CFC Rules under ATAD

October 9, 2019 | By Robert Van der Jagt, Marie Audrain, and Raluca Enache, KPMG Meijburg & Co, and Jesse Eggert, KPMG LLP.

Robert is a partner and heads KPMG’s EU Tax Centre, which is also based in KPMG Meijburg & Co. Marie and Raluca are senior managers with the EU Tax Centre. Jesse is a principal in the International Tax group of KPMG LLP’s Washington National Tax practice.


This article represents the views of the authors only and does not necessarily represent the views or professional advice of KPMG LLP or KPMG Meijburg & Co.

Overview and implementation status

CFC rules under ATAD: Background

In July 2013, the OECD published its Action Plan on Base Erosion and Profit Shifting (BEPS), which provided governments with concrete strategies to address tax avoidance and ensure that profits are taxed where economic activity is performed. Action 3 had the objective of strengthening controlled foreign companies (CFCs) rules and resulted in a final report in October 2015, which set out recommendations for the design of rules that could effectively prevent taxpayers from shifting income to foreign subsidiaries established in low (or lower) taxed jurisdictions.

At the European level, the idea of a comprehensive approach to improve corporate taxation in the European Union (EU) was launched in December 2014 as part of the Commission’s Work Programme 2015 and was followed in June 2015 by the publication of an Action Plan, in which the European Commission announced its intention to relaunch the Common Consolidated Corporate Tax Base (CCCTB). Luxembourg, which held the Presidency of the EU at the time, subsequently put forward the idea of splitting off certain international anti-BEPS aspects of the CCCTB proposal and adding these to the OECD proposals, that would together lead to an "anti-BEPS Directive." The anti-tax avoidance directive (ATAD), which was first presented in January 2016 and adopted by all Member States six months later on July 12, 2016, builds upon this initial draft.

The ATAD is intended to strengthen protection against aggressive tax planning in the EU and lays down common minimum rules in the areas of interest limitation, exit taxation, general anti-abuse rules (GAAR), CFCs, and hybrid mismatches.[1] These standards, which should generally apply as of January 1, 2019, are intended to provide a minimum level of protection to Member States.

CFC rules under ATAD: An overview

CFC regimes are anti-abuse provisions aimed at preventing tax avoidance by domestic companies that divert their operations through foreign subsidiaries resident in states with a more advantageous corporate tax regime. The ATAD lays down common rules to effectively prevent taxpayers from shifting income to CFCs (see articles 7 and 8). The directive, which builds upon the work performed at the OECD level, sets out common definitions and provides some flexibility to implement CFC rules that target either specific categories of income (Model A) or that are limited to income which has artificially been diverted to the CFC (Model B).

Definition of a CFC

Two cumulative criteria—control by a resident parent company (or companies) and a low level of local country taxation—have to be fulfilled for a foreign entity to qualify as a CFC:

  1. A resident parent company or companies have a direct or indirect participation of more than 50 percent of the capital or the voting rights or are entitled to receive more than 50% of the profits of the foreign entity.
  2. The actual corporate tax paid on the foreign entity’s profits in the state where it is established is lower than 50 percent of the corporate tax that would have been chargeable, had the foreign entity been established in the Member State of the parent company.

The ATAD provides only minimum defensive rules. This means that a Member State can implement stricter standards as long as these rules are in line with EU law, for example lowering the control thresholds (to, for example, 25pecent of the voting rights or capital) or implement additional control test methods (e.g., define control as the power of a person to elect or revoke board members).

However, the principle of proportionality enshrined in the EU law requires that CFC rules implemented by the Member States specifically target artificial arrangements.

Tainted income approach (Model A)

Under the tainted income approach, CFC income includes specific types of (nondistributed) passive income (i.e., interest, dividends, income from the disposal of shares, royalties, income from financial leasing, income from banking, insurance and other financial activities, and income from invoicing associated enterprises as regards goods and services where there is no or little economic value added).

