Chinese Controlled Foreign Company Rules in the Post-BEPS Era: New Developments

In this article, the authors argue that key concepts, such as “reasonable business needs”, in China’s controlled foreign company (CFC) rules have not been defined clearly. Consequently, disputes are easily triggered. In response, China promulgated its Implementing Measures for Special Tax Adjustment (Discussion Draft) in 2015, which followed the recommendations of the OECD’s BEPS Action 3 Final Report and provided more specific guidance. However, the Discussion Draft did not clarify how to determine “reasonable business needs”, how to strike a balance between maintaining international competitiveness of Chinese enterprises and protection of China’s tax base, or how to deal with losses suffered by CFCs. The authors suggest that, when China revises its CFC rules, it does not blindly follow the BEPS recommendations nor indiscriminately pursue stricter rules. Rather, it would be preferable to strike a balance between tax base protection and competitiveness in line with China’s economic development strategy and policy objectives.