How home-country CFC rules look through a Luxembourg or Dutch holding

Your home country can tax the profit before you see it

Owners often assume that profit kept in a Luxembourg or Dutch company is taxed only there until it is paid out. That is true for most profit. But every EU country, and the UK, has controlled foreign company rules. They allow the owner's country to tax certain income of a foreign company the owner controls, every year, as if it had been distributed, when the foreign company pays too little tax on it.

The rules have a common core since the EU Anti-Tax Avoidance Directive, but each country set its own thresholds. Germany looks for income taxed below 15%. France looks for tax at least 40% lower than French tax. Spain and the UK compare with 75% of their own corporate tax. Italy uses a simplified 15% effective tax test. Some countries tax individuals as well as companies; others only companies.

The good news is that a Luxembourg or Dutch company paying normal corporate tax is rarely low-taxed. The risk sits elsewhere: in income that benefits from a special regime, such as an IP box, in holding companies whose income is exempt, and in companies that exist only on paper. For those, the outcome depends on the owner's country, the type of income and, above all, on substance.

What ATAD requires every EU country to do

Articles 7 and 8 of Directive 2016/1164 (ATAD) oblige every EU member state to have a CFC rule for its resident companies from 2019. A foreign entity is a CFC if two tests are met. Control: the taxpayer, alone or with associated enterprises, holds more than 50% of the votes or capital or is entitled to more than 50% of the profits. Low tax: the corporate tax actually paid by the entity is lower than the difference between the tax it would have paid in the parent's state and the tax it actually paid. In plain terms, it pays less than half of the home tax on the same profit.

Member states could then choose between two models. Under model A, specific categories of passive income are included: interest, royalties, dividends and gains on shares, financial leasing, insurance and banking income, and income from invoicing companies that buy from and sell to associated enterprises with little added value. Under model B, only income from non-genuine arrangements is included, meaning income generated by assets and risks managed by people in the parent's state.

The substance carve-out is the key for a Benelux company. ATAD requires that model A does not apply where the CFC carries on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances. This codifies the Court of Justice's judgment in Cadbury Schweppes (C-196/04, 2006): a CFC rule may apply within the EU only to wholly artificial arrangements.

Law and practice: Council Directive (EU) 2016/1164 (ATAD), Articles 7 and 8; Court of Justice, Cadbury Schweppes, C-196/04, 12 September 2006. Luxembourg corporate tax of 23.87% combined in Luxembourg City (2026) and 22.80% planned from 2027 under budget bill no. 8800, as on our Benelux rates page.

Germany: Hinzurechnungsbesteuerung at 15%

The German CFC rules in Sections 7 to 14 of the Foreign Tax Act (AStG) apply to German-resident individuals and companies. Since the 2022 reform, the control test looks at whether the German taxpayer, together with related persons, holds more than half of the votes, capital or profit rights. Income is attributed only if it is passive, as defined by a catalogue of active income in Section 8(1), and low-taxed.

The low-tax threshold was cut from 25% to 15% by the Growth Opportunities Act, from 2024. This changed the picture for Benelux companies. With 25%, a Dutch B.V. paying 19% or a Luxembourg company in a low-rate commune could be low-taxed. With 15%, ordinary Dutch and Luxembourg corporate tax clears the bar. What remains below 15% are the Dutch innovation box (9%), the Luxembourg IP regime (80% exemption, so under 5% effective) and income that is exempt or sheltered by losses.

Dividends and gains on shares are active income under Section 8(1) nos. 7 to 9, with exceptions for hybrid payments and certain portfolio holdings. A Luxembourg holding that receives dividends from operating subsidiaries is therefore normally outside the German CFC rules, even if those dividends are tax-free in Luxembourg. Interest and royalties are passive unless they come from the company's own active business or own research. For a company in the EU or EEA, Section 8(2) offers a counter-proof: the company carries on a substantive economic activity there.

If the rule applies, the attributed amount is taxed in Germany at the full rate: for an individual, at progressive income tax rates, without the 25% flat tax or the partial-income method. For a German company, it is subject to corporate tax and trade tax.

Law and practice: Foreign Tax Act (Außensteuergesetz), Sections 7, 8 and 10, as amended by the ATAD Implementation Act of 25 June 2021 and the Growth Opportunities Act of 27 March 2024 (low-tax threshold of 15%, Section 8(5)). Corporate tax law: Section 8b KStG; trade tax: Section 7 sentence 7 GewStG.

France: Article 209 B for companies, Article 123 bis for individuals

France has two regimes. Article 209 B of the Tax Code (CGI) applies to French companies that hold more than 50% of a foreign entity subject to a privileged tax regime. Article 123 bis applies to French-resident individuals who hold at least 10% of a foreign entity subject to a privileged regime whose assets consist mainly, more than 50%, of financial assets, receivables or cash.

Both refer to Article 238 A for the definition of a privileged regime: the tax actually paid abroad is at least 40% lower than the French tax that would have been due on the same profit under ordinary rules. With French corporate tax at 25%, that places the line at about 15%. The tax administration's guidance adds a carve-out that matters for holdings: a foreign regime that exempts parent-subsidiary dividends or long-term gains on qualifying shares, in the same way as France, is not treated as privileged for that reason alone.

