CFC rules: understanding controlled foreign company rules and the risk for French expatriates in 2026

You are a Paraguayan tax resident, you invoice your clients through a US LLC, and your foreign income is taxed at 0%. Everything is in order. But one day, a lawyer friend asks you a question that chills you to the bone: “Have you checked the CFC rules? If France considers your US LLC to be a controlled foreign company, it can tax your LLC’s profits directly on your French tax return—even if you no longer live in France.” CFC rules—Controlled Foreign Corporation rules—are the ultimate weapon used by countries with worldwide taxation to prevent their taxpayers from relocating their profits to low-tax countries.

This guide explains what CFC rules are, how they work in France, Belgium, Switzerland, and Canada, whether they apply to your US LLC when you are a Paraguayan resident, and in what cases they might still concern you—even after you've expatriated.

CFC Rules: The Principle

The Logic

CFC rules start from a simple observation: a tax resident of a worldwide taxation country can create a company in a low-tax country, accumulate profits there, and never repatriate these profits to their country of residence—thus avoiding tax. Without CFC rules:

• A French tax resident creates a company in Hong Kong (0% corporate tax on foreign income).
• They invoice clients through this Hong Kong company.
• Profits accumulate in Hong Kong at 0% tax.
• They do not pay themselves dividends → France cannot tax (no distributed income = no taxable event in France).
• Result: the French resident earns €200,000/year but pays €0 in French tax by indefinitely deferring profit distribution.

CFC rules prevent this scheme by creating a legal fiction: the profits of the controlled foreign company are deemed distributed to the tax resident, whether they are actually distributed or not. Tax authorities tax foreign profits as if they had been paid to the taxpayer—even if the money is still in the company's account in Hong Kong.

Conditions for Application (General Scheme)

CFC rules typically apply when three conditions are met:

1. Control: The resident taxpayer controls the foreign company (holding > 50% of the capital or voting rights, or having decisive influence).
2. Tax-Advantaged Location: The company is established in a country where it is taxed at an effective rate significantly lower than the tax rate in the taxpayer's country of residence (often the criterion is: foreign rate < 50% of the domestic rate).
3. "Passive" or "Artificial" Income: The foreign company primarily receives passive income (dividends, interest, royalties, rent) or income from artificial intra-group transactions—not income from real economic activity.

If these three conditions are met, the foreign company's profits are included in the resident taxpayer's taxable base—as if they had received them directly.

CFC Rules in France: Article 209 B of the CGI

The French Mechanism

Article 209 B of the French Tax Code (Code Général des Impôts - CGI) is the French CFC rule. It applies to French resident legal entities (companies) that control companies in tax-advantaged countries:

• Control Criterion: The French company directly or indirectly holds more than 50% of the capital, financial rights, or voting rights of the foreign company. Or: the French company exercises "decisive" influence over the management of the foreign company.
• Tax Advantage Criterion: The foreign company is taxed at an effective rate below 40% of the normal French rate. The normal corporate tax rate in France being 25%, the threshold is 25% × 40% = 10%. If the foreign company is taxed at less than 10%, the criterion is met.
• Consequence: The foreign company's profits are added to the taxable income of the controlling French company. Imposition at the French corporate tax rate (25%) on the subsidiary's profits, with a tax credit for tax already paid abroad.

Article 123 bis of the CGI: The CFC Rule for Individuals

This is the article that directly concerns expatriates. Article 123 bis is the "individual" version of the French CFC rule:

• Scope: Any individual domiciled in France who directly or indirectly holds at least 10% (alone or with related persons) of the shares, units, financial rights, or voting rights of a legal entity established outside France in a state or territory with a privileged tax regime.
• Privileged Tax Regime Criterion: Same threshold as Article 209 B = effective foreign rate lower than 40% of the French corporate tax rate = lower than ~10%.
• Consequence: The profits (or positive income) of the foreign entity are deemed to constitute income from movable capital for the individual. This income is taxed at the progressive income tax scale (0-45%) + social contributions (17.2%)—whether the profits are distributed or not.
• Substance Exception: The taxpayer can avoid Article 123 bis if they demonstrate that the foreign entity has an effective industrial or commercial activity (not just a letterbox company). This is the economic substance exception—the same concept as in our economic substance guide.

