ATAD Controlled Foreign Company (CFC) Rules

The CFC Rules (Controlled Foreign Company Rules) under Articles 7 and 8 of ATAD require EU member states to introduce minimum standards for controlled foreign company taxation. They prevent groups from parking profits in low-taxed foreign subsidiaries without those profits being taxed in the parent's residence state. ATAD offers two alternative implementation models.

• Model A (Entity Approach): Attribution of undistributed income of the CFC in defined income categories
• Model B (Transactional Approach): Attribution of non-genuine income shifted through the CFC
• Two cumulative conditions (Art. 7(1) ATAD): (a) the foreign entity's actual corporate tax is lower than 50% of the tax that would have been charged in the parent member state; and (b) more than 50% participation (control) — both conditions must be met
• Substance escape for genuine economic activities of the CFC
• Member states may introduce stricter or additional categories

CFC rules already existed before ATAD in several EU member states (e.g., Germany, UK, France) but with significant differences in scope and methodology. At international level, OECD BEPS Action Plan 3 (2015) provided the substantive framework for modern CFC legislation. The EU Commission published its proposal COM(2016) 26 final on 28 January 2016 as part of the Anti-Tax Avoidance Package, forming the basis for the ATAD CFC rules. ATAD harmonised a Union-wide minimum standard for the first time. The original ATAD of 2016 established the CFC rules; ATAD 2 (2017) did not materially change the CFC rules regarding third-country situations, as it primarily addressed hybrid mismatches.

Several CJEU rulings before ATAD (notably Cadbury Schweppes, 12 September 2006, C-196/04) had already set the framework for EU-law-compliant CFC rules, particularly through the requirement for a substance exemption for genuine economic activities.

The CFC rules apply when an EU-resident company holds a controlling interest in a foreign entity:

• Direct or indirect participation of more than 50% in voting rights, capital, or profit entitlements
• Effective tax rate of the foreign entity below 50% of the parent state's rate
• Applies to both third-country and other EU member state subsidiaries; a substance escape is mandatorily required for EU/EEA entities (Art. 7(2)(a) ATAD), while member states may discretionarily extend it to third-country CFCs
• Permanent establishments may be treated analogously

• Control over the foreign entity (> 50% participation)
• Tax rate test: CFC's effective tax rate < 50% of domestic corporate tax rate
• Attribution of undistributed passive income (Model A) or shifted profits (Model B)
• Substance escape for CFCs with genuine economic activity (staff, premises, active assets)
• Credit for foreign taxes against the CFC inclusion
• No double taxation on subsequent distributions by the CFC

1 correction:
- Effective tax rate threshold in summary_de/en incomplete
4 clarifications.
3 notes.