Taxation of Controlled Foreign Companies in Context of the OECD/G20 Project on Base Erosion and Profit Shifting as well as the EU Proposal for the Anti-Tax Avoidance Directive – An Interim Nordic Assessment

If (effective) the CFC rules are not in place, it is relatively easy for taxpayers to reduce the overall tax burden by shifting the mobile assets and income to a company/subsidiary in a low-tax country.

For a more thorough explanation and exemplifcation, see Rust (2008).

Firstly, most states(if not all) recognize that a company should be considered as a separate entity (also) for tax purposes. Accordingly, the profits of a foreign company should be insulated from tax in the residence state of the shareholders, at least until the time of repatriation (Garfunkel (2010)).

More precisely, a foreign company is only subject to tax in the residence state of its shareholders if it earns income from sources in that state and such income is taxable there.

Secondly, the aforementioned opportunity for profit shifting obviously depends on the fact that jurisdictions with low or no corporate tax exist. In other words, deferral or sheltering of income is only beneficial to the extent that the foreign tax is less than the domestic tax. The size of the benefit depends on the difference between the foreign and domestic tax rates, the length of the period of deferral, and the prevailing interest rates (Arnold (1986)).

The policy objectives behind the introduction of the CFC rules differ among the states that have enacted such legislation. However, fundamentally, the CFC legislation is typically seen as an instrument to guard against the unjustifiable erosion of the domestic tax base by the export of investments to non-resident corporations (OECD (1996)).

The differences among the CFC regimes in place, including the reason why some states have abstained from introducing CFC rules, have partly been explained by the fact that some states mainly follow a doctrine of capital export neutrality (and therefore, mainly grants credit relief for foreign taxes), whereas others follow a doctrine of capital import neutrality (and hence, mainly applies the exemption method) (OECD (1996)).

However, it must be acknowledged that it may be too simplistic to consider the states’ international tax policies as a choice or compromise between the capital export neutrality and capital import neutrality (Graetz (2001)).

As the first country in the world, the United States adopted the CFC legislation in 1962.

The Revenue Act of 1962 (U.S.). The rules are to be found in the Subpart F of part III of subchapter N of Chapter 1 of subtitle A of the Internal Revenue Code (U.S).

In the 1970s, Canada, West Germany, and Japan also introduced the CFC legislation, and more countries joined in 1980s and 1990s. Hence, at least 15 countries had enacted the CFC legislation in the mid 1990s (OECD (1996)). In 1998, the OECD Council adopted a recommendation in which it recommended that countries, which did not have CFC rules, should consider adopting such rules, and that countries that had such rules should ensure that the rules applied in a fashion consistent with the desirability of curbing harmful tax practices (OECD (1998)). Subsequently, more countries followed and currently, more than 30 countries have the CFC legislation in place (OECD (2015a)).

In a Nordic context, Sweden was the first country to introduce the CFC legislation.

Inkomstskattelag [IL] [Swedish Income Tax Act] 39a: 1–14 (Swe.). Introduced by adoption of Proposition 1989/90:47 om vissainternationellaskattefråger [government bill] (Swe.).

In 1992, Norway followed Sweden’s lead and introduced the CFC rules as a consequence of the abolition of the regulations on currency control.

Skatteloven [SKTL] [Norwegian Tax Act] sec. 10–60 to 10–68 (Nor.). Introduced by adoption of Lovnr. 41 af 20. April, 1992 [act of parliament] (Nor.).

Finland introduced the CFC legislation in 1994,

Lakiulkomaistenväliyhteisöjenosakkaidenverotuksesta [VYL] [Finnish Act on Taxation of Shareholders in Controlled Foreign Companies] (Fin.). Introduced by adoption of Act no. 1217/1994. Already in 1979, it was considered to introduce the CFC legislation, cf. Rapakko (1989).

Denmark introduced the CFC rules in 1995, following the lengthy considerations about the pros and cons of such legislation.