In accordance with previous case law from the Court of Justice of the EU on this matter, the ATAD requires that CFC rules be combined with a substance carve-out, meaning that the rules do not apply where a controlled entity established in an EU/European Economic Area (EEA) country carries on a substantive economic activity supported by staff, equipment, assets, and premises. Member States may, however, choose not to implement this substance exemption with respect to controlled entities established in a third country.

In order to limit the compliance costs for entities that have lower risks of tax avoidance, Member States may also implement exemptions for:

  • Entities whose income consists of one-third or less of the previously listed types of passive income, and/or
  • Financial undertakings, if one-third or less of the CFC passive income comes from intragroup transactions.

The income to be included in the tax base of the controlling entity shall be calculated in accordance with the corporate tax rules of the Member State where it is situated and in proportion to its participation in the CFC.

Transactional approach: Application of the arm’s-length principle (Model B)

Under the transactional approach, CFC income is defined as nondistributed income arising from nongenuine arrangements, which have been put in place for the essential purpose of obtaining a tax advantage.

An arrangement will be regarded as nongenuine to the extent that the CFC would not have owned assets or would not have undertaken risks if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company's income.

Similar to the tainted income approach, the Directive gives Member States the ability to implement exemptions, in this case, for CFC entities or PEs with:

  • Low total profits (accounting profits of no more than EUR750.000 and nontrading income of no more than EUR75.000), or
  • Low profit margin (accounting profits account to no more than 10 percent of its operating costs for the tax period).

In accordance with the arm's-length principle, income to be included in the tax base of the controlling entity will then be limited to amounts generated through the significant people functions that it carries out.

Elimination of double taxation

The Directive provides additional rules in order to avoid double taxation of profits subsequently distributed by a CFC, as well as proceeds from the disposal of a participation in a CFC entity or of the business carried out by a CFC PE. To the same end, income tax paid by a CFC in its state of residence shall be deductible from the tax due by the controlling entity on its CFC income.

However, the ATAD does not include provisions preventing multiple taxation resulting from (e.g., the cascading application of multiple countries’ CFC rules to chains of subsidiaries or the concurrent application of transfer pricing legislation).

Implementation overview in the EU

In some Member States, CFC regimes were implemented before the entry into force of the ATAD. However national CFC rules were not harmonized at the EU level and therefore some CFC regimes were incompatible with the fundamental freedoms guaranteed under EU law. Following the adoption of common rules under ATAD 1, certain CFC regimes will have to be amended to be fully compliant with EU law.

Among countries which need to adjust their national CFC rules under ATAD 1 or introduce them into their legal systems are Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Ireland, Latvia, Luxembourg, Malta, the Netherlands, Slovakia, and Slovenia. 

Member state Model A Model B Unclear Comments
Austria X     Introduction of CFC rules
Belgium   X   Introduction of CFC rules
Bulgaria     X Introduction of CFC rules
Croatia X     Introduction of CFC rules
Czech Republic X     Introduction of CFC rules
Denmark X     Changes to existing CFC rules
Estonia   X   Introduction of CFC rules
Finland X     No changes to existing CFC rules
France     X No changes to existing CFC rules
Germany X     Changes to existing CFC rules
Greece X     No changes to existing CFC rules
Hungary X     Changes to existing CFC rules
Ireland   X   Introduction of CFC rules
Italy   X   Changes to xisting CFC rules
Latvia   X   Introduction of CFC rules
Lithuania X     Changes to existing CFC rules
Luxembourg   X   Introduction of CFC rules
Malta   X   Introduction of CFC rules
Netherlands X     Changes to existing CFC rules
Poland X     Changes to existing CFC rules
Portugal X     No changes to existing rules
Romania X     Introduction of CFC rules
Slovakia   X   Introduction of CFC rules
Slovenia X     Introduction of CFC rules
Spain X     No changes to existing CFC rules
Sweden X     Changes to existing CFC rules
United Kingdom X     Changes to existing CFC rules


Local implementation status


French companies can be subject to French corporate income tax (CIT) on the profits realized by their branches or subsidiaries established abroad and which are subject to a “privileged tax regime.” In such cases, the profits of the CFC would be subject to CIT in France and treated as part of the French parent company’s results for foreign branches or as deemed dividends for subsidiaries.


