Controlled foreign corporation legislation : its evolution and mutation from a European and international tax perspective

Abstract

Globalization has brought about seamless mobility of the free flow of capital and investments world-wide, which gave rise to cross-border business development. Unfortunately, with great improvements in the global economy, come also hurdles which countries are faced with when entering such cross-border business arrangements. Those entities which seek to avoid paying taxes in their home state could opt to do so by entering into artificial business arrangements, and defer taxation to such an entity which is normally found in a lower tax jurisdiction - for this reason, anti-avoidance legislation is adopted at domestic level. Through adequate Anti-Controlled Foreign Corporation/Company (CFC) regimes, a state is empowered to tax its resident taxpayers on income derived by foreign entities which they control. A state's CFC rules function by taxing income derived through the CFC at year end, in order to eliminate the benefit derived from the deferral. However this should be juxtaposed with other concerning features of the modern business environment, such as the pertinent fundamental freedoms set forth by the EC Treaty, namely the freedom of establishment and free-movement of capital - as seen in the United Kingdom's (UK) Cadbury Schweppes Plc. and Cadbury Schweppes Overseas Ltd. v. Commissioner of the Inland Revenue case of 2006. Different countries, both at European Union (EU) level, and on the international plane encompassing third countries, take different approaches when enforcing their CFC rules - this means that different notions are given to what truly classifies as a CFC. Therefore, when the Court of Justice of the European Union (CJ) is faced with cases pertinent to CFC rules, it tries to delineate salient features which ought to be regarded when considering CFC regimes. Further to this, guidelines and reports contribute towards such clarifications - as a state's prime intent is to secure its tax base whilst devising a fair tax system to ameliorate its economy.