Controlled foreign corporations (CFC)

Any commercial corporation goal is to maximize its profit. However, not every tax system is favourable for business and its development. In this regard, many companies have to deal with so-called «tax planning» to reduce their tax burden within the limits of the law.

Above mentioned is the reason why CFC topic is becoming more important. CFC means a foreign company, certain part of which is owned by tax residents of another country. Many companies use this scheme to reduce their tax burden, using so-called «offshore companies» that are established in low tax jurisdictions (e.g. tax havens).

The tax system in Latvia allows to successfully build a CFC structure and to effectively distribute the company’s profit.

However, many governments require to declare the existence of shares in foreign companies and to pay taxes basing on them. In 24 November, 2014, Russian government adopted a law under which persons are obliged to notify the tax authorities of the existence of controlled foreign company. Individual or legal person is recognized as controlling person if its participation in the authorized capital of the company is more than 25% (until 2016 – more than 50%). If total participation of Russian tax residents in one organisation is more than 50%, then a controlling person is recognized individual or legal person which has more than 10%.

In accordance with above mentioned law, companies will be required to pay tax on undistributed profit of foreign assets. That is, if foreign company is recognized as controlled foreign company, its undistributed profit will be taxed at 20% for legal persons and at 13% for individuals in Russia. It means that it would be difficult to implement tax planning and companies would have to look for other options to optimize taxes .

In this regard, the tax system in Latvia is more favorable and allows to build effective CFC structure and to distribute profit. Holding company regime in Latvia, as well as other regimes and tax rates, give opportunity to plan company’s activities to reduce tax burden as low as possible.

Our company’s mission is to help you to create effective CFC structure, reduce tax burden and increase your profit. We will find the best solution and we will offer different options of CFC structure, as well as provide necessary consultations and services that will help you to get what you expect from your business and even more.