The CFC Regimes of Sweden and the United Kingdom - a Comparison

Abstract: Over the last decades business has become increasingly globalised and corporations are no longer limited by national boundaries. As a consequence many states have abolished their exchange controls, that is to say, the rules that controlled the transferring of money or other assets abroad. The abolition of exchange controls, however, provides opportunities for tax avoidance. Since companies are tax subjects separated from the ones of their owners, assets might be transferred to low-taxed foreign companies, which the domestic authorities have no jurisdiction over to tax. To prevent this form of tax avoidance, some countries have introduced legislations that tax the shareholders directly although profits from these foreign companies have not yet been distributed. The companies that are targeted by these legislations normally fall under the term CFC or Controlled Foreign Companies. CFCs are generally defined by three criteria: they must be resident in a foreign territory, controlled by domestic shareholders and subject to a lower level of tax. The design, however, differ in each country and some jurisdictions do not even have a control prerequisite. In both Sweden and the United Kingdom CFCs are defined by these three criteria. Nonetheless, in comparison to the United Kingdom, the Swedish CFC regime has a more generous approach to what defines a low level of tax and thus has a lesser range of application. On the other hand, the United Kingdom regime has a number of exceptions, which relieves the shareholder from being charged. Within its range of application the Swedish regime, in contrast, is more rigid and makes no allowances for genuine business motives. The differences might be explained from the perspective of the doctrines of CIN and CEN or Capital Import Neutrality and Capital Export Neutrality. Arguably, Sweden applies the doctrine of CIN and the United Kingdom CEN on activities that are comprised by the realm of trade and industry. The difference is that whilst the CFC legislation in the United Kingdom is a tool to achieve or maintain CEN, the Swedish parallel operates where CIN is not desirable. In conclusion, the Swedish application of CIN should comprise all business pursued in foreign companies insofar as the business motives are genuine. That is to say, it should not matter if genuine business is pursued in a low-tax or high-tax country since profits from subsidiaries resident in foreign countries normally are exempted from tax anyway. Thus, the existing CFC regime in Sweden should have a more precise definition of which form of company or income is targeted, preferably in combination with a less generous approach to what defines a lower level of tax.