Is Your US LLC Affected by Article 123 bis?

The question all expatriates in Paraguay ask themselves: is my US LLC a "controlled foreign company" within the meaning of Article 123 bis?

Let's analyze the three criteria:

Criterion	Analysis	Result
1. Domicile in France	Article 123 bis applies to individuals domiciled in France. If you are a Paraguayan tax resident (not French), Article 123 bis DOES NOT APPLY to you.	Not applicable (if you are a PY resident)
2. Holding > 10%	You own 100% of your US LLC = criterion met (if you were a French resident).	Met (but irrelevant if criterion 1 not met)
3. Privileged taxation (rate < 10%)	A single-member US LLC is fiscally transparent in the USA = no corporate tax in the USA = effective rate 0%. In Paraguay: territoriality = 0% foreign income. Combined rate: 0%. Criterion met (if you were a French resident).	Met (but irrelevant if criterion 1 not met)

Conclusion: Article 123 bis does NOT apply to you if you are a Paraguayan tax resident. The indispensable condition is tax domicile in France. No domicile in France = no French CFC rule. It's that simple.

But—and this is a crucial "but"—this protection relies entirely on the validity of your Paraguayan residency. If the French tax authorities challenge your residency and reclassify you as a French tax resident (see our dual residency guide), then Article 123 bis can be invoked retroactively against you. This is an additional reason to build an impeccable substance file in Paraguay.

The Catastrophe Scenario: Reclassification + CFC Rules

How it works in practice

Here's the scenario you must avoid at all costs:

1. You leave France in 2024 for Paraguay. You believe you are a non-resident of France. You create a US LLC. You invoice €200,000/year through the US LLC. You don't pay tax (Paraguayan territoriality + US LLC transparency).
2. In 2027, the French tax authorities audit you. They challenge your Paraguayan residency (your spouse remained in France, you kept an apartment in Paris, you spend 120 days/year in France).
3. The tax authorities reclassify you as a French tax resident for 2024, 2025, and 2026 (3 years of audit period).
4. Once French residency is re-established, the tax authorities apply Article 123 bis: your US LLC is a controlled foreign company (you own 100%, effective rate 0%). The LLC's profits are deemed to constitute your income: €200,000/year × 3 years = €600,000.
5. Taxation: €600,000 × (income tax scale ~40% + social contributions 17.2%) = ~€340,000 in tax + 40% penalties for "deliberate omission" + late payment interest.
6. Potential total reassessment: ~€480,000-€550,000.

This scenario is the worst case—but it's not theoretical. The French tax authorities actually apply it when residency reclassification succeeds. It's the combination of reclassification + CFC that creates the tax bomb: reclassification alone is already serious (taxation on worldwide income), but combined with Article 123 bis on the undistributed profits of the US LLC, the bill is catastrophic.

Why a single-member US LLC is particularly vulnerable

A single-member US LLC is a "disregarded entity" in the USA—it does not exist as a separate taxpayer. Its income is deemed to be the direct income of its owner. This has two consequences:

• In the USA: no corporate tax (the LLC pays no tax, and the non-US owner also pays no tax if there is no US-source income).
• In France (if reclassified): the French tax authorities do not necessarily recognize US tax transparency. They may choose to treat the US LLC as an opaque entity (separate company) under foreign law—and apply Article 123 bis to its profits. Or they may treat it as transparent—and directly tax the income as non-commercial profits (BNC) of the taxpayer. In both cases, the result is the same: taxation in France.

The qualification of a US LLC (opaque or transparent) under French law is a complex subject that jurisprudence has not fully clarified. The French tax authorities tend to treat it as an opaque company when it suits them (Article 123 bis = taxation of undistributed profits) and as transparent when it also suits them (direct taxation of income as BNC). This is an area of uncertainty that your tax lawyer must anticipate.

