CFC Concepts - Key Terms from the Video Notes

Vocabulary flashcards covering key CFC concepts, definitions, and examples from the video notes.

Controlled Foreign Company (CFC)

A foreign company directly or indirectly controlled by resident taxpayers, earns substantial passive income, and is taxed at a substantially lower rate than in the resident state; passive income is attributed to resident shareholders and the comparison often uses the Effective Tax Rate (ETR).

Passive income

Income such as interest, rent, dividends, royalties, and capital gains earned by a CFC.

Golden Share

Voting power used to establish control for CFC purposes.

Effective Tax Rate (ETR)

The actual tax rate on the foreign subsidiary’s income, used to determine CFC treatment and compared to nominal rates.

Nominal Tax Rate

The statutory tax rate before deductions and credits; used in comparisons with the ETR.

Foreign related company (FRC)

A foreign company that, in Japan, is a CFC when 50% of its shares are owned by Japanese shareholders.

Japanese shareholder

A company or associated person that holds 10% or more of the outstanding shares of a CFC.

Paper Company

A foreign affiliated company with little substance (assets, employees, or management), often excluded if it fails substance criteria.

Cash Box Company

A company with mainly passive income and limited substance, often subject to CFC rules.

Blacklist Company

A company resident in a jurisdiction designated as non-cooperative for tax information exchange; typically included as a CFC.

Economic Activity Test (EAT)

Test to verify whether a foreign affiliate has sufficient economic substance to earn active income; failure often leads to CFC inclusion.

Full Inclusion

In Japan, all income before tax of the foreign company is included for CFC purposes.

Partial Inclusion

In Japan, only the passive income of the foreign company is included for CFC purposes.

Transaction-based (Transactional) approach

CFC framework that taxes specific incomes (usually passive) regardless of source or location.

Entity/Jurisdictional approach

CFC framework that taxes all income of a CFC located in a low-tax jurisdiction (all-or-nothing).

Current taxation of undistributed profits

Taxation applied to profits that have not been distributed to shareholders.

Tax credits / underlying tax credits

Mechanisms to mitigate double taxation, including foreign tax credits and participation exemptions.

Control thresholds

Rules to determine CFC status, typically involving ownership and/or voting power (e.g., >50%).

Management and Control criteria

Criteria used to assess whether a company is properly managed and controlled in substance.

Substance criteria

Requirements for business presence (employees, assets, active operations) to avoid being a ‘paper’ or ‘cash box’ company.

Non-cooperative jurisdiction

A jurisdiction designated by a finance ministry as non-cooperative in tax information exchange (e.g., Trinidad and Tobago in OECD context).

Advanced CFC regimes

Countries with well-developed CFC rules, cited as examples: United States, United Kingdom, Australia, Japan, and France.

USA – first adoption of CFC rules

United States is noted as the first country to adopt CFC rules (1962).

UK – CFC regime introduction

United Kingdom introduced CFC rules in 1984 to counter profit shifting to low-tax jurisdictions.

South Africa – Section 9D

South Africa introduced CFC rules in 1997 (Section 9D) to protect the tax base; initial focus on passive income, later covering active income.

J-CFC thresholds (Japan)

In Japan, a foreign entity is a CFC if (i) 50% of its shares are held by Japanese shareholders; (ii) a Japanese shareholder is 10%+ of the CFC.

ETR threshold in Japan (30%)

If the foreign subsidiary’s ETR is below 30% (or there is no income tax), CFC income is taxed in Japan.

Gains/losses on derivatives (passive income)

Included as part of passive income in CFC calculations.