What Is a Controlled Foreign Corporation?

A controlled foreign enterprise is a company that is controlled by a resident enterprise, or by a resident enterprise and a resident individual (hereinafter collectively referred to as a Chinese resident shareholder, including a Chinese resident enterprise shareholder and a Chinese resident individual shareholder). % Of countries (regions) are not foreign enterprises that do not distribute profits or reduce distribution for reasons of reasonable business. Control refers to the substantial control of shares, funds, operations, purchases and sales.

Controlled foreign enterprise

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A controlled foreign enterprise refers to a resident enterprise or a resident enterprise controlled by a resident enterprise or a resident individual (hereinafter collectively referred to as a Chinese resident shareholder, including a Chinese resident enterprise shareholder and a Chinese resident individual shareholder).

[ Note] "

An important way for resident companies to carry out international tax avoidance is through

According to the "People's Republic of China

On January 21, 2009, the State Administration of Taxation issued the Notice on Simplifying the Determination of the Actual Tax Burden of the Country in Which a Chinese Resident Shareholder Controls a Foreign Enterprise (Guo Shui Han [2009] No. 37). A special provision for companies to identify and manage specific measures.

Accordingly, Chinese resident enterprises or resident individuals who can provide information to prove that the foreign enterprises under their control are established in the United States, United Kingdom, France, Germany, Japan, Italy, Canada, Australia, India, South Africa, New Zealand and Norway are exempt from Profits that are not distributed or reduced by a foreign enterprise are treated as dividends and are included in the current income of Chinese resident enterprises. The document establishes a subsidiary obligation for enterprises, that is, Chinese resident enterprises or resident individuals need to provide information to prove that the foreign enterprises under their control are established in the United States, United Kingdom, France, Germany, Japan, Italy, Canada, Australia, India, South Africa, New Zealand And Norway. The controlled foreign enterprise system is only for foreign enterprises established in tax havens. For enterprises established in the aforementioned non-low-tax countries or regions, they are not subject to the controlled foreign enterprise system.

In practice, generally speaking, those countries or regions with lower tax rates, including the traditional tax havens in the Bahamas, Bermuda, Cayman Islands, and BVI, are generally considered to be countries or regions with actual tax rates below 12.5%.

If Chinese companies set up companies in these countries or regions, there will be greater risks of "controlled foreign companies". For some countries or regions that do not tax dividends and other income, such as Hong Kong, China's tax authorities may also determine that the actual tax burden on dividend income received by Chinese companies from companies in that region is less than 12.5%, so that controlled foreign companies are applicable. "Provisions. However, the Chinese tax authorities have not yet formulated any specific regulations on the above issues.

In order not to affect the competitiveness of investment entities in the international market, and to prevent the overseas development of enterprises from being prevented by tax avoidance of controlled foreign companies, Article 84 of the Implementation Measures for Special Tax Adjustments (Trial) stipulates that shareholders of Chinese resident enterprises need only Being able to provide information to prove that the foreign enterprise under its control meets certain conditions, it will be exempt from the foreign company's undistributed or reduced distribution of profits as the amount of dividend distribution, which is included in the current income of Chinese resident enterprise shareholders. The conditions set are: (1) established in a non-low tax country (region) designated by the State Administration of Taxation; (2) mainly obtained from active operating activities; (3) the total annual profit is less than 5 million yuan.