Selskabsskatteloven [SEL] [Danish Corporate Tax Act] sec. 32 (Den.). Introduced by adoption of Lovnr. 312 af 17 May, 1995 (act of parliament] (Den.). The possibility of introducing the CFC rules was already discussed 10 years earlier by a committee appointed by the minister of taxation, cf. Betænkningnr. 1060, 1985 [government recommendation] (Den.). Back then, the committee concluded that the CFC legislation would be too hard to administer.

Finally, Iceland was the last of the Nordic countries to introduce the CFC legislation.

Lög um tekjuskatt[TSKL] [Icelandic Income Tax Act] art. 57a (Ice.). Introduced by adoption of Act 46/2009, art. 2. See also Regulerd um skattlagninguvegnaeignarhalds í lögaðilum á lágskattasvæðum [Finance Ministry regulation] no. 1102/2013 (Ice.).

The BEPS project has rightly been described as the result of a perfect storm (Brauner (2014)). In other words, massive media coverage of tax planning schemes used by multinationals triggered a wider political interest, which was exacerbated by the world’s economic downturn. One of the initial results of this perfect storm was the release of the report addressing BEPS in February 2013 (OECD (2013a)). The report was followed by the adoption of an action plan in September 2013 (OECD (2013b)), which identified 15 actions along 3 key pillars: (1) introducing coherence in domestic rules that affect cross-border activities, (2) reinforcing substance requirements in the existing international standards, and (3) improving transparency as well as certainty. The work carried out according to the action plan resulted in a package of 13 final reports, one of them dealing with the design of effective CFC rules (OECD (2015a)).

The work on the CFC rules has been co-ordinated with the work on some of the other action points, mainly action 1 on tax challenges of the digital economy (OECD (2015e)), action 2 on hybrid mismatch arrangements (OECD (2015f)), action 3 on interest deductions (OECD (2015g)), action 5 on harmful tax practices (?), and actions 8–10 on transfer pricing (OECD (2015h)). Thus, the reports concerning these action points also contain some considerations regarding the CFC rules. For more on the interaction between the actions on CFC rules and transfer pricing rules, see Dourado (2015).

Even though the BEPS project has been subject to criticism – inter alia with respect to the project’s lack of clear goals and scope combined with unrealistically tight deadlines (Brauner (2014)) – it appears correct to claim that the BEPS project may be the most ambitious reform ever undertaken in the field of international taxation (Pistone (2014)). In the words of the OECD/G20, the BEPS package of measures, thus, represents the first substantial renovation of the international tax rules in almost a century, with the overall aim of realigning taxation with economic activities and value creation (OECD (2015c)).

Action 3 of the BEPS project concerns the rules on CFC taxation and belongs to the key pillar dealing with the introduction of coherence in domestic rules that affect crossborder activities (OECD (2015a)). The objective behind Action 3 was to develop recommendations for the CFC rules that are effective in dealing with BEPS. These recommendations take the formof“building blocks,” and it is specifcally stated in the report that the recommendations should not be seen as minimum standards. Instead, the recommendations are designed to ensure that the countries’ CFC rules will effectively prevent the taxpayers from shifting income into foreign subsidiaries, and at the same time ensure that sufficient flexibility is provided to implement rules in a manner that are consistent with the policy objectives of the overall tax system of the country concerned. The “building blocks” include the following:

Rules for defining a CFC (including definition of control)

On 28 January 2016, the European Commission published its so-called Anti-Tax Avoidance Package,

Communicationfrom theCommissiontotheEuropeanParliament and the Council – Anti-Tax Avoidance Package: Next steps towards delivering effective taxation and greater tax transparency in the EU, COM (2016) 23 final.

The proposal for the ATA Directive draws on the work previously carried out by the Commission in the course of the proposal for a Common Consolidated Corporate Tax Base (CCCTB).

Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB), COM (2011) 121/4.

Having the aim of combating tax avoidance practices that directly affect the functioning of the internal market, the ATA Directive, thus, lays down anti-avoidance rules in the following six specifc fields: deductibility of interest, exit taxation, a switch-over clause, a general anti-avoidance rule (GAAR), the CFC rules, and rules to tackle hybrid mismatches. These rules should create a level playing field of minimum protection for all member states’ corporate tax systems. Accordingly, the intention is that the ATA Directive should include principle-based rules that leave the detail of implementation to the member states, with the understanding that they are better placed to shape the precise elements of the rules in away that best fits their corporate tax systems.

