Key features of the final report
The report sets out recommendations in the form of building blocks which are designed to ensure that jurisdictions that choose to implement them will have rules that effectively prevent taxpayers from shifting income into foreign subsidiaries. The Report sets out six building blocks for the design of effective CFC rules.
- Definition of a CFC The entities that could be within the scope of CFC rules should be broadly defined. In addition to corporate entities, the CFC rules could also apply to transparent entities and permanent establishments. A further recommendation is to include a form of hybrid mismatch rule to prevent circumvention of CFC rules. In order to qualify an entity as a controlled entity the report recommends a level of control of more than 50% based on both a legal and economic control test.
- CFC exemptions All CFCs with an effective tax rate ‘meaningfully below’ the rate applied in the parent jurisdiction should be subject to CFC rules. This exemption could be combined with a so-called ‘white list’. The report does not favor exempting transactions and structures that are not avoidance driven.
- Definition of income All jurisdictions are free to choose their rules for defining CFC income. The report states that the choice is likely to be dependent on the degree of BEPS risk a jurisdiction faces.
- Computation of income The CFC income should be calculated on the basis of the rules of the parent jurisdiction. The report in addition recommends introducing a specific rule which limits the offset of CFC losses in the parent jurisdiction.
- Attribution of income The income of the CFC should be attributed to the controlling persons on the basis of their proportion of ownership and their period of control.
- Prevention/elimination of double taxation The parent jurisdiction should allow a tax credit for the taxes actually paid by the CFC. In addition, the parent jurisdiction should exempt dividends received from the CFC and capital gains realized on transfer of the interest in the CFC to the extent the income of the CFC has previously been subject to CFC taxation.
Impact of Action 3 for the Netherlands
It is unlikely that as a result of Action 3 the Netherlands will change its current rules regarding the mandatory taxable revaluation of certain low or untaxed passive investment participations or its rules regarding certain low or untaxed passive investment permanent establishments. This might change, however, should developments within the EU force the Netherlands to adjust its rules.