CFC in the UK

International law firm Antwort Law provides advice on various aspects of international tax law, including controlled foreign company (CFC) rules in the UK. In this article, we'll take a closer look at how these rules work, who they affect, and what consequences they may have for individuals and businesses.

A controlled foreign company (CFC) is a foreign corporation that is controlled by UK residents. The main purpose of CFC legislation is to prevent tax evasion by shifting income to low-tax jurisdictions. CFC rules allow the UK to tax the income of such companies as if it were generated directly in the country.

CFC rules in this country formally apply to individuals and legal entities-controllers, but before the tax is calculated and all other issues are resolved, these rules apply exclusively to legal entities-controllers. This means that individuals, whether domiciled or non-domiciled, are not subject to additional UK tax if they have a CFC.

Individuals

Individuals in the UK, whether domiciled or non-domiciled, are not required to declare the presence of a CFC on their personal tax returns. There are no special CFC notification forms or any similar requirements, making foreign ownership beneficial for UK residents from a CFC perspective.

Legal entities

The application of CFC legislation to legal entities that may act as controllers of other foreign companies is a much more complex issue. Legal entities that control foreign companies are required to report the income of those companies and may be liable to pay tax on the income of the CFC in the UK. Control can be defined in a variety of ways, including share ownership, voting rights, or other influence over the management of the company.

Example 1: Ownership of a foreign company through a UK entity

UK company A owns 75% of the shares of foreign company B, registered in a low-tax jurisdiction. In this case, company A can be considered the controller of company B under the CFC rules. If Company B's income is not sufficiently taxed in its jurisdiction of incorporation, the UK may require Company A to pay tax on those income.

Example 2: Individual as an indirect controller

Where a UK individual owns a significant share in a UK company which in turn controls a foreign company, the individual will not be directly subject to taxation under the CFC rules. The entire tax burden falls on the British company.

Why is ownership of foreign companies beneficial for UK residents?

1) No obligation for individuals: individuals, even if they are controllers of a CFC, are not required to report this in their tax returns. This greatly simplifies the management of foreign assets.

2) Flexibility and tax optimization: British residents can use foreign companies for tax optimization, minimizing their tax liability in the UK. This is especially true for non-domiciled residents who can avoid taxation on foreign income not remitted to the UK.

3) Complexity for legal entities: Although legal entities are required to report CFC income and may be subject to taxation, there are many strategies to minimize these obligations, including the use of international agreements and tax incentives.

CFC rules in the UK are a complex but flexible system that allows residents of the country to effectively manage foreign assets and income. It is important to understand all the nuances and possible consequences associated with owning a CFC and use professional advice to optimize your tax burden.

Antwort Law offers comprehensive tax planning and CFC consulting services. We are ready to help you understand complex tax law issues and ensure the stable operation of your business. Contact us for professional help and advice.

Lidia Ivanova

International lawyer
Antwort Law