Controlled Foreign Corporations or Companies, also known as CFCs, are a legal construction of the various tax authorities around the world. It is a concept describing a legal entity that exists in a foreign jurisdiction but is owned or controlled by tax-residents of a different jurisdiction. CFC laws were introduced to stop tax evasion through the use of offshore companies in low-tax or no-tax jurisdictions such as tax havens. It's usually not illegal to have a financial or controlling interest in a foreign legal entity, however many governments require that you declare your interests and pay tax on them, and CFC laws (combined with a no-tax jurisdiction or a double taxation agreement) sometimes mean that a company is only taxed in your jurisdiction.
Many countries' CFC laws are quite broad and make it infeasible to have an offshore company. Other countries target individuals owning offshore companies, but are more lax where corporations (particularly large multinationals) are concerned. Since many countries nowadays have made tax evasion a criminal offense, and with increased information sharing among tax authorities, it's less desirable to take a risk of not declaring foreign financial interests.
Usually it's possible to get around CFC laws by having a sufficient number of people with an interest in the company, but the required numbers vary greatly. In some jurisdictions, perhaps less than ten persons are required to own an offshore company before it's given its independence, whereas in other countries, you'd need hundreds. Some countries, like Australia, also have an exception list of countries whose companies will not be classed as CFCs. This is usually because the taxes levied there are equivalent or higher than in the shareholders' country.
Sometimes it is adventageous to have a CFC regardless of having to pay tax in your current country. This could be because the cost of setting up a foreign company is considerably less than setting up a local company, or a company situated in a particular country will be seen as more professional and worldly than one in your own country.
Foreigncorporations that have effectively connected income must file a tax return.
You own (on the last day of the foreigncorporation's tax year) from 10 to 50% of stock in a foreigncorporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreigncorporation.
You transfer property to a CFC in an exchange described in section 367(a) or (d), or you elect to apply the principles similar to section 367 to the transfer.
In order to comply with a foreign decree, a foreign subsidiary transferred all of the assets of one business to a new subsidiary in exchange for 100 shares of the new subsidiary's voting stock and then distributed the stock pro rata to its 60 percent domestic parent and its 40 percent foreign national shareholders.
Section 7.367(b)-2(a) of the temporary regulations provides that a "controlledforeigncorporation", as that term is used in the regulations, is defined in section 957 of the Code and the regulations thereunder.
Section 957 defines a "controlledforeigncorporation" as any foreigncorporation of which more than 50 percent of the combined voting power of all classes of stock entitled to vote is owned, or considered as owned, by United States shareholders on any day of the taxable year of such foreigncorporation.
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