How to Avoid Controlled Foreign Corporation Rules (CFC)
7 Strategies to Eliminate Taxes and Ensure CFC Rules Don’t Apply to Your Situation
Controlled Foreign Corporation (CFC rules) exist in all the major high tax countries.
They all say some version of “If you control an offshore company in a low tax jurisdiction we want our share of the profits.”
The definition of control will vary from state to state from as low as 10% in the USA to as high as 60% in Argentina.
Move Your Legal Residence to a Country With No CFC Rules
The most straightforward strategy to avoid CFC rules is to move your main residence to a country that doesn’t have them.
While all the main high tax jurisdictions like the USA, UK and the EU have CFC rules most of the world does not.
If your main residence is in Monaco or The Cayman Islands or Panama you will not have to worry about how to avoid CFC rules as they don’t exist.
2. Do Not Legally Control The Offshore Company
This can be easier said than done, however if you are not a director or a shareholder of the CFC then it’s by definition not a CFC and it won’t be reportable under CFC laws.
If you had a Panama company with Panamanian directors and the shares were owned by a Cook Islands Trust it would be difficult to argue that it was a CFC.
This kind of structure can be put in place to avoid CFC rules but it must be absolutely watertight to avoid attack by the state parasites.
3. Have an Operating Company in a Low or Zero Tax Location
Most countries make exceptions for operating companies. The laws are primarily intended for controlled companies distributing passive income.
If the foreign company is operating a trading business with offices and employees it may not fall under CFC rules. It will depend on the specific situation and countries.
4. Use a Low Tax Company in a White-listed Jurisdiction
Using a low tax Company in a white listed country can be a better strategy nowadays and it lets you fly below the radar of many tax departments.
Having a low tax company from Ireland or a UK LLP will work in some situations as both those jurisdictions are white-listed by other European jurisdictions.
They will not be subject to as much scrutiny as a company from Belize or Panama would be.
5. Spread Shares in the Offshore Company Amongst Family Members
Most CFC rules stipulate a percentage of the shares of the offshore entity that you must control for it to come under CFC rules.
Most start at around 25%. Therefore if you had 5 family members owning 20% each you can legitimately avoid CFC rules in some jurisdictions.
It will defend on the individual circumstances and there can’t be any official nominee arrangement between the family members.
6. Freedom of Establishment Rules Within the EU
If you have a Company in the EU it’s perfectly legal to structure your affairs in the EU jurisdiction with the lowest tax burden.
Malta, Cyprus and Ireland are examples of small countries within the EU with lower tax rates.
There’s nothing to stop EU residents setting up companies in those jurisdictions or even re-locating an existing EU company to a lower tax jurisdiction.
7. For UK Residents if Profits in the CFC are Less than £50k
Her Majesty's Revenue and Customs in the UK will not be interested in your offshore company if the annual profits are less than £50,0000 per year.