Art. 8 and 9 of the ATA Directive contain the proposed CFC rules. The conditions for the application of the CFC rules are laid out in art. 8, whereas art.9 concerns the computation of the CFC income. The aim of the proposed rules isto eradicate the incentive of shifting income to low-taxed subsidiaries, and in this regard, the Commission refers to a study that shows that the CFC rules, if well designed and effective, are critical anti-abuse rules as they could defeat most “model aggressive tax planning structures” identified in the study. According to the Commission, the proposed CFC rules in the ATA Directive have been discussed in the context of the CCCTB proposal, and the proposed rules should generally be considered in line with the outcome of Action 3 of the OECD/G20 BEPS project.

Commission Staff Working Document, SWD (2016) 6/2, which refers to the Study on Structures of Aggressive Tax Planning and Indicators, European Commission working paper n. 61, 2015, by Ramboll Management Consulting and CORIT Advisory.

The BEPS report initially states that a jurisdiction must consider two questions in order to establish whether the CFC rules should apply (OECD (2015a)). Firstly, it should be considered whether a foreign entity is of the type that would be considered a CFC, and secondly, it should be established whether the parent company has sufficient influence or control over the foreign entity for the foreign entity to be a CFC. These two questions will be dealt with separately in the following paragraphs.

With respect to the first question, the BEPS report recommends to broadly define the entities within the scope of the rules. Accordingly, in addition to including corporate entities, the CFC rules should also apply to certain transparent entities and PEs (to the extent that the income is not already taxed in the parent/headquarter jurisdiction). Moreover, it is recommended to include a form of hybrid mismatch rule to prevent entities from circumventing the CFC rules through different tax treatment in different jurisdictions (OECD (2015a); see sec. 2.1).

An example of the suggested hybrid rule is made in the report.See also Dourado (2015), who correctly argues that the CFC rules in such cases act as back-stop to anti-hybrid measures, which only operate when the mismatch directly occurs between two countries. Further, see the CFC-related considerations in the report on hybrid mismatch arrangements (OECD (2015f)).

The CFC rules of the proposed ATA Directive do not define which types of foreign entities the CFC rules should cover. In addition, no CFC-focused hybrid mismatch rule is laid out. However, the ATA Directive does state that the income to be included in the tax base of the parent should be calculated in accordance with the corporate tax rules of the member state where the taxpayer is resident.

Art. 9 (1) of the ATA Directive.

With Denmark as a notable exception, the CFC regimes of the Nordic countries only apply to foreign entities. Thus, in an attempt to align its CFC legislation with the EU law, the Danish CFC rules for companies also apply to domestic entities.

See also section 4.

The Finnish CFC rules were amended in 2009 in order to ensure that a PE of a foreign company (an indirectly owned PE) may be treated as a CFC if it is situated abroad in a state other than the residence state of the foreign company (Helminen (2009)).

VYL 2 (Fin.).

All in all, the five Nordic CFC regimes thus appear, at least to a certain extent, to take into account that the use of other entities than corporations could also create risks related to BEPS. However, none of the Nordic CFC regimes appear to include a specific CFC-focused hybrid mismatch rule, as suggested in the BEPS recommendations.

In the Danish literature, it has been discussed whether the rules on hybrid mismatches should applyinaCFC taxation context, and the conclusion appears to be that it is uncertain (Bundgaard (2007)). In general, however, the Danish administrative case law seems to support that all Danish tax provisions, including anti-avoidance provisions, should generally apply in a CFC context, unless it is explicitly stated in the provision or its preparatory remarks that the provision in question shall not apply in a CFC context, cf. Skatterådet [Tax Assessment Council], SKM2014.577.SR (Den.).

