |
| United Kingdom (UK companies) | 25% |
| EU minimum (companies) | 50% |
| Italy (individuals) | 50% |
Related holdings count together. The EU rule adds the taxpayer's associated enterprises to its own stake, and Portugal's rule for individuals lowers its 25% threshold to 10% where Portuguese residents together hold at least 50% of the company, so splitting shares with a partner or relative rarely gets a founder under the line.
Low tax: the half-the-home-tax test
The directive's tax test compares the corporate tax the foreign company actually paid with the tax it would have paid under the home country's rules: it is low-taxed when it paid less than the difference, which means less than half the home tax (ATAD article 7(1)(b)). With a home rate of 25%, a company paying 10% is low-taxed because 10% is below the 15% gap, while one paying 13% is not (ATAD article 7).
Italy's rule adds a 15% screen: a controlled company whose effective rate, from its own audited accounts, is 15% or more passes the tax test. Below 15%, or without audited accounts, the owner checks whether it pays less than half the Italian tax, and it is caught only if it does and more than a third of its income is passive or low-value related-party income (TUIR article 167). That text applies until December 31, 2026; a new consolidated income tax code (Legislative Decree 117 of June 19, 2026) takes over from 2027.
Which income CFC rules tax
The directive gives member states 2 models (ATAD article 7(2)). Under the first, the home country adds the CFC's undistributed income from 6 categories: interest and other income from financial assets, royalties and other income from intellectual property, dividends and gains on shares, financial leasing, insurance and banking, and invoicing companies that buy from and sell to associated enterprises while adding little or no value.
That model has an exit when the CFC carries on a substantive economic activity supported by staff, equipment, assets and premises. Member states may refuse the exit for companies outside the European Economic Area, which covers most zero-tax registries, and may leave out companies whose listed income is a third or less of the total.
The second model taxes only income from non-genuine arrangements. Member states may exempt from it a CFC with accounting profits up to €750,000 (about $853,000) and non-trading income up to €75,000 (about $85,300), or with profits up to 10% of its operating costs (ATAD article 7(4)).
A company that sells its owner's work to outside clients earns none of the 6 listed categories, so under the first model it is caught only where the home country wrote a wider rule. The exception is an invoicing company that resells the services of your other company: it is on the list, and transfer pricing rules test its margin as well.
| Foreign company's profit, all royalties | $200,000 |
|---|---|
| Tax it paid where it is registered | $0 |
| Parent company's stake | 60% |
| Added to the parent's tax base60% of the profit, in the year the CFC's tax year ends | $120,000 |
| Home tax at a 25% rate | $30,000 |
| Credit for tax the CFC paid | $0 |
| Extra tax at home this year | $30,000 |
Round numbers for an EU parent company under the directive's first model. Article 8 adds the income in proportion to the stake, credits tax the CFC paid, and deducts the amount again when it is later paid out as a dividend or the stake is sold.
CFC rules for individuals, country by country
The directive applies to taxpayers subject to corporate tax in a member state, so it reaches you only when your shares sit in an EU company, as with a holding company above an offshore subsidiary. Owning the foreign company personally brings in your own country's rules for individuals:
CFC rules for resident individuals in selected countries on this site (Index data checked September 29, 2026; Mexico, Estonia and Georgia checked October 12, 2026)
| Country of residence | Rule for individuals | What it catches |
|---|---|---|
| Spain | Yes: LIRPF article 91 | Certain income of controlled, low-taxed foreign entities |
| Portugal | Yes: CIRS article 20 | 25% or more of an entity under a clearly more favorable regime; 10% where Portuguese residents hold at least 50% |
| Italy | Yes: TUIR article 167, to December 31, 2026 | Control, an effective rate below 15% and below half the Italian tax, and over a third passive or low-value income |
| Brazil | Yes: Law 14.754 of 2023 | Profit of controlled foreign entities that meet the law's tests, taxed at 15% every December 31, paid out or not |
| Colombia | Yes: ECE regime, Estatuto Tributario articles 882 to 884 | Passive income of a controlled foreign entity, for holders of 10% or more |
| Uruguay | Yes, from 2026: IRPF Title 7 article 21 (Law 20.446 of 2025) | Foreign dividends, interest and gains of entities you own 5% or more of, at any tax rate; not active business income |
| Albania | Yes: Law 29/2023 article 19 | Undistributed passive income of an entity you control over 50% that pays less than half the Albanian tax |
| Mexico | Yes: tax haven investment rules | Undistributed income of tax haven investments you effectively control, in proportion to your stake |
| Estonia | Yes: tax haven company rules | Undistributed profit of tax haven companies controlled by Estonian residents |
| United Kingdom | No CFC charge on individuals | Transfer of assets abroad rules can tax a foreign company's income instead |
| Ireland, Czechia, Croatia | No | Their CFC rules attribute income only to companies |
| Armenia | No | No CFC provisions in the Tax Code |
| Georgia | No | No CFC rules; a company effectively managed in Georgia is Georgian resident |
| Paraguay | No | Personal income tax reaches only Paraguayan-source income |
| UAE, Cayman Islands | No | No personal income tax |
Uruguay's rule shows how much the income test matters: it attributes foreign dividends, interest and gains to resident owners of 5% or more, while a foreign company's active business income is taxed when it is paid out (IRPF Title 7, article 21).
