Controlled foreign company (CFC) rules let a parent's country tax low-taxed profits of foreign subsidiaries before they are paid up as dividends. EU Member States must apply them under the Anti-Tax Avoidance Directive, and the United States has its own long-standing regimes. Substance (people, premises and decision-making where profits are booked) is what keeps a structure outside CFC rules and inside treaty and free-zone benefits.
How CFC rules work
A CFC rule looks through a foreign subsidiary and taxes some or all of its profits in the parent's hands as they arise. Under the EU Anti-Tax Avoidance Directive, an entity is a CFC where the parent, with associated enterprises, holds more than 50% of its votes, capital or profits, and the foreign tax actually paid is lower than the difference between the tax that would have been paid under the parent country's rules and the tax actually paid. Included income is calculated in proportion to the parent's participation.
EU Member States had to apply these rules from 1 January 2019, but each country's law differs on the details, such as which income is caught and what exceptions apply for genuine economic activity. A group headquartered in Germany or France with a low-taxed subsidiary in a zero or low-rate jurisdiction must therefore test that subsidiary under its own domestic CFC law, not just the directive.1234
United States: Subpart F and the successor to GILTI
US shareholders of controlled foreign corporations have long been taxed currently on certain passive and mobile income under Subpart F, and since 2018 on a broader measure of foreign earnings known as global intangible low-taxed income (GILTI). Federal legislation enacted in 2025 is widely reported to have renamed GILTI as net CFC tested income and to have changed its computation from 2026. We could not confirm the new name, rate or effective date on an official page, so this is listed as a gap. US state conformity to these federal rules varies by state.
Economic substance and the UAE position
Substance regimes require entities earning certain income to show core activities, staff and premises where the profit is booked. The UAE introduced economic substance regulations in 2019 but has cancelled the reporting requirements for financial years ending after 31 December 2022, through Cabinet Decision No. 98 of 2024. Businesses remain responsible for earlier years, including information requests and penalties.
Cancellation of reporting does not make substance irrelevant. A UAE free zone entity only receives 0% corporate tax on qualifying income if it meets the qualifying free zone person conditions, which include adequate substance in the free zone; otherwise its income is taxed at 9%. Substance also underpins treaty residence, transfer pricing outcomes and defences under the parent's CFC rules.56
Why substance matters for treaty access
Treaty benefits such as reduced withholding tax depend on the recipient being a genuine resident and beneficial owner, and most modern treaties as amended through the OECD multilateral instrument include an anti-abuse test that looks at the principal purpose of an arrangement. A holding company with no staff, decision-making or business rationale beyond the treaty rate is at risk of being denied relief. We could not open the OECD source for the principal purpose test; see gaps.
| Market | Regime | What we confirmed |
|---|---|---|
| EU Member States (incl. Germany, France) | ATAD CFC rules | More than 50% control test; low-tax comparison; applied from 1 January 2019 |
| UAE | Economic substance regulations | Reporting cancelled for financial years ending after 31 December 2022 |
| UAE free zones | Qualifying free zone person regime | 0% on qualifying income, 9% on non-qualifying income; adequate substance is a condition |
| United States (federal) | Subpart F and GILTI successor | Post-2025 changes not confirmed on an official page (see gaps) |
Decisions to make
- Will a low-taxed subsidiary be caught by the parent's CFC rules?12Test control (more than 50% under ATAD), the foreign effective tax compared with the parent country, and the type of income. Genuine activity exceptions differ by country.
- Does the entity have enough substance for the benefit it relies on?6Free zone 0% rates, treaty rates and CFC exceptions each depend on people, premises and decisions in the right place.
Documents usually needed
- Group structure chart showing ownership percentages and voting rights
- Effective tax rate calculations for each foreign subsidiary
- Board minutes, employment contracts and lease agreements evidencing local management and staff
- Tax residence certificates for treaty claims
- Historical UAE economic substance notifications and reports for periods before cancellation
Common mistakes
- Assuming the UAE's cancellation of economic substance reporting removes the need for substance in free zone entities.
- Testing a subsidiary only against the ATAD minimum and not the parent country's stricter domestic CFC law.
- Using a holding company with no staff or decision-making to claim treaty benefits.
- Ignoring prior-year UAE economic substance obligations and penalties, which survive the cancellation.
Questions businesses ask
Do UAE companies still file economic substance reports?
No for financial years ending after 31 December 2022: the reporting requirement was cancelled by Cabinet Decision No. 98 of 2024. Obligations for earlier years, including responding to requests and paying penalties, remain.5
Our French parent owns 100% of a UAE free zone company taxed at 0%. Could France tax its profits?
Potentially. The ownership exceeds the ATAD control test and the foreign tax is low, so French CFC rules must be checked; the outcome depends on French domestic exceptions and the subsidiary's genuine activity.126
What this guide does not yet confirm
These points need checking with a qualified local professional before you rely on them.
- US federal changes to GILTI under 2025 legislation (reported renaming to net CFC tested income, rate and effective date) could not be confirmed on an official page; IRS, Congress.gov and US Code pages were unreachable during research because of fetch rate limits.
- The OECD multilateral instrument principal purpose test text could not yet be checked; claims on treaty anti-abuse rules are therefore not made.
- The UAE qualifying free zone person substance conditions were not confirmed on an official page.
- Germany's, France's and the UK's domestic CFC details (income categories, exemptions, thresholds) were not researched in this part.
- India does not appear to have a CFC regime but this was not confirmed on an official page.
Sources and review status
Each statement is numbered to the source it was checked against. We use official sources where we can, and each statement says whether it was checked against an official or a secondary source. Sources last checked on 18 October 2026. None of it has been professionally reviewed yet: it is research checked against official and secondary sources by WONE Global, not legal or tax advice.
Under the EU Anti-Tax Avoidance Directive, an entity is a controlled foreign company where the taxpayer, alone or with associated enterprises, holds directly or indirectly more than 50% of its voting rights, capital or profit entitlement. Control test in Article 7(1)(a); applies to foreign entities and permanent establishments whose profits are not taxed or are exempt in the parent's Member State.
The ATAD low-tax test is met where the actual corporate tax paid by the foreign entity or permanent establishment is lower than the difference between the tax it would have paid under the parent Member State's rules and the tax actually paid. Article 7(1)(b); in practice this catches foreign effective rates below roughly half of the parent-country tax that would have applied.
Under ATAD, CFC income included in the parent's tax base is calculated in proportion to the parent's participation and is included in the tax period in which the foreign entity's tax year ends. Article 8(3) and 8(4).
EU Member States were required to transpose the ATAD CFC, interest limitation and general anti-abuse rules by 31 December 2018 and apply them from 1 January 2019, and the exit tax rules by 31 December 2019 with application from 1 January 2020. Article 11; national implementing laws differ in detail.
The UAE cancelled economic substance reporting requirements for financial years ending after 31 December 2022 through Cabinet Decision No. 98 of 2024, amending Cabinet Decision No. 57 of 2020. Businesses remain responsible for prior-year obligations, information requests and any penalties imposed by the Federal Tax Authority.
A UAE Qualifying Free Zone Person pays 0% corporate tax on qualifying income and 9% on non-qualifying income. Free zone entities meeting the qualifying conditions, which include maintaining adequate substance in the free zone; the conditions are set by Cabinet and Ministerial Decisions.
Secondary source; the page refers to its free zone section for the substance conditions, which could not yet be checked. Official Ministry of Finance and FTA pages blocked automated access.
Questions on this topic
6 statements on controlled foreign companies and economic substance