With respect to question two – whether the parent company has sufficient infuence or control over the foreign entity for the foreign entity to be a CFC – the BEPS report recommends that the CFC rules should at least apply both a legal and an economic control test, where the latter mainly focuses on the rights to profits in certain circumstances, such as a disposal, dissolution, liquidation, and other distributions of profit (OECD (2015a); see sec. 2.1). Moreover, countries may include de facto tests to ensure that these control tests are not circumvented. Such a de facto test could inter alia look at who takes top-level decisions, who has influence over the day-to-day activities, or at any particular contractual ties. A CFC should be considered controlled where residents hold, at a minimum, more than 50% control.However, the BEPS report acknowledges that broader policy goals or prevention of circumvention may require a lower threshold. The level could be established through the aggregated interest of related parties or unrelated parties, or from aggregating the interests of any taxpayers that are found to be acting in concert. Accordingly, in this regard, the BEPS report suggests that countries apply either an “acting-in-concert test,” a “related party test,” or “a concentrated ownership requirement.”

The ladder test could, for example, entail that the interests, of all residents, in the CFC are aggregated as long as each interest is higher than 10%.

Concerning the required level of control, the ATA Directive stipulates that the taxpayer by itself, or together with its associated enterprises as defined under the applicable corporate tax system, holds a direct or indirect participation of more than 50% of the voting rights, owns more than 50% of the capital, or is entitled to receive more than 50% of the profits of that entity. By using a 50% threshold and focusing on both direct and indirect participations, the ATA Directive’s CFC rules appear to be in line with the recommendations in the BEPS report concerning the control requirement. However, it should be noted that the ATA Directive’s reference to associated enterprises “as defined under the applicable corporate tax system” gives the member states some leeway to design and apply the control requirement, as they would like. As a result, the scope of application of the CFC rules across the member states may (continue to) differ considerably, and the objective of securing a coherent and coordinated transposition of the BEPS measures into the member states’ national tax systems could be harmed.

A common feature of the Nordic CFC regimes is that they apply in cases of both direct and indirect control/influence. As a starting point, the Norwegian, Icelandic, and Finnish CFC regimes apply if the foreign entity is controlled by the resident taxpayers. Accordingly, these three regimes put emphasis on the fact that the resident taxpayers, taken together, own at least 50% of the capital or hold at least than 50% of the voting rights in the foreign entity (the Finnish rules also apply if Finnish taxpayers are entitled to at least 50% of the yield).

SKTL 10-62 (Nor.), TSKL 57a (3) (Ice.). and VYL 3 (Fin.).

The Danish CFC regimen effect also generally applies a 50% threshold.

SEL 32 (6) (Den.).

All five CFC regimes include rules that ensure the control test is not circumvented. The Icelandic CFC rules, for example, apply even though less than 50% of the capital or voting rights are owned/held by Icelandic taxpayers, if it can be shown that the Icelandic resident benefits from the entity in a direct or indirect manner (Gudmundsson & Jóhannesson(2010)).

TSKL 57a (3) (Ice.)

In comparison with the BEPS recommendations and the ATA Directive, it is striking that Finland is the only Nordic country to apply both a legal and an economic ownership test, as the Finnish rules also apply if Finnish taxpayers are entitledtomore than 50% of the yield. The other Nordic CFC regimes are based on the legal ownership of capital and/or voting rights. In order to be in line with the BEPS recommendations, and incase of Denmark and Sweden, comply with the Directive, an economic ownership test should, therefore, be added.

Exemptions and threshold requirements are commonly used to make the CFC rules more targeted and reduce the administrative burden. In this regard, the BEPS report recommends that a tax rate exemption is included (OECD (2015a); see sec. 3.1). This exemption should exclude subsidiaries – that are subject to an effective tax rate that is sufficiently similar to the tax rate applied in the parent jurisdiction – from CFC taxation, and the exemption could be combined with a list, such as a white list. The exemption is based on the effective rate (actual tax paid divided by the CFC’s income), as this approach takes into account the tax base or other tax provisions that may increase or reduce the effective rate paid by the CFC. In this context, the CFC’s income (the denominator) should be either the tax base in the parent jurisdiction if the CFC income had been earned there or the total income according to an international accounting standard, such as International Financial Reporting Standards (IFRS), with adjustments.