CFC Rules in Belgium

The Belgian Framework

Belgium introduced CFC rules as part of the transposition of the EU's ATAD (Anti-Tax Avoidance Directive):

• Article 185/2 CIR 92: CFC rules for Belgian legal entities that control foreign entities in low-tax countries.
• Control Criterion: holding > 50% of the capital or voting rights.
• Taxation Criterion: the foreign entity is taxed at an effective rate less than half of the Belgian rate (Belgian corporate tax 25% → threshold: < 12.5%).
• Targeted Income: "undistributed" passive income of the foreign entity (interest, dividends, royalties, financial income, income from the disposal of shares).

For Belgian Individuals

Belgium does not have an exact equivalent of the French Article 123 bis for individuals. Belgian CFC rules primarily target legal entities. However:

• Belgium uses other mechanisms to target taxpayers who use foreign companies: the general anti-abuse provision (Article 344 §1 CIR 92), taxation of "foreign-source income" if the foreign company is considered transparent, and disclosure obligations for foreign structures.
• As with France, these rules only apply to Belgian tax residents. If you are a Paraguayan tax resident (removed from the Belgian national register, effective residence in PY), Belgian CFC rules do not concern you.

CFC Rules in Switzerland

The Swiss Framework

Switzerland does NOT have strict CFC rules. It is one of the few developed jurisdictions that has not transposed BEPS recommendations on CFCs (Switzerland is not an EU member and is therefore not subject to the ATAD directive). However:

• Switzerland has other anti-abuse mechanisms: "economic reality" (Swiss tax authorities can reclassify a legal structure if it does not correspond to economic reality), taxation of base companies (Basisgesellschaft) in certain cantons, and disclosure obligations for foreign participations.
• In practice, a Swiss tax resident who creates a US LLC to avoid Swiss tax might see this LLC reclassified as an "artificial arrangement" by the cantonal tax authorities—even without a formal CFC rule.
• Again: these mechanisms only apply to Swiss tax residents. A Paraguayan resident who has left Switzerland is not affected.

CFC Rules in Canada (FAPI rules)

The Canadian Framework

Canada has one of the strictest CFC regimes in the world, called FAPI (Foreign Accrual Property Income):

• Principle: a Canadian tax resident who controls (> 50%) a "foreign affiliate" must include in their Canadian taxable income the passive income ("FAPI") of that company—whether distributed or not.
• FAPI income: interest, dividends, royalties, rental income, capital gains, service income (if services are provided primarily by the Canadian resident themselves = "personal services business income").
• Rate: FAPI income is included in the Canadian resident's income and taxed at the progressive Canadian scale (federal + provincial, 30-55% depending on the province).
• No foreign rate threshold: unlike France (10% threshold), Canada applies FAPI rules regardless of the foreign country's tax regime. Even if your company is in a country with 20% corporate tax, FAPI income is taxable in Canada.

Canadian Specifics for Expats in Paraguay

Canada is more aggressive than France on CFC rules—but the principle remains the same: FAPI rules only apply to Canadian tax residents. If you have left Canada for Paraguay:

• Obtain non-residency confirmation via the CRA's Form NR73. This written confirmation protects you against any attempt by the CRA to apply FAPI rules to you.
• Sever your Canadian residential ties (see our residency days guide, Canada section).
• Caution: Canada has a specific "departure tax" (Canadian exit tax) rule that taxes unrealized capital gains at the time of departure. Your US LLC shares might be subject to this departure tax. Consult a Canadian accountant before leaving.

The Unrecognized Trap: Retroactively Applied CFC Rules

How it works

The most dangerous trap of CFC rules is not their direct application—it's their retroactive application in case of residency reclassification:

1. You leave France in 2024 and settle in Paraguay. You believe you are a non-resident of France.
2. You create your US LLC in 2024. For 3 years (2024-2026), the LLC accumulates profits (€600,000 in total).
3. In 2027, the French tax authorities retroactively reclassify you as a French tax resident (for 2024, 2025, 2026).
4. The tax authorities retroactively apply Article 123 bis: during these 3 years, you were a "French resident" with a "controlled" US LLC in a "privileged tax" country. The LLC's profits are reintegrated into your French taxable income for each of the 3 years.
5. Result: retroactive taxation on €600,000 + penalties + late payment interest.