Brazil's rule taxes on a fixed date: since 2024 the profit of a qualified controlled foreign entity is taxed at a flat 15% every December 31, whether or not it is distributed (PwC, Brazil individual income). Law 14.754 of 2023 sets the tests that make an entity qualified, so the charge does not reach every company a Brazilian resident owns.
Your country has 2 more ways to tax the company itself, and neither depends on a CFC rule. A company run from your home can be resident there under the place of effective management test, and then it is taxed as a local company on all of its profit, not only the passive part. Work you do in a country can also give a foreign company a permanent establishment there.
No CFC rule does not mean the profit is safe
Croatia has no CFC charge on individuals, but it treats a foreign company whose place of effective management and supervision is in Croatia as a Croatian resident for profit tax. A company you run from Zagreb pays Croatian tax like any local company. A "No" in the table settles the CFC rule and nothing else.
UK CFC rules
The UK has a full CFC regime, but it charges only companies. HMRC's manual restricts the charge to UK resident companies that, together with connected or associated persons, are apportioned at least 25% of a CFC's chargeable profits (HMRC INTM194500).
A UK-resident individual who owns a foreign company falls under the transfer of assets abroad rules in sections 714 to 751 of the Income Tax Act 2007 instead, which can tax them on income of a foreign company they moved assets to (HMRC INTM600120). A foreign company whose central management and control is in the UK is UK resident in its own right (HMRC INTM120060).
US CFC rules: Subpart F and GILTI
The US rule reaches individuals directly. A US shareholder is a US person owning 10% or more of the vote or value of a foreign corporation, counting direct, indirect and constructive ownership, and the corporation is a CFC when US shareholders together own more than 50% of its vote or value on any day of its tax year (IRS, Instructions for Form 5471).
Each US shareholder then includes 2 amounts in income every year, paid out or not: Subpart F income, and the amount section 951A called global intangible low-taxed income, or GILTI. For tax years beginning after December 31, 2025, section 951A renames it net CFC tested income (26 U.S.C. 951A).
US citizens are taxed on worldwide income wherever they live (IRS), so a US founder abroad who owns 100% of a foreign company is inside both rules from the first day. The reporting runs through Form 5471 and the GILTI calculation, and a missing form costs $10,000 per foreign corporation per year, plus up to $50,000 more if it is still missing 90 days after an IRS notice (IRS, Instructions for Form 5471).
US rules do not work in reverse. A non-American who owns a US single-member LLC is not a US shareholder of anything. The LLC is disregarded for income tax unless it elects corporate treatment (IRS), and a nonresident owner pays US income tax only on income effectively connected with a US trade or business and on certain US-source income (IRS), though the LLC still files Form 5472 (IRS). The owner's own country decides whether the LLC is a company, and so possibly a CFC, or a transparent entity.
How to stay outside CFC rules legally
No arrangement keeps the profit both untaxed and yours. The legal routes change one of the 3 facts the rule tests:
- Give the company real activity. Staff, equipment, assets and premises where it is registered meet the directive's substance exit; they are the same things economic substance laws ask for, and they cost money every year.
- Let it pay enough tax. A company paying at least half the home tax passes the EU and Italian tests, and one paying at least 75% of the corresponding UK tax passes the UK's (TIOPA 2010 section 371NB); the US and Uruguay have no such test, apart from the US high-tax election. A moderate-rate onshore company can cost less than a zero-tax one taxed again at home.
- Pay the profit out. The EU model adds only undistributed income, so profit distributed each year is taxed as dividends instead; Brazil taxes a qualified company's profit every December 31 either way.
- Live where the rule does not reach individuals. Then check that country's management test before relying on it.
A foreign company the CFC rule misses, and one it catches
Outside
An Italian company owns 100% of a Cyprus company with 4 staff and an office in Limassol. It pays Cyprus's 15% corporate tax, more than half the Italian rate, and runs a real business, so neither the tax test nor the income test catches it.
Caught
A founder living in Madrid owns 100% of a BVI company with no staff that collects royalties from his Spanish company and holds his portfolio. It pays 0%, he controls it, and its income is passive, so Spain's international fiscal transparency rule adds its income to his own each year.
Does a CFC rule reach your company?
- Confirm your country of residence for this year, and whether its CFC rule applies to individuals, companies or both.
- Add your stake to those of relatives and companies you control, and compare the total with the threshold.
- Work out the tax the company pays as a share of its profit, and compare it with your country's test, such as half the home tax in the EU.
- List the company's income by type: interest, royalties, dividends, gains, and sales to or from companies you own.
- Check the management and permanent establishment tests separately; either can tax the company when no CFC rule applies.
- Check whether your country requires the shareholding to be reported even when no CFC charge applies.
David's note
I check the CFC rule before anything else. If your country applies it to individuals and your company would be a low-taxed shell, I would rather see you pay a moderate rate in a company that has real people and a real office than book a zero rate that comes back into your own return, with interest, when the tax office finds it.