Even though thewording of the ATA Directive includes a low-tax condition, and not a low-tax exemption, the effect is the same, that is, CFCs that are subject to an effective tax rate, which is sufficiently similar to the tax rate in the parent company’s jurisdiction, are excluded from the scope of the rules.More precisely, the article states that the CFC rules should only apply if, under the general regime in the country of the entity, profits are subject to an effective corporate tax rate lower than 40% of the effective tax rate thatwould have been charged under the applicable corporate tax system in the member state of the taxpayer.

Art. 8(1)(2) of the ATA Directive.

In addition to the low-tax condition, the ATA Directive also states that the CFC rules should only apply if the entity is not a company whose principal class of shares is regularly traded on one or more recognized stock exchanges. Moreover, the CFC rules should not apply to financial undertakings that are resident in the EU/EEA or in respect of their PEs in one or more member states.

Art. 8(2) of the ATA Directive. The reasoning behind excluding financial undertakings within the EU/EEA is that the CFC rules within this geographical area should be limited to artificial situations without economic substance, which would imply that the financial sector would be unlikely to be captured by the CFC rules, cf. the preamble to the ATA Directive, para. 10. However, as Haslehner (2016) correctly has argued, it seems surprising that such financial undertakings are a priori exempted from the CFC rules, as it suggests that these are entirely unsuspicious of the BEPS activities.

Concerning the use of a low-tax exemption/condition, the CFC regimes of all theNordic countries, except for Denmark, are rather similar. Accordingly, the CFC rules of Sweden, Norway, Iceland, and Finland apply such an exemption/ condition, and despite some differences with respect to calculation, these exemptions/conditions depend on a comparison of effective tax rates. The Swedish rules generally define low taxation as a rate lower than 55% of the Swedish rate,

IL 39a:5 (Swe.).

The CFC rules in Sweden, Norway, Iceland, and Finland all contain an exemption for the entities resident in the EU/EEA with genuine economic activities.

This exemption is more extensively dealt with under section 4.

The Danish CFC rules are quite different from the others, as the Danish rules do not include a low-tax exemption/condition because the rules are meant to apply equally to foreign as well as domestic entities. Instead, the Danish CFC rules should not apply if the group has opted for (Danish) voluntary international tax consolidation, if the entity in question is to be considered an “investment company,” or if the special rules for life insurance companies apply, as Danish taxation on a continuous basis has been secured through other means in these situations. Moreover, it may be possible to obtain an exemption from the Danish CFC rules with respect to subsidiaries operating within the financial sector.

SEL 32 (1-2) (Den.).

Overall, the CFC regimes in Sweden, Norway, Iceland, and Finland seem to be broadly in line with BEPS recommendations concerning exemptions and threshold requirements as well as the relevant parts of the ATA Directive. However, as EU countries, Sweden and Finland may be forced to abolish or amend their industry/treaty exemptions if the ATA Directive is adopted. Denmark’s approach in this regard is quite different from the approaches set out inthe BEPSrecommendations andthe ATADirective.However, the BEPS report acknowledges that the EU member states can choose to apply the CFC rules to both domestic subsidiaries and foreign subsidiaries, in order to avoid a clash with for example, the freedom of establishment,

See also section 4.

After determining that a foreign company should be considered a CFC, it has to be determined whether or not the income earned by the CFC is of the type that raises concern with respect to BEPS. In this context, the BEPS report recommends that the CFC rules should include a definition of income to ensures that income, which raises BEPS concerns, is attributed to controlling the shareholders in the parent jurisdiction (OECD (2015a); sec. 4.1). However, the BEPS report does not include an explicit definition of such income. Instead, the report acknowledges that flexibility is needed in order to ensure that jurisdictions can design the CFC rules, which are consistent with their domestic policy frameworks. Accordingly, jurisdictions are free to choose their rules for defining the CFC income.

This recommendation appears weak and unfocused. It encourages jurisdictions to include a definition of CFC income, but without stating how this income should be defined. However, in the accompanying explanation, a non-exhaustive list of approaches, which jurisdictions could use, is provided. These approaches can be divided into four main approaches which may be combined with each other: (1) approaches using a categorical analysis, (2) approaches using a substance analysis, (3) approaches using an excess profits analysis, and (4) transactional and entity approaches.

