How is CFC detected?

[omaozeko]

Hi,

I'm trying to understand how CFC is detected. Is there an exchange mechanism CRS type where information is sent abroad between countries or some sort of detection off public registries? Or is there no detection mechanism per say but it's simply a rule that shape what taxes need to be paid?

Thank you

 

[avalanche]

Probably just banks asking for UBO and reporting on them. (not sure)

 

[Sir Gelato]

It is an exchange info system, but every country has their own. Made for detect funds⁤ that go from onshore to offshore, the ubos behind the offshore corporations and block funds⁣ in case of tax evasion.
There are many benefits depending on nature of your business,⁢ that exempt you to pay some kind of taxes( not sure at all).
Even though︀ it is not as common as crs.

 

[blockchain4ever]

Two compliance things have been forced upon the tax havens and the banks: a public company⁤ registry, and CRS from the bank you use for your company.

 

[Konstanz]

I would not rely on naive hopes to avoid CRS. More and more countries join‌ CRS. Also CRS reporting is quite tricky and change by country to country and bank‍ itself. So, it's better to structure that way you don't need to worry about CRS⁠

 

[Martin Everson]

Well with EU DAC6⁤ that came into force yesterday it has become a lot easier.

https://www.offshorecorptalk.com/th...eporting-comes-into-effect-1-july-2020.29711/

 

[sargentshallots]

Thanks for creating this thread. This is exactly the question I have in my mind. Does⁤ anyone in this forum have first hand experience with CFC rule violations? How strictly are⁣ tax authorities going after owners and how are they getting tipped off?

Okay so if I understand correctly: Each EU country is supposed︁ to create laws (the point of an EU directive) that force both people who help︂ create these tax advantaged structures (lawyers, accountants etc.) and the people who are the owners︃ of these structures to report their information to the tax office of where they are︄ a tax resident. So snitching on themselves and their offshore companies.

Let's say a citizen︅ of one of the Benelux countries, living in Italy, and creates a micro-company in Romania.︆ The business is e-commerce, shipping from China to US. So nothing gets in or out︇ of Romania or the EU for that matter. The company owners will move to Romania︈ (and become a tax resident) within 6 months, should they be worried about any CFC︉ violations in the meantime?

Like are there thresholds for these kinds of situations, do they︊ care about small fish? An accountant in Romania basically said "Romanian government doesn't care, why︋ would they report someone to Italy? They want their tax money" when asked about CFC.︌

So I'm guessing the incentive would be on the country where the company owners are︍ a tax resident in (since they would be losing potential tax revenue). So if living︎ in Italy, the Italian tax authorities would start an investigation/audit, right?

I don't know if️ there is a reason to be concerned and how paranoid one should be.

 

[JustAnotherNomad]

A lot of people get this wrong: CFC rules are rarely an issue for someone‌ with an operative business. For example, the Italian CFC rules only apply to businesses that‍ derive at least 1/3 of their revenue from passive income (like dividends, royalties, interest, ...).⁠ So if you have a dropshipping business, if will NOT be affected by the Italian⁤ CFC rules AT ALL.
If I understood it correctly, the Italian CFC rules also only⁣ apply when it’s a company that holds the shares of the CFC, not when it’s⁢ an individual.
I really don’t know where this obsession with CFC rules come from. For︀ most people on this forum, they aren’t a problem at all.

Does that mean you︁ are off the hook? No.
Because if you run your business from Italy, there would︂ be a permanent establishment. Permanent establishment rules are what people in this forum should be︃ worried about, not CFC rules.
However, the first part of “PE” is “permanent”, which usually︄ means it must exist for at least 12 months. Also I doubt that any data︅ about company formations is exchanged upon incorporation. I would assume that such data is exchanged︆ at the end of the year, like with CRS. But I don’t know for sure.︇
I personally wouldn’t worry about such a structure if one only moves from one EU︈ country to another within a few months.
With moving out of the EU, it could︉ be a different story due to exit tax.

 

[sargentshallots]

Thank you so much for chiming in! I read one of your responses in︂ another thread and I actually wanted to ask you directly about this topic. After seeing︃ the page for Poland, I went to find information about Italy in the PWC website︄ and indeed saw that 1/3rd of revenues or higher must come from passive income.

So with that requirement plus the rule talking about companies holding shares rather than individuals pretty︅ much removes any worry about triggering CFC.

I think the reason many of us are︆ worrying about CFC is because not every country calls these rules in the same way︇ (I think some countries have CFC rules being triggered by individuals) AND also because we︈ confuse CFC with permanent establishment, like you mentioned.

Watching the nomad capitalist video once again,︉ he also mentions that some countries call it PE:





So our fear is the same,︊ living in one country and operating a company in another country and getting into trouble︋ with the tax authorities. And we are (mistakenly) labeling it as a CFC rule, when︌ in many cases, it should be PE. I hope that gives others a better overview︍ as well.

I hope so too. there will also be some substance in︁ RO, such as having a physical office and possibly interns working there. But hopefully it︂ should be difficult to prove any wrongdoing in the meantime with the porous borders within︃ the EU.

Eventually we would want to sell the company, but possibly to buyers from︄ the EU. So I will have to find out more about what would cause an︅ exit tax.

Thanks again!

 

[JustAnotherNomad]

CFC is different from PE. Usually countries have rules for both, they are different concepts.‌ CFC rules are basically a protection against classical tax evasion where you admit you have‍ operations in a high-tax country, but you try to shift profits to a low-tax country⁠ using intellectual property and stuff like that, everything pretty much only happens on paper. And⁤ the government basically just says: “We know what you’re trying to do. Forget about it.”⁣

A PE on the other hand is about where work is done. It doesn’t require⁢ management or the shareholders to be physically present.
For example, it could be a Bulgarian︀ company that sends housekeepers to work at different hotels in Italy during the summer season.︁ Even though it’s not the same workers every year and they are only present during︂ 3-4 months, the fact that the company keeps sending people every year could be regarded︃ as “permanent” operations in Italy. The Bulgarian company would then have to pay Italian corporate︄ income taxes for everything related to the operations in Italy. The tax treaty between Italy︅ and Bulgaria would then most likely make sure that the same income wouldn‘t be taxed︆ again in Bulgaria.

Pretty much all countries have PE rules because it’s usually the basis︇ for what corporate income can be taxed. But not all countries have CFC rules.
Some countries have CFC rules that apply to corporations only, others have rules that cover individuals︈ as well. But typically they are only relevant when you try to shift profits using︉ licenses (passive income), stuff like that. When it’s an active business, you would be covered︊ by PE rules anyway.

 

[cyprus123]

I agree with Konstanz. Better accept that CRS is a reality and becoming one in‌ more and more countries. Structure your business and don't worry about CRS.