The control requirements are broadly in line with the ATAD, as a foreign entity is deemed to be controlled as soon as a French entity holds, directly or indirectly, more than 50 percent of its stocks, shares, financial rights or voting rights. However, the threshold of 50 percent is reduced to 5 percent where French resident companies, branches or establishments together hold more than 50 percent of the shares of a CFC, or where foreign entities controlled by a French company hold together more than 50 percent of the shares of a CFC.

The French CFC legislation does not apply to EU companies unless the structure constitutes an artificial scheme aimed at avoiding the application of French legislation. In addition, as a safe harbor clause that, in practice, only applies to CFC outside the EU, the CFC rules do not apply if the nonresident company is engaged in real industrial or commercial activities in the low-tax jurisdiction (i.e., the location of the CFC is not solely motivated by tax avoidance).

Considering that the French CFC provisions are compliant with the ATAD in substance, the government is not expected to make any significant changes. However, the new Anti-Fraud Law of October 23, 2018, reduces the “low-tax” threshold to 40 percent as from January 1, 2020 (i.e., a CFC will be considered as benefiting from a “privileged tax regime” if it is subject to a local tax on profit that is less than 60 percent of the CIT it would have been liable to, had it been resident in France). This change of threshold is justified by the progressive decrease of the French CIT rate from 33 1/3 percent to 25 percent in 2022.


The currently applicable German CFC rules broadly apply to passive income derived by a CFC from sources not listed in a catalogue of active income, provided this passive income is subject to an effective tax rate of less than 25percent. The German tax law also provides for a substance carve-out for EU and EEA resident CFCs that carry out a genuine economic activity. If the German CFC rules apply, the passive income qualifies as a deemed dividend distributed (proportionally) to the respective German tax resident shareholder(s). This deemed dividend is not subject to any participation exemption or the final flat withholding tax for individual shareholders.

German CFC rules are broadly compliant with the tainted income approach, although they deviate from the ATAD in the following points:

  • A foreign entity is a CFC if controlled by German residents. The respective Germans are not required to be related as they would be under ATAD.
  • German tax law provides for a catalogue of active income instead of a list of passive income.
  • Profit distributions are considered active income.
  • The tax rate at which a low taxation is assumed is fixed by law at 25 percent. There is no relative minimum tax rate.

Although no amendments to the existing rules have yet been put forward by the German government, it is expected that there will only be selective adjustments (e.g., minimum tax rate is expected to be lowered); however, no overall and extensive modification of the German rules is foreseen.


Ireland introduced a CFC regime that is broadly in line with the ATAD transactional approach and takes effect for accounting periods beginning on or after January 1, 2019. The general thrust of the regime is to assess an Irish company with a CFC charge based on an arm’s-length measure of the undistributed profits of the CFC that are attributable to the activities of significant people functions (SPFs) carried on in Ireland. In that respect, the applicable tax rate depends on the type of income derived from the CFC activities (i.e. 12.5 percent for trading and 25 percent for nontrading income).

The CFC charge does not apply to arrangements which are already within the scope of Ireland’s transfer pricing regime or remunerated on an arm’s-length basis. Where there are no SPFs performed in Ireland related to the assets and business risks of the CFC, there will be no CFC charge either.

In accordance with the various options offered by the ATAD, the new Irish CFC regime also provides for exemptions under which the CFC charge does not apply if:

  • Securing a tax advantage is not the essential purpose of the arrangement giving rise to the CFC’s income. The Irish Revenue released guidance on this matter in July 2019. [2]
  • The CFC has pretax accounting income profits of less than EURO75,000 (less than EURO750,000 in the case of trading activities) or low-margin activities (i.e. the arm’s-length margin on defined operating costs is less than 10 percent).
  • The CFC has no undistributed income for the period, taking into account dividends paid to the Irish parent during the accounting period or within the next nine months. Generally, profits in the character of capital gains are also excluded.
  • Where an Irish parent has acquired a CFC from a third party, the parent will have a transitional period of 12 months post-acquisition to restructure arrangements with the CFC.


