🇪🇺EU ATAD I CFC: Articles 7-⁠8 and Member State Implementation

Concept

EU Anti-Tax Avoidance Directive I (ATAD I) — Council Directive (EU) 2016/1164 of 12 July 2016. It sets a minimum standard on 5 anti-avoidance measures for all Member States. Articles 7-8 contain CFC rules. Transposition from 1 January 2019 (exit tax — 2020). ATAD II (Directive 2017/952) expanded Article 9 (hybrid mismatches + reverse hybrids).

Member States are required to choose Option A (categorical) or Option B (transactional) for implementation of Article 7(2). This choice determines how strictly an MS applies CFC to different jurisdictions.

An important distinction for HNWI is that some MS (Italy, Spain, Germany) apply CFC to individuals directly; others (France, Netherlands, Belgium) apply it only to corporate residents, while individuals are covered by alternative rules. The Italian forfait under Art. 24-bis TUIR (€300k for new residents from 2026; €100k or €200k for those who opted in earlier) neutralises Art. 167 TUIR CFC for the beneficiary in respect of foreign-source income.

Legal Framework

• Council Directive (EU) 2016/1164 ("ATAD I") — 12 July 2016, OJ L 193, 19.7.2016
  • Transposition: 31 December 2018, application from 1 January 2019
  • Exit tax (Art. 5): application from 1 January 2020
• Council Directive (EU) 2017/952 ("ATAD II") — 29 May 2017. Expanded Art. 9 (hybrid mismatches) + introduced Art. 9a (reverse hybrids)
  • Majority — from 1 January 2020; reverse hybrid from 1 January 2022

ATAD I Structure — 5 Mandatory Measures

• Article 4 — Interest limitation rule: exceeding borrowing costs deductible only up to 30% of EBITDA (Art. 4(1)); a member state may allow a deduction of up to €3 million or a full deduction for a standalone entity (Art. 4(3)), and picks one of the three carry regimes in Art. 4(6) — including carry-forward of unused interest capacity for a maximum of five years (Art. 4(6)(c))
• Article 5 — Exit taxation: on unrealised gains upon exit
• Article 6 — General Anti-Abuse Rule (GAAR): disregards "non-genuine arrangements" whose main purpose is a tax advantage; the same construction as the PPT in tax treaties
• Articles 7-8 — CFC rules
• Article 9 — Hybrid mismatches (expanded by ATAD II)

Article 7 — CFC Trigger

Subject: (a) entity resident in another jurisdiction, or (b) permanent establishment, whose profits are not taxed/exempt in MS.

Control test (Art. 7(1)(a)): taxpayer alone or together with associated enterprises holds:

• >50% voting rights, OR
• >50% capital (directly/indirectly), OR
• >50% rights to profits

Associated enterprises (Art. 2(4)): ≥25% votes / capital / rights to profits. Aggregation: if a person holds ≥25% in the taxpayer and in one or several others, all are associated.

Tax-rate test (Art. 7(1)(b)): actual CT paid by CFC is less than the difference between the tax that would have been charged under MS rules and the tax actually paid. Effectively: CFC ETR < 50% of MS rate.

Article 7(2) — Option A vs Option B

MS are required to choose an option (or a combination):

Option A — Categorical (Art. 7(2)(a)): re-attribution of non-distributed income from categories:

• (i) interest and income from financial assets
• (ii) royalties and IP
• (iii) dividends and disposal of shares
• (iv) financial leasing
• (v) insurance, banking, financial activity
• (vi) invoicing companies providing sales/services to associated enterprises with low/no added value

Substance carve-out (Art. 7(2)(a) last paragraph): Option A does not apply if CFC carries on substantive economic activity, supported by staff, equipment, assets, premises — a codification of the Cadbury Schweppes test. For third-country CFC, MS may decline to apply the carve-out.

De minimis (Art. 7(3)): MS may not apply Option A if ≤1/3 of CFC income falls into specified categories; for financial undertakings — if ≤1/3 income arises from transactions with taxpayer and its associates.

Option B — Non-genuine arrangements (Art. 7(2)(b)): re-attribution of non-distributed income from non-genuine arrangements whose main purpose is a tax advantage. "Non-genuine" means that the CFC would not own assets / undertake risks without control by a person performing significant people functions in the MS of the taxpayer.

