What are controlled foreign company (CFC) rules?

What CFC rules do

Normally, a country taxes you on a company’s profits only when the company pays them to you, for example as a dividend. Controlled foreign company rules are an exception. If you control a foreign company and it is taxed lightly, your country may treat some of its profits as yours now, whether or not they are paid out.

The rules exist to stop profits being parked in low-taxed companies abroad. The OECD’s report on BEPS Action 3 sets out the building blocks most CFC regimes share, and each country combines them in its own way:

Why an Estonian company raises CFC questions

Estonia’s corporate income tax is paid when profit is distributed, not when it is earned. Tax on profit kept in the company is 0% (source: emta.ee, checked 3 Oct 2026), and profit paid out as a dividend is taxed at 22% (source: emta.ee, checked 3 Oct 2026) of the gross distribution. How Estonia’s corporate income tax works explains the model.

Many CFC tests compare the tax a foreign company actually paid on a year’s profits with the tax it would have paid at home. A company that keeps its profit may show little or no tax paid for that year, even though tax will be due when the profit is distributed. How your country’s test treats that timing depends entirely on its own rules and guidance.

This is a question about you as the owner, in your country of residence. It is separate from whether the company itself is taxed abroad through a permanent establishment or because of where it is managed.

The EU minimum standard

EU member states must have CFC rules that meet the Anti-Tax Avoidance Directive. It treats a foreign entity as a CFC when both conditions are met:

1. Control. The taxpayer, alone or with associated enterprises, holds more than 50% (source: eur-lex.europa.eu, checked 27 Sept 2026) of the voting rights or capital, or is entitled to more than that share of the profits.
2. Low tax. The corporate tax the entity actually paid is lower than the difference between the tax it would have paid in the taxpayer’s member state and the tax it actually paid.

Member states then choose between two ways of defining the income that is taxed:

• Categories of income, mostly passive income such as interest, royalties and dividends, with an exception where the company carries on a substantive economic activity supported by staff, equipment, assets and premises.
• Non-genuine arrangements, meaning income from arrangements put in place for the essential purpose of obtaining a tax advantage.

The directive applies to taxpayers subject to corporate tax, such as companies. Whether CFC rules also apply to individuals who own a foreign company depends on each country’s national law, and member states may go further than the directive. Outside the EU, each country sets its own rules.

Questions to take to an adviser

This site can’t tell you whether CFC rules apply to you. These questions help you get a clear answer from your tax authority’s guidance or a tax adviser in your country.

1. Does my country of residence have CFC rules, and do they apply to individuals?
2. What is the control test, and does it count shares held by related people or companies?
3. What is the low-tax test, and how does it treat a company that pays tax only on distribution?
4. Which income is caught, and is there an exemption for a company with genuine business activity?
5. How is double taxation avoided when the company later pays a dividend?

The fit check includes CFC rules among the concepts it flags, with links to official explanations. If you are still deciding where to set up, Estonian company or a company in your own country puts these questions next to the practical ones, and does e-Residency make me tax-resident in Estonia? covers personal residency.