In response to the OECD recommendations on BEPS, Spain extended the scope of its existing CFC rules as early as 2015. As a consequence, Spanish taxpayers are required to include in their taxable base income generated by CFCs that do not have sufficient personal or material resources to carry out business activities. In addition, certain types of passive income derived by a CFC are subject to taxation at the level of the Spanish controlling entity, even if valid business reasons or a sufficient substance can be evidenced.

While the Spanish CFC regulations in force are more stringent than the provisions of the ATAD, the following adjustments are nonetheless required:

  • The scope of the existing CFC rules is broadened to include permanent establishments.
  • The scope of the substance carve-out applicable to EU CFCs is extended to EEA member states (i.e., Iceland, Liechtenstein, and Norway) and the clause’s wording is adjusted to reflect the substantive economic activity test under the ATAD. The current exemption applying to taxpayers that can evidence that their "formation and operations are due to valid economic reasons" is, therefore, eliminated.
  • With respect to attributable income, Spain has opted for the tainted income approach albeit with certain differences that the Spanish legislator will have to incorporate:
    • The list of in scope CFC income categories will be extended to income originating from financial leasing arrangements and to income from sales of goods and services performed with associated enterprises in which the CFC adds little or no economic value.
    • As regards income derived from insurance, banking, financial leasing, or other financial activities, amendments will be made to introduce a substance carve-out and to lower the applicable thresholds for exemption to one third or less (currently 50 percent) of such income originating from intragroup transactions.
  • The existing safe harbor rule for foreign holding companies is abolished. As a consequence, income derived from participations of at least 5 percent and held for a minimum period of one year will no longer be exempt.

United Kingdom

Under the current CFC rules, which came into force from January 1, 2013, to the extent that the profits of a CFC for a particular accounting period fall within the gateway provisions and none of the entity-level exemptions applies, those profits (computed, broadly, following U.K. tax principles) are broadly apportioned and taxed on any U.K. resident company with a 25 percent assessable interest in the CFC.

The gateway provisions specifically define those profits, which are considered to have been artificially diverted from the United Kingdom and are, therefore, subject to a CFC charge. If profits do not fall within the gateway provisions, they are excluded.

Profits can also be excluded where certain “entry conditions” are not satisfied or other exclusions apply. Non-trading finance profits (NTFP), which are not otherwise excluded are fully taxable, unless the finance company exemption applies. Profits from a property business (whether relating to U.K. or foreign property) are fully exempt in all circumstances.

If one of the entity-level exemptions is met, all of the profits of a CFC are excluded from a CFC charge, avoiding the need to consider separately the company’s different types of profits under the gateway provisions.

Two specific changes to the U.K. CFC rules will need to be made in order to ensure they are fully compliant with ATAD:

  • Definition of control – The current U.K. CFC measure of control (in assessing whether a company is a CFC) does not take into account interests held in the CFC by nonresident associates or related parties, whereas ATAD requires all associated enterprises to be taken into account when assessing control.

The existing CFC rules will be amended so that any interests held by associated enterprises (irrespective of where those associated enterprises are resident) are taken into account when assessing control. An associated enterprise in relation to a U.K. resident company is defined as having either a direct or indirect 25 percent investment in the UK resident company (or vice versa) or mutual 25 percent ownership in the associated enterprise and the UK resident company by a third party.

As a result of the changes, subsidiaries of U.K. companies which were not previously within the scope of the U.K. CFC rules, may now be, and groups should perform a review of their existing group structures in that respect.

  • Finance company exemption – Broadly, a CFC’s NTFPs derived from U.K. significant people functions (SPFs), U.K. capital investment, U.K. finance leases, and specified arrangements in lieu of dividends give rise to a CFC charge.

However, the current group finance company exemption (by election) provides a full or partial exemption for NTFPs arising in respect of “qualifying loan relationships.”

The proposed amendment will result in NTFPs that have U.K. SPFs no longer qualifying for this exemption.

