The Control Standards In Controlled Foreign Company Rules

By introducing the background and concept of controlled foreign company rules(CFC rules), this dissertation presents the concept of control standards in CFC rules and introduces the definition of control standards which containing the types and the level of control, with analyzing the representative countries’ laws and the OECD/G20 Base Erosion and Profit Shifting Project report. Because of the different types of control, this dissertation recommends each country apply a legal and an economic control test so that satisfaction of either test results in control. Countries may also include de facto tests where they achieve the same effect. Once a CFC regime has established what actually confers control, the next question is how much control is enough for the CFC rules to apply. It is recommended that each country adopt an acting-in-concert test, a related party test and a concentrated ownership rule. The control standards in each country shall be different according to the economic conditions and policy goals. This dissertation consists of three chapters.Chapter 1 gives a brief introduction to the background of CFC rules, firstly found in the American legislation, which can make taxpayers have no(or much less of an) incentive to shift profits into a third, low-tax jurisdiction. Then this dissertation shows the definitions of CFC rules, control standards, and the control. The phenomenon of the separation between the ownership and the right of control results in the economic control and the de facto control. At last, the legislative processes in China, US and UK and the legislative tendencies in others’ countries are showed.Chapter 2 focuses on the types of control. Legal control generally looks at a resident’s holding of share capital to determine the percentage of voting rights held in a subsidiary. Economic control focuses on rights to the profits, capital and assets of a company in certain circumstances. Even through the de facto control tests would lead to added costs, complexity and uncertainty for taxpayers and countries, it is essential because there are many situations that would not be caught by either the legal or economic control tests.Chapter 3 gives a comprehensive analysis of the level of control which introduces how much control is enough for the CFC rules to apply. The CFC rules of the majority of countries state that resident taxpayers shall have a legal or economic interest in the foreign entity of more than 50% to form an effective control. But sometimes owning 50% or less could still allow parent companies to exert influence in certain situations. So it is necessary to add an acting-in-concert test, a related party test and a concentrated ownership rule to CFC rules, while this tests shall be more professional and scientific.Based on the research about the control standards, Chapter 4 makes a conclusion that the legislation shall contain a legal control test, an economic control test, and a de facto test, and a substantial judgment shall be essential while ascertaining the level of control. Finally, Chapter 4 gives some suggestions and expectation on Chinese legislations.