Abstract This study examines the structural limitations of controlled foreign company (CFC) legislation when confronted with foreign foundation-based income structures. It refers to foreign foundations with legal capacity and independent assets. In such cases, there are no shareholdings or shareholders but rather beneficiaries, as outlined by the foundation’s statutes. These legal entities can be characterised as orphan structures. In the absence of shareholding, traditional CFC taxation does not apply. The study uses examples of German CFC taxation, CFC taxation under the EU Anti-Tax Avoidance Directive (ATAD), and a Maltese foundation to demonstrate this issue. Using the Maltese flat rate foreign tax credit (FRFTC) as an example, the article analyses a cross-border structure in which a German parent company wholly owns a Maltese subsidiary that is the sole beneficiary of a Maltese foundation that generates passive income. The study adopts a multifaceted approach, integrating a theoretical and legal analysis, a formal mathematical model of effective taxation, and a dogmatic examination of the relevant German CFC tax law (Sections 7 and 15 of the Foreign Transaction Tax Act, AStG). This methodology facilitates a comprehensive and rigorous examination of the tax implications of foreign foundation-based income structures for the effectiveness of the CFC tax law. The analysis demonstrates that (passive) income subject to an effective tax rate of approximately 6.25%, and thus low-tax, can systematically escape the CFC inclusion by using such orphan or foreign foundation-based income structures. These shortcomings are not unique to German CFC tax law but are inherent in the general legal design of the CFC tax law, which frequently fails to address foundations as income-generating entities. The study develops policy-relevant conclusions and outlines legislative actions for strengthening the legal effectiveness of the CFC tax law.
Thomas Kollruss (Wed,) studied this question.