Member State Implementation

Portugal bases its test on the low-taxed entity rather than the income category and covers individuals by cross-reference: Art. 20(3) CIRS applies the corporate rule of Art. 66 CIRC to IRS taxpayers holding at least 25% of capital, votes or income rights (Portal das Finanças). Greece keeps a categorical test — control above 50% with associated enterprises and more than 30% of pre-tax net income in the listed passive categories — with relief for substantive economic activity inside the EEA (Art. 66 ITC). Cyprus applies Option B: the undistributed income of a controlled company is added only to the taxable income of a Cyprus-resident company, only to the extent it arises from non-genuine arrangements, and not at all where accounting profits are at most €750,000 with non-trading income at most €75,000, or profits are at most 10% of operating costs (s. 36 ITL). A Cyprus-resident individual is therefore outside the rule altogether, which explains its use as a residence destination; see the country-of-residence table in the CFC master guide. Poland takes the opposite approach: its personal income tax act carries its own CFC article with a 19% rate, a principal branch combining control above 50% or de facto control, listed income and comparative tax tests, plus separate listed/no-exchange and asset/income branches. Qualifying EU/EEA activity and taxation give relief under Art. 30f(18) from paragraphs (1), (15a) and (16); the register under (15) may remain (Art. 30f PIT Act).

Poland has a separate corporate CFC track. Article 24a of the 2026 consolidated Corporate Income Tax Act imposes a 19% CFC levy on a Polish-resident corporate taxpayer where the statutory conditions are met. Besides the listed and no-information-exchange jurisdiction routes, the principal low-tax route tests control above 50%, the composition of income, and tax actually paid against the tax that would be due under Polish corporate rules; the comparison is not a flat worldwide 14.25% effective-rate threshold (Art. 24a(1)–(3)). Article 24a(16) protects an EU/EEA entity with substantial genuine economic activity from the specified levy, and Article 27(2a) requires a separate CFC return by the end of the ninth month after the relevant tax year. This corporate rule does not replace the personal Art. 30f PIT rule above. From 1 October 2026 an amendment changes only the cross-reference to the list of jurisdictions in Art. 24a(3)(1) CIT and Art. 30f(3)(1) PIT.

Article 8 — Computation

• Art. 8(1) (Option A): income calculated under the CT rules of the MS; CFC losses are not included in the taxpayer's base but may, under national law, be carried forward and taken into account in later periods
• Art. 8(2) (Option B): only income from assets/risks, linked to SPF in MS
• Art. 8(3): the income attributed is calculated in proportion to the taxpayer's participation as defined in Art. 7(1)(a)
• Art. 8(5): upon subsequent distribution of dividends from previously attributed income — previously attributed amount deducted (avoidance of double tax)
• Art. 8(6): upon disposal of CFC interest — previously attributed undistributed income deducted from capital gain base
• Art. 8(7): mandatory credit for foreign tax paid by CFC against taxpayer's tax (regardless of Option A/B). In C-524/23 (Commission v Belgium, judgment of 26 February 2026) the CJEU held that Belgium had failed to transpose Art. 8(7): the credit is due in every case falling within Article 7, and stricter domestic measures cannot stand in its place.

ECJ Case Law

• Cadbury Schweppes plc v IRC C-196/04 (Grand Chamber, 12 September 2006) — landmark. CFC = restriction on freedom of establishment (Art. 49 TFEU); justifiable only for "wholly artificial arrangements" intended to escape national tax. Objective test: physical existence, premises, staff, equipment.
• X-GmbH v Finanzamt Stuttgart-Körperschaften C-135/17 (Grand Chamber, 26 February 2019) — application to third-country CFC under free movement of capital (Art. 63 TFEU) + standstill clause (Art. 64). "Wholly artificial" broader for third countries; justifiability depends on effective exchange of tax information.
• These precedents provide the legal context; ATAD codified them through the substance carve-out (Option A) or the non-genuine arrangements test (Option B).

Pillar Two Interaction

• Council Directive (EU) 2022/2523 (14 December 2022) — Pillar Two Directive
  • IIR from FY beginning 31 December 2023
  • UTPR from FY beginning 31 December 2024
  • Scope: MNE groups consolidated revenue ≥€750 million in ≥2 of 4 preceding FY
• Order of application: ATAD CFC applies first; CFC tax is then pushed down to CFC entity for calculation of jurisdictional ETR (Art. 24(3), 24(6) Directive 2022/2523). A QDMTT in every jurisdiction is computed without a push-down of taxes on controlled foreign companies and foreign branches: the parent jurisdiction's CFC tax does not enter that computation and does not reduce the local top-up (side-by-side package, 5 January 2026)
• GloBE Information Return (GIR) — first deadline 30 June 2026 for groups with FY 31 December 2024
• Below threshold groups (<€750m) — Pillar Two not applicable, ATAD CFC remains standalone

The 2029 Horizon: the Commission Proposal of 24 June 2026

On 24 June 2026 the Commission adopted the tax omnibus proposal — COM(2026) 560 final — which provides for amending six directives at once, ATAD among them. The legal basis is Article 115 of the Treaty on the Functioning of the European Union: a special legislative procedure, unanimity in the Council, with the European Parliament giving a consultative opinion. Transposition is set for 31 December 2028 and the main provisions apply from 1 January 2029. This is a Commission proposal, not an adopted act: until the Council acts, none of what follows is law, and the text — dates included — changes in negotiation.