Groups with existing FinCo structures will need to revisit the SPFs for each loan balance that exists on January 1, 2019. The SPFs could be a combination of ongoing activities associated with the management of the loan and activities and decision making that took place at the inception of the loan or at any time the terms of the loan were previously amended.

The above changes took effect from January 1, 2019, via Finance Bill 2018-19 (published on November 7, 2018), which is currently being enacted into law.

Americas region

Under U.S. tax law, a CFC is defined as a foreign corporation from the viewpoint of the United States for which more than 50 percent of its authorized and outstanding shares, measured by total voting power or value, is owned by U.S. shareholders. U.S. persons meeting the 10 percent ownership threshold in corporations that are classified as CFCs must recognize a pro-rata share of the CFC’s subpart F Income in their annual taxable income on a current basis. The U.S. tax law enacted in December 2017, commonly referred to as the Tax Cuts and Jobs Act (TCJA), broadened the definition of a CFC, by expanding applicable attribution rules and including owners of nonvoting stock (prior law defined ownership with reference to voting power only). The TCIA also introduced the global intangible low-taxed income (GILTI) rules, which provide for current taxation at a reduced effective rate of certain foreign income that is neither specifically exempted nor otherwise subject to current taxation under existing CFC principles.

In Latin America, before the publication of BEPS in 2013, Brazil and Mexico already had CFC rules addressing base erosion. These rules are aligned with some of the recommendations on BEPS Action 3. At the end of 2016, Colombia introduced a law with CFC rules that were influenced by the BEPS recommendations.

ASPAC region

Only certain ASPAC countries have CFC rules. These are Australia, China, Indonesia, Japan, Korea, New Zealand, and Taiwan. India, Hong Kong, Singapore, Malaysia, Philippines, Thailand, and Vietnam, by contrast, all have no CFC rules. Japan and Indonesia have further tightened their CFC rules since the BEPS final reports were issued in October 2015. China’s proposed update to CFC rules (set out in September 2015) has since been stalled, though there has been a steady increase in reported enforcement cases.


[1] The ATAD lays down common minimum rules in the following areas:

  • Interest limitation: The interest limitation rules take the form of an earnings stripping rule, whereby in principle no deduction would be given for interest exceeding 30 percent of EBITDA. The rules have been substantially amended to allow for flexibility and exemptions upon transposition, and include de minimis thresholds, escape clauses and a grandfathering provision. Member States that have existing national targeted rules (e.g., thin capitalization rules) that are equally effective to the proposed interest limitation rule will have until January 1, 2024, to implement this provision and phase out their domestic rules, unless an agreement is reached on interest limitation rules at OECD level prior to this date.
  • Exit taxation: The exit tax rules apply to certain cross-border transfers of assets or residence within the EU or to non-EU countries. The rules broadly reflect EU case law, including a payment deferral mechanism for transfers within the EU/EEA. Member States may defer the implementation of this provision to December 31, 2019 (instead of 2018 for the other provisions).
  • GAAR: The rule, which is intended to reflect EU case law, will require Member States to ignore arrangements that do not comply with the standard, and contains both a motive and substance test.
  • Controlled foreign companies: CFC's income will become taxable in the 'home' jurisdiction if certain thresholds are met, especially as regards ownership (50 percent) and level of tax payable compared to what would have been due in the 'home' Member State (de facto effective tax rate of less than 50 percent of the home jurisdiction). A carve-out clause applies for CFCs that satisfy a substance test, which Member States may choose not to apply in the case of non-EU CFCs.
  • Hybrid mismatches: the ATAD 1 covers only intra-EU situations involving hybrid entities and hybrid instruments. Hybrid permanent establishment mismatches and mismatches with third countries are addressed in ATAD 2. To the extent a hybrid mismatch results in a double deduction, a deduction shall only be provided in the source state of the payment. If a hybrid mismatch results in a deduction without inclusion, the deduction shall be denied.

[2] Tax and Duty Manual. Part 35b-01-01 on Controlled Foreign Company Rules.