Regardless of which approach a jurisdiction chooses to apply, the recommendation states that the CFC rules, at a minimum, should capture the funding return allocated undertransfer pricing rules toa low-function cash box.

The categorical approach divides the income into categories and attributes income differently, depending on how it is categorized. The categories could be defined with reference to the legal classification (typically focusing on income, such as dividends, interest, insurance income, royalties and IP income, and sales and services income), relatedness of parties, and/or source of income.

The substance approach, on the other hand, focuses on whether the CFC’s income has been separated from the underlying substance, including people, premises, assets, and risks. Thus, the basic question to be answered (when using this approach) is whether the CFC had the capability to earn the income itself. In answering this question, it could be considered to apply a facts and circumstances analysis, an analysis focusing on the significant functions within the group, an analysis considering whether the CFC had the necessary business premises and establishment in the CFC jurisdiction to actually earn the income, or an analysis based on a modified version of the so-called nexus approach.

The nexus approach was developedin the context of BEPS action item 5 to ensure that preferential IP regimes require substantial activity (OECD (2015c)).

The excess profits approach would characterize the income in excess of a normal return earned in low-tax jurisdictions as CFC income. The normal return should be understood as the return that a normal investor would expect to make with respect to anequity investment. This approach has a mechanical nature and does not rely on a formal classifcation to determine whether income should be included.

A numerical example is provided in the report (OECD (2015a); see sec. 4.2.3).

On the topic of defining the CFC income, the BEPS report finally notes that regardless of which type of analysis is used, jurisdictions need to decide whether to apply an entity approach or a transactional approach. Under the first approach, an entity that does not earn a certain amount or percentage of the CFC income will be found not to have any attributable income, even if some of the income would be of an attributable character. Accordingly, either all or none of the CFC’s income will be included. Under the ladder approach, the character of each stream of income is assessed to determine whether that stream of income is attributable. Thus, under this approach, some income can still be included even if the majority of income does not fall within the definition of CFC income. Overall, the advantage of the entity approach is that it may reduce administrative burdens, but the disadvantage is that the approach is both over-inclusive and under-inclusive. In comparison, the transactional approach may increase the administrative burden, but it is generally more accurate in attributing the income.

For a more thorough discussion of the pros and cons of these two alternatives, see the report itself (OECD (2015a)).

Concerning the definition of CFC income in the ATA Directive, the Directive appears to rely on some of the approaches exemplified in the BEPS report. Accordingly, elements of both the categorical approach and the substance approach can be traced in the CFC rules of the ATA Directive. Moreover, the ATA Directive relies on the entity approach when it comes to deciding on how much of the CFC’s income that should be attributed to the parent company.

See the wording of art. 8 (1), which simply states that “the non-distributed income” of the CFC should be included. See also Commission Staf Working Document, SWD (2016) 6/2, which explains that for simplicity reasons, the directive foresees that all the income of the CFC will be taken into account when the conditions are met.

In more detail, the ATA Directive sets out an income condition, which will be met, if more than 50% of the income accruing to the CFC falls within the following categories:

Art. 8 (1) (c) of the ATA Directive.

In general the ATA Directive’s definition of “tainted” income seems quite broad. However, the income condition of the ATA Directive shall apply to financial undertakings only if more than 50% of the entity’s income in the aforementioned categories comes from the transactions with the taxpayer or its associated parties. In this regard, it should be remembered that the CFC rules should not at all apply to financial undertakings that are resident in the EU/EEA or in respect of their PEs in one or more member states.

Art. 8(2) of the ATA Directive. See also section 3.2.

All of the Nordic CFC regimes generally rely on the entity approach.

VYL 4 (Fin.), TSKL 57a (5) (Ice.), SKTL 10-61 (Nor.), SEL 32 (1) & (7) (Den.) and IL 39a: 10-13.

As a main rule, the Norwegian and Icelandic CFC rules apply no matter what kind of income the CFC generates, provided that the other conditions for CFC taxation are fulfilled. However, as aforementioned, the Norwegian and Icelandic CFC rules do not apply with respect to the entities in treaty countries, unless the entity mainly generates passive income.

