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CFC Rules: When Your Home Country Taxes Your Seychelles IBC
CFC rules let your home country tax your Seychelles IBC's profits. How the control and low-tax tests work in the EU, US, UK and Australia, and what to check.
Licensed auditor & chartered accountant · 6 years of experience in offshore accounting
A Seychelles IBC can pay no Seychelles tax and still be taxed where you live. Controlled foreign company (CFC) rules let a home country tax a foreign company’s profits in its owners’ hands, often before any dividend is paid. In this post, we’ll explain the tests, show how six tax systems apply them, and set out what they mean for an IBC.
Quick Summary
CFC rules let a country tax its residents on a controlled foreign company’s undistributed profits when that company is lightly taxed.
Control usually means residents, with related persons, holding more than 50% of the votes, capital or profits.
A standalone IBC paying 0% fails every low-tax safe harbour, and the US, Australia and Canada have no rate test to fail.
Ownership, income type and carve-outs decide the result, and EU states may refuse the substance carve-out outside the EEA, as Germany does.
Paying dividends does not switch CFC rules off; it only stops the same profit being taxed twice.
Being managed from home can also make the IBC tax resident there, and Seychelles has no double tax treaty with the UK, US, Germany, Canada or Australia to settle that.
What CFC Rules Are
The tax benefits of a Seychelles company are the Seychelles half of the picture, and CFC rules are the home half.
A CFC rule taxes resident owners each year on their share of some or all of a foreign company’s income. The OECD’s 2015 report on CFC rules says they exist partly to stop the “long-term deferral of taxation” a lightly taxed foreign company allows.
The report’s recommendations are not minimum standards, so each country builds its own rules from six blocks:
which entities count as a CFC, including control
exemptions and thresholds, including the low-tax test
what income is caught
how that income is computed
how it is attributed to the owners
how double tax is relieved
The Three CFC Tests: Control, Low Tax and Income Type
The Control Test
The OECD recommends treating a foreign company as controlled where residents hold more than 50%, directly or indirectly, on a legal or economic test, counting related persons together. Countries may go lower.
The Low-Tax Test
The OECD’s benchmark is an effective rate “meaningfully below” the home rate. Each system sets its own line:
EU: tax paid is under half what the home country would charge
UK: the tax exemption needs local tax of at least 75% of the UK tax
Germany: under 15% (Foreign Tax Act section 8)
US: no low-tax gate, only a high-tax exception above 18.9% (90% of the 21% corporate rate)
Which Income Is Caught
Most systems target passive income, such as interest, dividends and royalties, and income diverted from the home country. The US goes further: for tax years beginning after 2025, net CFC tested income, formerly GILTI, reaches most of a CFC’s income (Public Law 119-21).
Which Countries Have CFC Rules
The Anti-Tax Avoidance Directive has required every EU member state to apply CFC rules since 1 January 2019, as a floor states may raise.
Country | Who is caught | Low-tax test | Key point |
|---|---|---|---|
EU minimum (ATAD) | Companies with more than 50% control | Tax paid below half the home tax | Listed income types (Model A) or non-genuine arrangements (Model B); substance carve-out refusable outside the EEA |
United States | US persons with 10% or more in a company over 50% owned by such holders | None; a high-tax exception above 18.9% | Subpart F plus net CFC tested income |
United Kingdom | UK resident companies with 25% or more | Local tax under 75% of UK tax | Charge only on profits through the “gateway” |
Germany | German resident individuals and companies with more than 50% | Under 15% | Substance escape only for EU and EEA companies |
Australia | Owners of 10% or more where five or fewer Australian entities control | None; Seychelles is “unlisted” | Tainted income taxed unless an active income test is met |
Canada | Canadian residents with a controlled foreign affiliate | None | Passive and investment business income taxed as earned |
The UK gateway in TIOPA 2010 Part 9A targets what HMRC calls profits “artificially diverted from the UK”.
Common CFC Exemptions
Genuine economic activity. The EU’s Model A spares a company with a substantive economic activity supported by staff, equipment, assets and premises; states may refuse this outside the EEA, and Germany does.
De minimis thresholds. US: foreign base company and insurance income under the lesser of 5% of gross income or US$1 million (section 954), which only removes it from Subpart F. UK: profits up to GBP 50,000, or GBP 500,000 with at most GBP 50,000 of non-trading income. Germany: CFC income of at most one third of total income and EUR 100,000. EU Model B states may exempt profits up to EUR 750,000 with non-trading income up to EUR 75,000.
Low profit margin. The UK exempts a CFC with accounting profits of no more than 10% of its relevant operating expenditure, and Model B states may do the same.
Excluded territories. The UK’s list in SI 2012/3024 does not include Seychelles.
What CFC Rules Mean for a Seychelles IBC
An IBC Owned by Individuals
Outside a multinational group, an IBC owned by individuals is taxed in Seychelles only on Seychelles-source income. Its foreign income bears 0%, so the low-tax tests are failed or absent:
US owners. If US shareholders of 10% or more own over 50%, each includes their share of Subpart F income and net CFC tested income yearly (section 957).
