What are Controlled Foreign Corporations (CFCs)?
Controlled Foreign Corporations (CFCs) are a type of foreign corporation that is controlled by U.S. persons. A CFC is defined as one in which U.S. persons own more than 50% of the total combined voting power of all classes of stock entitled to vote or more than 50% of the total value of shares of all classes of stock of the corporation. In Washington, CFCs are subject to the same tax rules and regulations that apply to domestic corporations. CFCs must pay U.S. taxes on their worldwide income, whether it is earned in the U.S. or abroad. This means that the U.S. parent company must include the CFC’s earnings in their own tax return. For CFCs located outside of the U.S., U.S. tax law generally requires that they pay taxes on any income earned that is then repatriated to the U.S. CFCs may also owe additional taxes on certain types of income such as passive income. Passive income can include interest, dividends, rents, royalties, and capital gains. This type of income is considered to be income generated from investments rather than from active involvement in a business. CFCs are important for international tax law in Washington because they can be used to shield U.S. persons from paying taxes on certain income earned abroad. However, U.S. persons must comply with all applicable U.S. tax laws and regulations when setting up and owning CFCs, or they risk being subject to stiff penalties.
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