1. Introduction
The National Tax Agency announced the “Partial Amendments of a Circular for the Act on Special Measures Concerning Taxation (Corporation Tax) on 31 May, 2019. Under the 2019 tax reform, the Controlled Foreign Company (CFC) rules were further amended, including the exclusion of shareholding companies, etc. from the scope of paper companies and the method of calculation of income and foreign taxes in a tax-consolidated group or a pass-through entity.
2. CFC Rules in 2017 Tax Reform
In the former rules, the trigger tax rate was less than 20%; therefore, a CFC with the effective tax ratio of 20% or more was not subject to the CFC taxation even if it was a paper company.
However, based on the BEPS project, the 2017 tax reform fundamentally amended the CFC rules. The new rules aimed to deter tax avoidance more effectively by focusing on CFCs’ economic activities. The amendments under the 2017 tax reform were as follows:
① Abolishment of the trigger tax rate
② Amendment of the definition of a CFC and criteria for the CFC taxation
③ Amendment of Economic Activity Standards
④ Expansion of the scope of passive income
3. 2019 Tax Reform
① Amendment of the scope of paper companies
Shareholding CFCs, Real estate CFCs, and Resource development CFCs are excluded from the scope of paper companies.
② Consolidated tax group and pass-through taxation
Where a CFC is a member of consolidated tax group or pass-through entity, the CFCs’ income, tax burden rate, and foreign taxes are calculated without applying tax consolidation or pass-through provisions.
4. Conclusion
In this News, we mentioned the amendments of CFC rules.
Please note that this News only introduces general outlines and does not include professional advice. So please make sure not to make any decisions without taking professional advice individually. If you have any questions, please feel free to contact us.
(Reference) (Japanese)
（Accessed on June 28, 2019）
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