CFC rules will find your offshore company

The pitch is always the same shape. Incorporate somewhere that does not tax corporate profit, bill your clients from there, and the money accumulates untaxed until you decide to take it out.

It is not that this is illegal. It is that the country you personally live in has spent forty years building rules specifically to stop it, and a single founder with a laptop is the easiest possible case for those rules to catch. There is no board in the Cayman Islands. There are no employees in Dubai. There is one person, in one chair, making every decision — and that chair has an address.

Three doctrines, routinely confused

Founders tend to file all of this under "CFC rules". It is actually three separate mechanisms with different triggers and very different consequences, and knowing which one you are facing changes the answer completely.

Why residence bites first

Most of the world decides corporate tax residence on two alternative tests: where the company was incorporated, or where it is actually managed. The second test exists precisely because the first is trivially gameable.

The formulations differ — the UK and Australia ask where central management and control abides, Germany looks for the place of management under §10 AO, India codified a place-of-effective-management test in 2016, and the UAE's own corporate tax law treats a foreign-incorporated company that is effectively managed and controlled in the UAE as a resident person. The substance is the same everywhere: decisions, not paperwork.

For a solo founder the analysis is short. Who is the director? You. Where are you? There. There is no second location for the decision-making to have occurred in.

A treaty used to rescue this. Article 4(3) of the OECD model resolved dual corporate residence in favour of the place of effective management, which at least produced a single answer. Since the Multilateral Instrument, the default for covered treaties is that the competent authorities must agree the answer between themselves — and absent that agreement, treaty benefits can simply be denied. For a company of your size, nobody is opening a mutual agreement procedure. The practical effect is that the tie-breaker no longer breaks the tie.

CFC, in the shape you will actually meet it

If the company survives the residence question, CFC rules are next. Two regimes cover most founders.

The European version

Every EU member state has had CFC rules since the Anti-Tax Avoidance Directive took effect on 1 January 2019. The directive sets a floor, and states implement one of two models.

• Control is generally more than 50% of voting rights, capital or profit entitlement, counting interests held by associated enterprises. A sole owner is comfortably inside it.
• Low taxation is broadly where the tax actually paid abroad is less than half of what the state would have charged. A zero-tax jurisdiction fails this by definition.
• Model A attributes listed categories of undistributed passive income — interest, royalties, dividends, financial leasing, and income from invoicing companies with little economic substance.
• Model B attributes income arising from non-genuine arrangements, tested against where the significant people functions actually sit. For a one-person company, they sit with the one person.

The directive binds member states for corporate taxpayers, but most states apply an equivalent regime to individuals under domestic law — Germany's Hinzurechnungsbesteuerung, France's article 123 bis, Spain's transparencia fiscal internacional, and their Italian, Portuguese and Nordic equivalents. France's individual rule engages at a 10% holding, not 50%, which catches minority founders who assumed control was the test.

The American version

A foreign corporation is a controlled foreign corporation where US shareholders — each holding at least 10% of vote or value — together hold more than 50%. Subpart F picks up passive and mobile income. GILTI then picks up substantially everything else, which was the point of it.

GILTI is materially harsher for an individual holding shares directly than for a US corporation holding them, because the deduction and the foreign tax credit that make the regime tolerable are corporate features. The usual repair is a §962 election, or interposing a US corporation. Both are decisions to take before the income arises, not in the following April.

The British version

The UK's formal CFC code is aimed at corporate groups. Individuals are caught by two older and broader instruments: the transfer of assets abroad code, which attributes income to a UK-resident transferor who can still benefit from it, and the attribution of a non-resident close company's gains to participators holding more than 25%. Neither has a low-tax threshold in the way ATAD does.

The mismatch that catches US LLC owners

This one deserves its own section, because it affects a large share of the founders reading this and is almost never mentioned at formation.

A single-member US LLC is disregarded for US federal tax purposes. Founders reasonably conclude that it is transparent everywhere — that the profits are simply theirs, taxed once, wherever they live.

Your country of residence is not obliged to agree. Most civil-law jurisdictions classify a foreign entity by comparing its characteristics to domestic company forms, and an LLC — limited liability, separate legal personality, transferable interests, centralised management — tends to come out looking like a corporation. Germany's comparison-of-types analysis has treated US LLCs as opaque since guidance issued in 2004. Japan's Supreme Court reached the same conclusion about a Delaware limited partnership in 2015. The UK's default treatment of LLCs is opaque, softened only by the Supreme Court's decision in Anson v HMRC in 2015, which turned on the specific terms of that operating agreement rather than establishing a general rule.

There is no universal fix. There is only knowing, before you form, how the country you actually live in classifies the thing you are forming. That question has a different answer in Lisbon, Berlin and Dubai, and it is worth an hour of a local adviser's time.

Where these rules do not reach

There is a real answer to all of this, and it is not a better company. It is a different personal residence.

CFC rules are a feature of worldwide tax systems. Countries that tax individuals only on local-source income have no reason to build them, and mostly have not.

Notice what every entry in the right-hand column has in common. Removing the CFC exposure does not remove the residence exposure — a company managed from the UAE can be a UAE taxpayer, and work performed in Singapore has a Singaporean source. Moving the owner solves the attribution problem. It does not solve the management problem.

What to actually do

1. 1Establish where you are personally tax-resident, properly and on the current year's facts. Every question below depends on it, and it is not the country on your passport or the one on your invoices. The 183-day rule is not a rule covers how that is really determined.
2. 2Ask whether the company would be treated as resident where you sit, before asking anything about CFC rules. This is the question that most often decides the outcome.
3. 3Find out how your country of residence classifies the entity you are forming — transparent or opaque. Get this wrong and every later calculation is wrong.
4. 4If a CFC regime does apply, establish which model, at what holding percentage, and over which categories of income. The 10% triggers matter as much as the 50% ones.
5. 5Do the arithmetic before assuming a structure saves anything. A US LLC taxed transparently at home, filing what a non-resident owes the IRS, frequently costs less in total than an offshore company that triggers attribution, a residence enquiry and two sets of professional fees.
6. 6Where the structure genuinely does not work, change the residence rather than the company. That is the variable these rules are actually keyed to.

The uncomfortable summary is that for a one-person business, corporate structure is a weak lever and personal residence is a strong one. Most of the offshore advice sold to founders has that the wrong way round, because company formation is a product and residence is not.