On CFC the proposal narrows the scope in two ways. The first carve-out is for taxpayers within the scope of Directive 2022/2523: the objectives and effects of CFC rules overlap substantially with the income inclusion rule, so EU companies are carved out in respect of their low-taxed subsidiaries. The exception to that carve-out is a group headed in a jurisdiction with a qualified side-by-side regime whose low-taxed subsidiary does not pay a qualified domestic top-up tax, or receives a refund or other benefit in connection with it. The second carve-out is for small and medium-sized groups: across ten years of ATAD there have been almost no CFC cases among them. The choice under Article 7(2) is removed in the process — Option B is deleted and only Option A remains, which for Luxembourg, the Netherlands and Ireland is a structural change rather than an adjustment.

The proposal also amends Article 4. The interest limitation stops being a minimum standard and becomes a single ceiling: 30% of EBITDA in every Member State, with no right to set a stricter threshold. The €3 million safe harbour, today optional under Art. 4(3), becomes mandatory for the first three years from the entry into force of the directive and is indexed annually for inflation; the standalone-entity option is deleted. The rules on imported hybrid mismatches are abolished outright, while the rest of Article 9 stays. By contrast, the general anti-abuse rule in Article 6 is extended to all direct taxes on companies, including withholding tax and the top-up tax under Directive 2022/2523.

For the typical configuration — a group within the minimum tax perimeter with European sub-holdings — that means CFC rules may cease to apply entirely. It cannot serve as a basis for planning today: unanimity in the Council on tax is the same barrier that stopped Unshell, DEBRA and the transfer pricing directive. For both proposals in the package, see the EU tax omnibus and the DAC recast.

The proposal rests on an evaluation of ATAD itself. The evaluation report required by Article 10 of the directive was adopted by the Commission on 25 June 2026 — SWD(2026) 168 final, with a separate executive summary SWD(2026) 177 final; it covers the period from 1 January 2019 to mid-2025 and draws on an external study and on the call for evidence of July–September 2024 (49 responses). Two findings explain the omnibus directly. On CFC: the main effect is deterrent, the administrative burden is significant and is aggravated by fragmented implementation, and taxpayers generally consider that the arrival of Pillar 2 has made CFC rules redundant for groups within its scope. On hybrids: the rules are rarely activated because of the same deterrent effect, but their complexity — particularly around imported mismatches — is identified as a key challenge for tax authorities and taxpayers alike. ATAD itself is nonetheless found to remain fully relevant: EU-wide one-off compliance costs are estimated at €25–27 billion, and the conclusion is framed as making the rules more targeted and less burdensome rather than dropping them.

EU Non-⁠Cooperative Jurisdictions List

Update of 17 February 2026. Annex I (10 jurisdictions): American Samoa, Anguilla, Guam, Palau, Panama, Russian Federation, Turks and Caicos Islands, US Virgin Islands, Vanuatu, Vietnam. This revision added Vietnam and Turks and Caicos; removed Fiji, Samoa, and Trinidad and Tobago, which had cured long-standing deficiencies. On the mechanics and history of these lists — see tax transparency.

Annex II (grey list, 9 jurisdictions): Belize, BVI, Brunei, Eswatini, Greenland, Jordan, Montenegro, Morocco, Türkiye. In February 2026, Seychelles and Antigua and Barbuda were removed from Annex II, having met the standard on exchange of information on request.

Many MS apply stricter CFC rules to these jurisdictions (Netherlands — automatic Option A; Spain — automatic low-tax presumption). For clients with Russian assets this matters: Russia remains in Annex I (see suspension of Russia's tax treaties). Next update — October 2026.

Implications for HNWI

• Italy (Art. 167 TUIR) — applies to individuals. The Art. 24-bis TUIR forfait rose €100k → €200k → €300k (for new residents from 1 January 2026, plus €50k per family member; Legge di Bilancio 2026 of 30.12.2025). Those who opted in earlier keep €100k or €200k (grandfathering). Circolare 17/E 2017: CFC does not apply to the forfait beneficiary for foreign-source income covered by substitute tax. From 1 January 2027 the TUIR itself (Presidential Decree 917/1986) is repealed and replaced by the new Testo unico delle imposte sui redditi (Legislative Decree of 19 June 2026 No. 117) — the article numbering changes, the substance of both regimes does not
• Germany (AStG §§ 7–14) — individuals with >50% participation. Substance carve-out for EU/EEA CFC
• France — Art. 209 B (corporates); individuals under Art. 123 bis CGI (threshold ≥10%; fictitious distribution taxation)
• Netherlands — CFC to corporates; individuals through Box 2 (substantial interest ≥5%) and Box 3 (assumed return on foreign holdings) / lucrative interest
• Spain — Art. 100 LIS (corp), Art. 91 LIRPF (individuals, up to ~47%)
• Belgium — CFC corporates; individuals through kaaiman tax on passive foreign entities
• UK — left the EU; ATAD does not apply. UK CFC — TIOPA 2010 Part 9A; for individuals — Transfer of Assets Abroad (TOAA).