Retroactivity is possible because the French tax recovery period is 3 years (10 years in case of fraud). During this period, the tax authorities can review your situation and apply Article 123 bis if the conditions were met.

Protection: The Same 10 Rules

The protection against the retroactive application of CFC rules is exactly the same as the protection against residency reclassification: if the tax authorities cannot reclassify you as a French resident, they cannot apply Article 123 bis. The 10 anti-dual residency rules are your CFC shield:

• Bring your family to Paraguay
• Sell or rent your French home
• Spend less than 90 days in France
• Invoice via US LLC from Paraguay
• Move your economic interests out of France
• Obtain the DNIT tax residence certificate
• Actually live in Paraguay (200+ days)
• Keep an attendance log
• Update your online profiles
• Consult a tax lawyer before leaving

The link is direct: no reclassification = no CFC. The battle of CFCs is won or lost on the ground of residency — not on that of the US LLC structure.

The Substance Exception: Your Ultimate Defense

The Principle

Even if the French tax authorities manage to reclassify you as a French resident (a worst-case scenario), Article 123 bis provides an exception: the taxpayer can demonstrate that the foreign entity (your US LLC) carries out an effective industrial or commercial activity. If this demonstration is successful, the LLC's profits are NOT reintegrated into your income — even if all three conditions of Article 123 bis are met.

Criteria for Effective Activity

To benefit from the exception, your US LLC must have:

• Real commercial activity: The LLC invoices clients, provides services, delivers products. It is not a passive holding company that holds financial assets.
• Real clients: Revenues come from third-party clients (not artificial intra-group transactions). Your consulting, freelance, or SaaS clients are real clients.
• Economic rationale: The US LLC has a reason for being beyond taxation (USD invoicing, access to the US banking system, international credibility, liability protection). See our substance guide.

If your US LLC is a consulting/freelance vehicle with real clients, real invoicing, and effective commercial activity — the substance exception should apply. But this exception is not automatic: it is UP TO YOU to demonstrate it (reverse burden of proof). Hence the importance of documenting your US LLC's activity (client contracts, invoices, Mercury statements, professional correspondence).

The Limit of the Exception: Passive Income

The substance exception does NOT cover the passive income of the US LLC (if any):

• If your US LLC holds an investment portfolio (ETFs, stocks) that generates dividends and capital gains, these revenues are "passive income" that do not benefit from the commercial activity exception.
• If your US LLC receives royalties from software licenses without associated development activity, these royalties may be considered passive.
• Recommendation: separate your activities. US LLC for consulting/freelance (commercial activity = substance exception). Interactive Brokers in your personal name for investments (no US LLC = no CFC on investments, since Interactive Brokers is not a company you control).

The ATAD Directive and Harmonized European CFC Rules

What is ATAD

The ATAD directive (Anti-Tax Avoidance Directive, 2016/1164/EU) is the European directive that harmonizes anti-tax avoidance rules in the EU, including CFC rules. All EU Member States must have transposed ATAD into national law — including CFC rules compliant with European standards.

What ATAD Requires for CFCs

• Scope: ATAD CFC rules apply when a taxpayer (mainly legal entities, individuals depending on national transposition) controls a foreign entity (> 50% of rights) that is taxed at an effective rate below 50% of the domestic rate.
• Targeted income: ATAD targets undistributed passive income (interest, dividends, royalties, financial income, disposal income). Income from effective commercial activity is excluded (substance exception).
• Two possible approaches: Member States can choose the "entity" approach (all CFC income is attributed to the taxpayer) or the "transactional" approach (only passive/artificial income is attributed). France uses the "entity" approach (Article 209 B) and a hybrid approach for Article 123 bis.

