What can you do with controlled foreign companies (CFC)?
The CFC laws are filled with vague wordings, inaccuracies, contradictions, and, in some places, raise serious concerns about incompatibility with other points of tax legislation. At first glance, it is not entirely clear why do unnecessary actions, spend energy and money on supporting the life of an office in another country, if the tax rate, in any situation, will be standard. However, for businessmen who are willing to spend their time studying the specifics of tax legislation in more depth, an amazing world of the benefits and advantages of doing business through the CFC will open up.
1. Deadline for paying income tax
An individual must pay income tax within 6 months from the end of the year in which the income was received. The owner of the CFC has the right to receive a deferment in payment of income tax for up to two years.
2. Date of determination of who, when and why should pay tax
If the financial year of the company ended, for example, on January 1, 2020, the determination of the tax obligations of its owner will take place only on December 31, 2021, that is, after almost two years. Over the course of these years, the owner of the CFC can discover many options for avoiding any deductions and use one of them. Such actions will completely free the owner of the CFC from the need to pay taxes.
3. Transfer of losses of previous years
When calculating the CFC tax base, its owner is allowed to transfer the losses incurred earlier "to a brighter future", not limited to a specific number of financial years.
4. Non-taxable minimum income
Whatever the size of the income, an individual must pay tax at a standard rate. With CFC, the situation looks much more attractive.If an investor plans to invest $ 8 million in a company and continue to receive income in the amount of 5% per annum, he can create 4 such companies, being sure that the annual income received in this way will not be taxed.
5. Deduction of expenses from the tax base
If the investor performs a simple operation, for example, the purchase and sale of securities, the cost of it will be minimal, the investor will only have to pay for the services of a broker.
6. Revenue Accounting
The owner of the CFC calculates the income. It is usually calculated in currency (usually USD and EUR), after which it is converted into the local money at the average annual rate.
7. The human factor
The income of a CFC enterprise, as well as the amount of tax payable, is determined by the audit report. The likelihood that the fiscal authorities will wish, at all costs, to invalidate the decision of the licensed auditor and to personally familiarize themselves with the constituent documents of a foreign company is close to zero.
8. Degree of operational freedom
Individual entrepreneurs are bound by strict, often conflicting restrictions, starting from the moment of registration of an account with a foreign bank. Due to its initial “foreignness”, the CFC does not face such problems.
The liquidation of the company and the subsequent transfer of all assets withdrawn from it to a new “clean” company has a lot of positive consequences, but it also requires time. In order to take advantage of the benefits of tax legislation, it is wise to take appropriate measures.
It is also worth mentioning that, within the framework of constant law innovations, the unrealized profits of the CFC, which are the result of a market revaluation of investments, are not included in the tax base.
This means that when investing in the fund’s shares, CFC does not incur obligations to pay taxes on the income of this fund (regardless of whether these incomes were realized or not), the company will have to pay tax to the state only upon the sale of these shares. If the CFC makes a direct investment in a securities portfolio equivalent to the contents of such a fund, the company will be required to pay income tax in your local country.
Thus, investment funds and similar products will become the optimal solution for investors, allowing you to manage your investment portfolio before investing in securities directly from the company’s account or transferring funds to a trust.