Controlled foreign companies (CFCs) in low tax jurisdictions are a headache for tax authorities, with the potential for profit to be earned at a low tax rate and not contribute to the coffers of the government of the parent company’s location. The potential for profits to be perhaps relocated to the lower tax jurisdiction has resulted in rules to stop such relocation. In the US, the rules are known as Subpart F; in the UK, they are simply the CFC rules.
In both cases, the result of the rules is some or all of the profits of the CFC are attributed to the parent/shareholder, and so become subject to that in that way in the parent/shareholder’s country. In the UK (and elsewhere) these rules haven’t quite kept up with the changes in the way in which businesses – particularly multinationals – are run, and it has become clear over the last decade or so that something needs to change.
Perhaps unsurprisingly, income from IP is one of the concerns with CFCs – IP doesn’t pass any border controls when you move it from one owner to another.