Impact for Expats in Paraguay

ATAD does not directly apply to Paraguayan residents (Paraguay is not in the EU). But ATAD has two indirect impacts:

• Harmonization of European CFC rules: All EU countries now have CFC rules — there are no longer any European countries without CFCs. If you have structures in the EU (Luxembourg holding, Irish company), these structures are subject to the CFC rules of the country of their EU resident shareholder (if you have a European associate).
• Global trend: ATAD pushes the CFC rules standard towards global adoption (via BEPS Action 3). Even non-EU countries are gradually adopting similar CFC rules. Paraguay does not have CFC rules in 2026 — but this is not impossible in the long term if international pressure intensifies.

Does Paraguay Have CFC Rules?

The Answer: No (in 2026)

Paraguay does not have CFC rules in its tax legislation in 2026. Law 6380/2019 (tax reform) contains no CFC-type provisions. A Paraguayan tax resident who controls a foreign company (US LLC, Hong Kong company, Luxembourg holding) is not taxed in Paraguay on the undistributed profits of this company — even if the company is in a country with 0% corporate tax.

The reasons are consistent with Paraguayan tax philosophy:

• Territoriality: Paraguay only taxes income from Paraguayan sources. The profits of a US LLC are from an American (or international) source — not Paraguayan. Paraguay has no reason to tax them, whether distributed or not.
• Administrative simplicity: CFC rules are complex to administer (it is necessary to evaluate the effective foreign rate, the nature of the income, the control of the entity). The Paraguayan tax administration (DNIT) does not have the resources or expertise to apply sophisticated CFC rules.
• Political culture: Paraguay has no tradition of extraterritorial taxation. Taxing the profits of companies located abroad is contrary to the deeply entrenched territorial philosophy.

The Future Risk

Could Paraguay adopt CFC rules in the future? It is possible but unlikely in the medium term:

• CFC rules are recommended by the OECD (BEPS Action 3) but are not a mandatory "minimum standard." Paraguay is not required to adopt them to remain compliant with BEPS standards.
• The adoption of CFC rules would require an amendment to Law 6380/2019 — a cumbersome and politically difficult legislative process (no political support for taxing foreign companies of residents).
• In practice: even if Paraguay were to adopt CFC rules one day, they would probably be limited to legal entities (Paraguayan companies controlling offshore subsidiaries) and not individuals. The impact on expats would be minimal.

Summary Table of CFC Rules by Country

Country	CFC rules?	Applies to individuals?	Foreign rate threshold	Impact if PY resident
France	Yes (Art. 209 B + 123 bis CGI)	Yes (Art. 123 bis)	< 10% (40% of French corporate tax)	None (if valid PY residency = not FR resident)
Belgium	Yes (ATAD, Art. 185/2 CIR 92)	Limited (mainly legal entities)	< 12.5% (50% of Belgian corporate tax)	None (if valid PY residency = not BE resident)
Switzerland	No formal CFC rule	N/A	N/A	None (even if CH resident = no formal CFC)
Canada	Yes (FAPI rules, very strict)	Yes	No threshold (all foreign passive income)	None (if non-resident CA confirmed by NR73)
USA	Yes (Subpart F + GILTI)	Yes (US citizens + residents)	GILTI: < 13.125% effective	None (if not US citizen or resident)
Paraguay	No	N/A	N/A	No CFC rule applicable as a PY resident

CFC Rules Protection Strategies

Strategy 1: Secure Your Paraguayan Residency (the most important)

All CFC rules require the taxpayer to be resident in the country that applies them. The absolute protection against French, Belgian, or Canadian CFC rules is to be an undeniable Paraguayan tax resident:

• DNIT tax residency certificate
• Presence 200+ days/year in Paraguay
• Family in Paraguay
• Total severance of ties with the country of origin
• Impeccable evidence file

If your PY residency is unassailable, the CFC rules of your country of origin are moot. This is strategy number one — by far.

