Generally, certain classes of taxpayers must include in their income currently certain amounts earned by foreign entities they or related persons control.
At the same time, such rules were intended not to interfere with active business income or transactions with unrelated parties.
Alternatively or in addition, domestic members of a foreign entity owning less than a certain portion or class of shares may be excluded from the deemed income regime.
Subpart F[2] was designed to prevent U.S. citizens and resident individuals and corporations from artificially deferring otherwise taxable income through use of foreign entities.
Controlled foreign company rules in the UK do not apply to individual shareholders, but otherwise they are similar to the U.S.
[22] Such shareholders must include in their currently taxable income as a deemed dividend their share of passive income if two tests are met: Control in this case is ownership by all German residents of more than 50% of the vote or capital of the foreign corporation.
In determining the 50% threshold, all German residents are considered, even those owning very minor amounts.
The CFC Rules were first introduced in Indian taxation as part of the proposed Direct Tax Code 2010.
The CFC provisions was also retained in revised draft of Direct Tax Code, 2013.
[citation needed] Several countries have adopted other measures aimed at preventing artificial deferral of passive or investment income.
U.S. passive foreign investment companies (PFICs) require that shareholders in foreign mutual funds must include in their current taxable income their share of ordinary income and capital gains, or face a tax-and-interest regime.
Under these "check-the-box" rules, shareholders may be able to elect to treat their shares income, deductions, and taxes of a foreign corporation as earned and paid by themselves.
Artificial arrangements to avoid CFC status may be ignored in some jurisdictions under legislative provisions or court-developed law, such as substance over form doctrines.