Within the EU both rules are limited. Article 209 B does not apply to an EU entity unless its holding is an artificial arrangement set up to avoid French tax. Article 123 bis applies to an EU entity only in the case of an artificial arrangement, and since the Constitutional Council's decision of 1 March 2017 a taxpayer can also rebut it for entities outside the EU. For individuals the stakes are high: the attributed income is increased by 25% for income tax.

Law and practice: Code général des impôts, Articles 209 B, 123 bis and 238 A; BOFiP BOI-IS-BASE-60-10-20 (definition of a privileged tax regime, 40% threshold); Constitutional Council decision no. 2016-614 QPC of 1 March 2017 (bofip.impots.gouv.fr).

Spain: transparencia fiscal internacional and the 75% test

Spain applies international fiscal transparency (TFI) to companies under Article 100 of the Corporate Income Tax Law (LIS) and to individuals under Article 91 of the Personal Income Tax Law (LIRPF). Both require control of at least 50%, alone or with related persons and relatives up to the second degree, and a foreign tax on the relevant income below 75% of the Spanish corporate tax that would have been due. With Spanish corporate tax at 25%, that is 18.75%.

The income attributed is a list of passive categories: income from property not used in a business, dividends and gains from shares, interest and other financial income, certain insurance, banking and financial leasing income, and services to Spanish related parties with little added value. There are two traps for holdings. Dividends and share gains are passive unless the holding has at least 5% for one year and directs and manages the subsidiaries with its own material and human means. And where the foreign entity has no organisation of material and human means at all, Article 100.2 LIS attributes its entire income, not just the passive part.

For EU and EEA entities there is an exception: TFI does not apply if the taxpayer proves that the entity was set up and operates for valid economic reasons and carries out economic activities. A Luxembourg or Dutch company that holds subsidiaries with a director in Luxembourg who decides, an office and a group function passes more easily than a company with a nominee board. A Dutch B.V. paying 19% on its first EUR 200,000 is only just above the 18.75% line, so losses or exemptions can push it below.

Law and practice: Ley 27/2014 del Impuesto sobre Sociedades, Article 100; Ley 35/2006 del IRPF, Article 91; Ley 11/2021 on measures against tax fraud (extensions from 2021); Agencia Tributaria, Manual práctico IRPF, régimen de transparencia fiscal internacional (sede.agenciatributaria.gob.es).

Italy: Article 167 TUIR. UK: the CFC charge

Italy applies its CFC rule in Article 167 of the Income Tax Code (TUIR) to Italian residents, companies and individuals, that control a foreign entity. Two conditions must both be met: the entity is low-taxed, and more than one third of its income is passive, including dividends, interest, royalties, financial leasing, insurance and banking income and low-value intra-group services. Since 2024 the low-tax test can be run in a simplified way: an accounting effective tax rate below 15%, if the accounts are audited. The ordinary test compares the tax paid with half of the Italian tax on the same income.

A Luxembourg holding that receives exempt dividends shows an accounting effective rate close to zero and passive income well above one third. The Italian owner then needs the exemption: proof that the entity carries on a substantive economic activity, with staff, equipment, assets and premises. That proof can be filed with the tax return or through an advance ruling. Italian companies may also opt to pay a 15% substitute tax on the controlled company's profit instead of the transparency charge.

The UK CFC rules in Part 9A of the Taxation (International and Other Provisions) Act 2010 apply only to UK-resident companies with an interest of at least 25%. They work through gateways that pick out profits artificially diverted from the UK, and exemptions that clear most companies first: the tax exemption where local tax is at least 75% of the UK tax (18.75% at the 25% main rate), the low profits and low profit margin exemptions and the excluded territories exemption. Dividends received by a CFC are rarely a problem, since they would be exempt in the UK too. UK individuals are not subject to the CFC charge but to the transfer of assets abroad rules, which have their own motive defence.

Luxembourg and the Netherlands apply their own CFC rules to their resident companies, which matters if the Benelux company itself owns a subsidiary in a low-tax country, such as a UAE free zone company or a Cayman fund vehicle. Luxembourg (Article 164ter LIR) uses model B: only income from non-genuine arrangements, managed by people in Luxembourg, in an entity taxed at less than half of Luxembourg tax. The Netherlands (Article 13ab of the Corporate Income Tax Act) targets subsidiaries in jurisdictions on its list, such as Bahrain, the BVI, Cayman or Jersey, with more than 30% passive income and without the substance safe harbour.

Law and practice: Italy: Article 167 TUIR as amended by Legislative Decree 209/2023 (simplified 15% test and optional 15% substitute tax, from 2024). UK: TIOPA 2010, Part 9A; ITA 2007, Part 13, Chapter 2. Luxembourg: Article 164ter LIR and circular of 4 March 2020. Netherlands: Article 13ab Wet Vpb 1969 and the annual list of low-tax and non-cooperative jurisdictions.

CFC risk check for your Benelux company

The result updates with each answer. It is a first screen, not an opinion: thresholds assume a 25% home corporate tax rate and ordinary rules.

CFC rules and Benelux companies: frequent questions