German owners. A controlling German resident is taxed yearly on the IBC’s low-taxed interest, most royalties and most related-party income (Foreign Tax Act section 7).
UK owners. Individuals fall outside the UK CFC charge, which reaches only companies, but the transfer of assets abroad rules can tax them on the IBC’s income unless they show tax avoidance was not a purpose, or the transactions were genuine commercial ones not designed for it.
Australian owners. Seychelles is unlisted under ITAA 1936 Part X, so a 10% owner is taxed on tainted income unless the IBC passes an active income test that needs, among other things, a Seychelles permanent establishment and a tainted income ratio below 0.05.
Canadian owners. Passive and investment business income is included yearly under section 91 of the Income Tax Act, with no foreign tax to deduct.
A non-resident can own 100% of a Seychelles company, and a sole owner controls the IBC under every test above.
An IBC Owned by a Company
An IBC owned by a foreign company is usually in a multinational group: enterprises that would have to prepare consolidated accounts, with members tax resident in two or more countries or a permanent establishment abroad. Since mid-September 2021, Seychelles company tax has reached such an IBC’s foreign active income unless earned through a permanent establishment abroad, and its foreign passive income unless it has adequate substance in Seychelles (Business Tax (Amendment) Act 2020, which inserted section 5(1A)).
That income is taxed at 15% on the first SCR 1 million and 25% above, so compare the rate actually paid with your country’s test.
Do Dividends Avoid CFC Rules?
No. CFC rules tax profits without waiting for a dividend, and relief on a later dividend only prevents double taxation. The EU directive deducts amounts already included (Article 8(5)), the US does not tax previously taxed earnings again (section 959(a)), and Germany relieves later dividends through a reduction amount (Foreign Tax Act section 11).
CFC Rules vs Place of Effective Management
CFC rules tax the owner; residence rules tax the company. An IBC is tax resident in Seychelles because it is incorporated there, but another country can treat it as resident too if its place of effective management sits there.
Under the 2017 OECD Model Tax Convention, treaty partners try to settle a dual-resident company’s residence case by case, weighing its place of effective management, place of incorporation and other factors (Article 4(3)). Seychelles has no double tax treaty with the UK, the US, Germany, Canada or Australia (SRC treaty list), so domestic law decides alone:
UK. A company is UK resident if its central management and control is in the UK (HMRC INTM120030), and that control can sit with an owner who in fact runs the business, not the board on paper.
Germany. A company whose centre of top-level management is in Germany is taxed there on all its income (Fiscal Code section 10 and Corporation Tax Act section 1).
An IBC run day to day from London or Berlin can therefore be taxed there as a resident, whatever its CFC position.
Reporting That Comes With a Foreign Company
US. Certain US officers, directors and shareholders of foreign corporations file Form 5471 with their return; missing it costs US$10,000 per company per year, plus up to US$50,000 more if it continues after an IRS notice (IRS instructions).
UK. A UK company with a relevant interest of 25% in a CFC files the CT600B supplementary pages unless the tax, excluded territories or low profit margin exemption applies.
Germany. Residents notify the tax office when they acquire or dispose of foreign holdings of 10% or more or costing over EUR 150,000, or first gain control of a company outside the EU and EFTA, within 14 months of the year end (Fiscal Code section 138).
Banks. Under the Common Reporting Standard, a bank holding an account for a passive entity reports the name, address, tax residence, tax number and birth details of each reportable person who controls it.
What to Check Before Relying on a 0% Rate
Who owns and controls the company, counting family, associates and anyone acting with you.
What the company earns, passive or trading income, and who it trades with.
Your country’s low-tax test and exemptions, and whether they cover non-EU companies.
Where decisions are actually made, and by whom.
Which reporting duties fall on you and the company.
Once those answers are clear, we can form the Seychelles side of your holding company structure and handle its annual compliance.
FAQ
What is the CFC look-through rule?
It is a US rule. Section 954(c)(6) stops dividends, interest, rents and royalties paid between related CFCs from counting as Subpart F income, to the extent they come from the payer’s income that is neither Subpart F income nor effectively connected US business income. Public Law 119-21 made it permanent; it matters for groups of foreign companies, not a single IBC.
Does substance in Seychelles help with CFC rules?
Only where your home country credits it. EU states can refuse the substance carve-out outside the EEA, as Germany does, and US rules have none, while Australia’s active income test needs, among other things, a Seychelles permanent establishment. In Seychelles itself, substance decides whether a group IBC’s foreign passive income is taxed.
Is my IBC a CFC if I own less than 50%?
It can be. A company is a US CFC when US shareholders of 10% or more together own over 50%, the UK charges a UK company holding 25% of a UK-controlled company, and Canada counts up to four other Canadian shareholders towards control. Germany also taxes 10% holders on low-taxed passive investment income without control.
Does Seychelles have CFC rules of its own?
No. The OECD’s 2020 tax policy review of Seychelles says it has no CFC rules, and no Business Tax amendment since has added any. The multinational-group rules in force since 2021 tax a Seychelles company’s own foreign income, not its foreign subsidiaries’ income.