Strategy 2: Document the Substance of Your US LLC

In case of reclassification (worst-case scenario), the substance exception of Article 123 bis is your second line of defense. Document the effective commercial activity of your US LLC:

• Client contracts (evidence of real commercial activity)
• Invoices issued (services rendered to third-party clients)
• Mercury Bank statements (financial flows corresponding to the activity)
• LLC Operating Agreement (formalized legal structure)
• IRS declarations (Form 5472, annual report)
• Diversification of clients (not 100% French = international activity)

Strategy 3: Separate Commercial Activity and Investments

Do not put your investments (ETFs, crypto, real estate) in your US LLC. Passive income (dividends, capital gains, rents) does NOT benefit from the substance exception if Article 123 bis applies. Keep your investments in your personal name (Interactive Brokers in your name, not the LLC's name) and reserve the US LLC for commercial activity (consulting, freelance, SaaS).

Strategy 4: Distribute Profits Regularly

Article 123 bis taxes undistributed profits. If your US LLC distributes 100% of its profits each year (Mercury transfer → personal account), there are no "retained" profits in the LLC → no application of Article 123 bis (profits are distributed, not accumulated). The LLC is transparent in the USA, so "distributions" are a non-event for US tax purposes (no withholding tax).

Note: this strategy is an additional protection but does not replace strategy 1 (solid PY residency). If the tax authorities reclassify you as a French resident and the profits are distributed, they will be taxed as investment income (PFU 30%) or as non-commercial profits (progressive scale) — not via Article 123 bis but through classic channels. The tax outcome is similar. The real protection remains unassailable Paraguayan residency.

US GILTI: A CFC Rule That Does NOT Concern You (Unless You Are American)

For US Citizens/Residents Only

The USA has its own version of CFC rules, called GILTI (Global Intangible Low-Taxed Income):

• GILTI taxes "intangible" income (services, intellectual property, income exceeding 10% of the value of tangible assets) of foreign companies controlled by US citizens or residents.
• Effective rate: ~10.5-13.125% (50% of the US corporate tax rate of 21%, with an 80% tax credit for foreign taxes paid).
• Important: GILTI applies to US citizens and residents — not to foreign non-residents. If you are a French/Belgian/Swiss resident in Paraguay with a US LLC, you are NOT a "US person" and GILTI does NOT apply to you.
• A single-member US LLC of a non-US resident is transparent and does not generate GILTI (no US corporate tax on the LLC = no basis for GILTI calculation).

Conclusion

CFC rules (controlled foreign company rules) are the weapon of countries with worldwide taxation to tax the undistributed profits of foreign companies of their residents. In France (Article 123 bis), Belgium (ATAD), Canada (FAPI) — these rules are strict and the consequences are heavy: taxation of your US LLC's profits as if they had been distributed to you, even if they remain in the Mercury account.

But — and this is the central point — CFC rules only apply to tax residents of the country that imposes them. If you are a Paraguayan tax resident (cédula, RUC, DNIT certificate, effective residency), French, Belgian, Swiss, and Canadian CFC rules do NOT concern you. Paraguay has no CFC rules of its own. Result: the profits of your US LLC are taxed nowhere — neither in Paraguay (territoriality), nor in the USA (transparent LLC, no US-source income), nor in France (not a French resident).

The risk of CFC rules is not a direct risk — it is a conditional risk that only materializes if your Paraguayan residency is challenged and reclassified. That is why protection against CFC rules is exactly the same as protection against residency reclassification: actually living in Paraguay, cutting ties with the country of origin, documenting your residency, and building an impeccable file.

CFC rules are a bogeyman for uninformed expats. For a well-structured expat in Paraguay — effective residency, US LLC with substance, complete evidence file — they are a non-issue. Your Paraguayan residency is your CFC shield. As long as the shield is solid, no CFC rule in the world can reach you.

Do you want a structure that is immune to CFC rules? Contact our team for comprehensive support: Paraguayan residency (from €1,400), US LLC with documented substance, DNIT accounting (€30/month), and coordination with your tax lawyer for a solid anti-reclassification file. CFC rules do not concern you — provided you genuinely live in Paraguay.