Rules on Controlled Foreign Companies (CFCs)

In recent years, Greece has strengthened its tax framework to combat tax avoidance and profit shifting, aligning with the European Union’s Anti-Tax Avoidance Directive (ATAD) and OECD BEPS guidelines. One of the key provisions in this effort is Article 66 of Income Tax Code (Law 4172/2013), which sets out the rules on Controlled Foreign Companies (CFCs). These rules are designed to prevent Greek tax residents from artificially shifting profits to entities established in low-tax jurisdictions.

What is a Controlled Foreign Company (CFC)?

A Controlled Foreign Company (CFC) is an entity that meets the following criteria:

• A Greek tax resident (either an individual or legal entity) directly or indirectly owns more than 50% of the voting rights, capital, or profit participation in a foreign company.
• The effective corporate tax paid by the foreign entity is lower than 50% of the tax that would have been due in Greece (lower than 11%).
• More than 30% of the foreign entity’s income consists of passive income, such as interest or other income generated from financial assets, royalties, dividends or capital gains, income from movable or immovable property, or income from insurance, banking and other financial activities.

If a foreign company qualifies as a CFC, then its undistributed passive income will be attributed to the Greek tax resident and taxed accordingly in Greece (either as corporate profit or as self -employment income). This means that even if the income is not repatriated, the Greek taxpayer will be liable to pay tax on it as if it were received.

Example of a CFC

A Greek S.A. (A.E) maintains a connected foreign company outside the EU which does not make distributions to the Greek company and, consequently, the latter does not acquire taxable income.

Assume that the total income of the Greek S.A. comes from royalties it receives from third countries with zero withholding tax, amounting to €20 million, while the actual tax paid abroad amounts to €100,000. The tax that would have been payable in Greece if this income had been received by the Greek S.A is: 20 million × 22% = €4.4m.

Since the actual tax paid abroad is less than €2.2m., the second criteria is satisfied.

Exemptions and Exceptions

There are certain exemptions to the CFC rules, designed to prevent undue burdens on legitimate business activities. These include:

• If the foreign company is established within the European Union (EU) or the European Economic Area (EEA) and carries out genuine economic activities supported by staff, assets, and premises, the CFC rules do not apply.
• CFC rules are not applied for shipping companies incorporating and qualifying under Law 29/1975 and Law 2867/1953.

The implementation of the CFC rules means that Greek businesses and individuals with foreign holdings must carefully assess their structures to ensure compliance. Key considerations include reviewing corporate structures, evaluating foreign company tax rates and income sources.

Given the complexity of these provisions, taxpayers with foreign interests shall seek professional tax guidance to navigate compliance and optimize their international tax positions.