SKTL 10-64 (Nor.).

Neither the Finnish nor the Swedish CFC rules contains a general passive income requirement/exception. However, as aforementioned, it should be taken into account that the Finnish CFC rules do not apply with respect to the entities in treaty countries, unless the entity is located in a country mentioned in the black list or benefits from a specific tax relief.

VYL 2 (Fin.).

Concerning the rules for computing the income of the CFC, the BEPS report states that it is necessary to determine which jurisdiction’s rules should apply and whether any specific rules for computing CFC income are necessary (OECD (2015a); see sec. 5.1). Against this background, the BEPS report recommends to use the rules of the parent jurisdiction to calculate a CFC’s income. The reasoning behind this recommendation is that such an approach would be consistent with the goals of the BEPS action plan and would reduce the administrative costs compared with the other options that were considered.

The other options were to use the CFC jurisdiction’s rules, toallow taxpayers to choose, and finally, to use a common standard, such as the IFRS.

The CFC rules in the ATA Directive are fully in line with these two recommendations. Thus, it is directly stated that the income to be included in the parent company’s tax base shall be calculated in accordance with the rules of corporate tax law of the member state, where the taxpayer is resident for tax purposes. In addition, it is explicitly mentioned that losses of the CFC shall not be included in the tax base, but shall be carried forward and taken into account when applying the CFC rules in subsequent tax years.

Art. 9 (1) of the ATA Directive.

With respect to computation and utilization of losses, the CFC regimes of all five Nordic countries appear to be in line with the BEPS recommendations, as well as the ATA Directive. Accordingly, pursuant to the CFC rules of all the Nordic countries, the income from the CFC to be included in the parent company’s tax base shall be calculated in accordance with the rules of corporate tax law in the parent company’s jurisdiction.

TSKL 57a (5) (Ice.), SKTL 10-65 (Nor.), IL 39a: 10–13. With respect to the Finnish CFC regime, it does not follow directly from the CFC provisions. However, the preparatory remarks as well as subsequent case law, cf. Korkeinhallintooikeus [Supreme Administrative Court], KHO 2003 T 1938 (Fin.), have confirmed that the ordinary Finnish tax rules should be used for the computation of the income in the CFC (Leväjärvi (2013)). The same applies concerning the Danish regime, cf. e.g. L 23 (2008/2009) Forslag til lov om ændring af selskabsskatteloven, fusionsskatteloven og forskellige andre skattelove [governmentbill] (Den.).

In none of the Nordic jurisdictions is it possible to utilize the losses of the CFC to reduce the parent company’s or other group companies’ taxable income.

TSKL 57a (5) (Ice.), VYL 5 (Fin.), SEL 32 (1) & (9) (Den.), SKTL 10-61 (Nor.), IL 39a:6 (Swe.). Prior to 2003, losses in a CFC could actually be used to reduce the Norwegian shareholder’s other taxable income. However, the Norwegian CFC rules were amended in order to mitigate tax planning based on this possibility.

All together, the Nordic CFC regimes are, thus, in line with both the BEPS recommendations and the ATA Directive concerning the rules on how to compute the income. However, with respect to the ATA Directive, it should be noted that the calculation in accordance with the rules of the corporate tax law of the member state where the taxpayer is resident for tax purposes, entails that the legal effect of applying the different member states’ CFC rules may (continue to) vary significantly, as the corporate tax rules among the member states differ.

When the amount of CFC income has been calculated, the next step is determining how to attribute that income to the appropriate shareholders of the CFC. In the BEPS report, this step is broken into five parts, and for each of these, the report sets out a recommendation (OECD (2015a); see sec. 6.1).

