The Study On The Identification Of The Controlled Foreign Company In The United States’ Legislation

Along with the faster development of the global economy, multinational companies, as important carriers of the global economy, achieve a high level of growth in both of the quantity and the scale. For multinational companies, the minimum of taxes they need to pay would be one of the best ways to maximize their profits and reduce the trading costs. Registering CFCs within tax heavens is one of the best means of the international tax avoidance of multinational companies. In order to protect countries’ interests regarding taxes freeing from being destroyed, many governments set out to the CFC legislations.The United States, as the largest exporter for the capital in the world, turned to be the first one to legislate the Controlled Foreign Company(“CFC”) act, which is also widely known as the Subpart F, in the 1960 s. After that, other countries began to create their own CFC legislations to protect their interests regarding taxing. CFC legislations are to tax part of the revenue of CFCs which are belonging to the residents. China creates its own CFC legislations so late that the CFC legislation is not officially presented until the appearance of Chinese Enterprise Tax law, which takes effect on January 1st 2008. It is a huge breakthrough as creating our own CFC legislation in Chinese anti-avoidance process. However, Chinese CFC legislation still stays on the primary stage, and there are some issues needing us to resolve. It is the identification of the CFC which is the jumping-off point of the CFC legislation and the CFC practice both.This paper is a combination of the comparative method and the induction. The author starts from the Subpart F with some U.S. CFC cases, and also adds some own analysis. On the basis of the analysis of the Subpart F, the author puts forward with some suggestions for the improvement of Chinese CFC legislation. This paper consists of three chapters as follows:Chapter Ⅰ focuses on the basic contents of the CFC legislation. In one country, the Controlled Foreign Corporation, short as CFC, means to be a foreign corporation which is controlled by its residents and located on a low-tax country or area outside of the country hereof. Generally, there are four legal traits of a CFC. Firstly, a CFC shall be a legal person independent from its shareholders. Secondly, it shall be located outside of the majority shareholders’ country. Thirdly, its location mostly turns to be a low-tax country or area. And lastly, the whole or majority of its business would be operated outside of its location. In accordance with the Worldwide Investment Report 2014 issued by United Nations Conference on Trade and Development, the volume of the global Foreign Direct Investment(“FDI”) in 2013 increases a lot after 2012’s decline. Additionally, the volume of the FDI into offshore financing centers still stands at a high level and its increase keeps the same pace with that of the volume of the global FDI. In accordance with the traditional tax legislations, the states have no right to tax the revenue of the CFCs controlled by the states’ residents. However, if the states choose to ignore this kind of international tax avoidance, then the governments’ revenue will be harmfully cut. Consequently, states, like the U.S., started on the constructions of the CFC legislation.Chapter Ⅱ majorly analyses the identification of CFCs in the Subpart F. Section one of this chapter concludes the definition of “control”. In Subpart F, there are two main types of “control”, as the ownership rule and the in-reality rule. The ownership rule means that the CFC is controlled by residents at a given percentage of the voting power or the total stock value of the CFC. The ownership rule can be divided as three parts according to the ways of owning the voting power or the total stock value, the direct ownership, the indirect ownership and the constructive ownership. It shall be noted that the constructive ownership is a rule which can only be used in defining CFCs rather than determining the amount of taxes residents shall pay. The in-reality rule requires the U.S. shareholders to have a fateful impact on the business operation, the board of directors and other similar affairs of the CFC. The author uses the Garlock case to help understanding the in-reality rule. Section two mostly analyses the scope of the taxpayer and the earning & profit(“E&P”) which shall be taxed under the Subpart F. Pursuant to the Subpart F, U.S. shareholders who own more than 10% of the voting power or the total stock value of the CFC shall be the taxpayer under the Subpart F. The E&P taxed under the Subpart F consists of two parts, the Subpart F Income and the earnings from the investment of the U.S. domestic property. The Subpart F Income includes the insurance income and the base company income. The earnings invested in excess passive assets were included in the U.S. Subpart F before, and were excluded in 1996. Section three of this chapter analyses two important rules, the Check-the-Box Rule and the Look-Through Rule. These two rules enhance the impact of the Capital Import Neutrality on the Subpart F. According to these two rules, the U.S. shareholders have no obligation of paying taxes if the dividends are transferred between CFCs outside of the U.S., which is not exempted before the effectiveness of these two rules, on condition that this kind of dividends are not from the E&P under the Subpart F of the CFCs hereof.Chapter Ⅲ expounds Chinese active CFC legislation. According to the World Investment Report 2014 issued by United Nations Conference on Trade and Development, in 2013 China ranks the second largest economy country only to the America. However, Chinese CFC legislation fails to keep the same pace with Chinese current investment situation. The first CFC legislation did not appear until Chinese Company Income Tax Law approved in 2007. Although several CFC legislation rules have been enacted since the Company Income Tax Law approved, Chinese CFC legislation is still staying in the primary stage, and most rules are ambiguous. The author advises us of referring the Subpart F for our Chinese CFC legislation. in order to develop our Chinese CFC legislation, we can do a lot of things, like adding the constructive ownership, enriching the measurements for the ownership, defining the contents of the in-reality rule, adding more exemptions and so on.