The first recommendation states that best practice would be either to tie the attribution threshold to the control threshold or to use another attribution threshold, which attributes income to, at minimum, the taxpayers who could influence the CFC. Such an approach should entail administrative simplicity and reduced compliance burdens. Moreover, it should ensure that taxpayers have enough influence to gather information on the activities and income of the CFC. The second recommendation states that the amount of income attributed to each share holder or controlling person should be calculated by reference to both their proportion of ownership and their actual period of ownership. The third recommendation concerns the determination of when the income should be included in the tax returns of the taxpayers, and finally, the fourth reommendation concerns the determination of how the income should be treated. With respect to both, the BEPS report states that countries are free to choose so that the CFC rules will operate in a way that is coherent with the existing domestic law. However, it is mentioned that many existing CFC rules specify that the attributed income must be included in the taxpayer’s taxable income for the taxable year in which the end of the CFC’s accounting period ends. Moreover, with respect to how the income should be treated, the report notes that the existing CFC rules take several different approaches, including what could be labeled as a deemed dividend approach, a lifting the corporate veil approach, and a flow through approach.

For more on different attribution methods, see e.g. Schmidt (2013a).

The CFC rules of the ATA Directive broadly seem to be in line with the recommendations in the BEPS report on how to attribute income. Accordingly, the attribution threshold appears to be tied directly to the control threshold.

Cf. art. 8 (1) (a). See also section 3.1.

With respect to all five Nordic CFC regimes, the attribution threshold is to some extent tied to the control threshold.

For more on the control thresholds, see section 3.1.

Concerning the amount to be attributed to the parent, the Swedish, Icelandic, Danish, and Norwegian rules all entail that the CFC’s income should be included in proportion to the shareholder’s part of the CFC’s share capital.

IL 39a:13 (Swe.), TSKL 57a (1) (Ice.), SEL 32 (7) (Den.), and SKTL 10-61 (Nor.). If the shares in the CFC are divided into different classes with different entitlement to dividend, the size of the entitlement to dividend is decisive pursuant to the Norwegian CFC rules, cf. Ot. prp. nr. 16 (1991-1992) (Nor.).

Finally, all of the Nordic CFC regimes are in line with the last BEPS recommendation concerning attribution, as the ordinary corporate tax rate of the parent jurisdiction in all instances should be applied to the attributed income.

According to the BEPS report, it is a fundamental policy consideration to ensure that CFC legislation does not lead to double taxation, as this could pose an obstacle to international competitiveness, growth, and economic development.

For more on the needtoavoid economic double taxation triggered by the CFC rules, see Kuzniacki (2015).

The CFC rules of the ATA Directive do not contain a rule stating that the member state of the parent company should allow relief for taxes paid by the CFC as well as CFC tax assessed on intermediate companies. Instead, the ATA Directive only addresses relief with respect to situations where the CFC distributes profits or the taxpayer disposes of the shares in the CFC. Accordingly, it is explicitly stated that the amounts of dividend income from the CFC, and the proceeds from disposal of CFC shares that previously have been subject to CFC taxation, shall be deducted from the tax base when calculating the amount of taxes due on these dividends and proceeds.

Art. 9 (4) and (5) of the ATA Directive.

It seems strange that the CFC rules of the ATA Directive do not contain an explicit rule providing relief with respect to taxes paid by the CFC, as well as CFC tax assessed on intermediate companies. However, it should be noted that the preamble to the ATA Directive states that where the application of the rules set out in the Directive gives rise to double taxation, taxpayers should receive relief through a deduction for the tax paid in another member stateorthird country, as the case may be.

Para. 5 of the preamble of the ATA Directive.

As also recommended in the BEPS report, the CFC regimes of Sweden, Norway, Finland, and Denmark all provide ordinary credit relief for foreign taxes paid by the CFC,

VYL6(Fin.), SEL 32 (11) (Den.), SKTL 16-20 (Nor.). Concerning the Swedish CFC taxation, the relief provision are to be found in Avräkningslagen [AL] [Swedish Foreign Tax Credit Act] 4:1 (Swe.).

The Finnish CFC rules include a provision that allows unused foreign tax credits to be carried forward and deducted in the following 5 years.

VYL 6 (Fin.).

Finally, in most cases, the Nordic regimes appear to exempt dividends from the CFC and gains on disposition of CFC shares from taxation, so that the income of the CFC is not in effect taxed twice in the jurisdiction of the parent company. This either follows from the special rules dealing with these particular issues

VYL 4 (Fin.), SKTL 10-67 & 10-68 (Nor.), IL 42:22 (Swe.).