Romania's Controlled Foreign Company rules (art. 40⁵ Fiscal Code) tax, at the level of a Romanian parent company, the undistributed profit of a controlled, low-taxed foreign entity earning passive income — before any dividend is paid. Two owners of the same Dubai company differ: only the one holding it under a Romanian company is exposed.
Normally, the profit of a foreign company is taxed in its own state, and Romania reaches it only once it arrives here, as a dividend. The Controlled Foreign Company rules — from which the CFC acronym derives — break this rule in one precise case.
When a Romanian company controls a lightly taxed foreign entity that earns passive, easily shifted income, the Romanian state no longer waits for distribution. It taxes the undistributed profit directly at the level of the Romanian parent, in proportion to the holding. The rules come from the ATAD Directive and were introduced into the Fiscal Code at art. 40⁵, applicable from 1 January 2018 — part of the same arsenal as the instruments described in which structures still work lawfully in 2026.
The distinction between the two entrepreneurs above is, in my experience, the most frequently misjudged point in the whole of international taxation — and the consequence of the CFC rules is counter-intuitive enough that many refuse to believe it until they see it in a tax assessment.
The text of art. 40⁵ speaks, consistently, of "the corporate-income-tax payer". Paragraph (3) is explicit: "the corporate-income-tax payer that controls it includes in the taxable base the undistributed income of the entity".
From this flows the essential nuance: the CFC rules do not apply to individuals. A Romanian-resident individual who directly holds a company in the UAE, in Cyprus or anywhere else is not caught by art. 40⁵. The undistributed profit of that company is not attributed to their tax base under this text.
It is essential to understand what these lines do not say. Not that personal holding is "better" or escapes tax — only that the mechanism of art. 40⁵ does not apply. The individual remains fully exposed to other rules, often harsher ones.
If you manage it from Romania, it may become a Romanian tax resident on the place-of-effective-management criterion, with corporate tax on worldwide income. This is the risk that replaces CFC, not one that disappears.
As a Romanian tax resident, you owe tax on worldwide income, hence also on dividends received from abroad, which are declared in Romania.
The accounts of the company and your own are reported. The structure is visible before it is declared.
Including art. 11 of the Fiscal Code, which allows recharacterisation of transactions lacking economic purpose.
In other words: personal holding takes you out of the CFC perimeter and puts you into the residence perimeter. It is not a loophole. It is a change of risk.
The taxpayer, alone or together with its associated enterprises, holds a direct or indirect participation of more than 50% of the voting rights; or holds, directly or indirectly, more than 50% of the entity's capital; or is entitled to receive more than 50% of the entity's profits. The threshold is "more than 50%", not "at least 50%"; the criteria are alternative — one suffices; and the holding is calculated including indirectly and together with associated enterprises. Cascading structures, with fragmented participations across entities of the same group, do not avoid the test; they only make it more laborious to verify.
The legal wording: the corporate tax actually paid on its profits by the entity or permanent establishment is lower than the difference between the corporate tax that would have been charged to it under the Romanian rules and the corporate tax actually paid on its profits. Decoded: the tax actually paid abroad is compared with the tax that would have been due under Romanian rules. The resulting mechanism is a half-tax test — the entity falls within CFC when the effective foreign tax is below half of the tax that would have been due in Romania on the same profit.
What matters is not the nominal rate displayed by the jurisdiction, but the tax actually paid — a jurisdiction with a respectable nominal rate but generous exemptions that hollow out the base can fall within the test. And if the entity is in a jurisdiction of the kind analysed under non-cooperative jurisdictions and the consequences of listing, a separate set of defensive measures applies, with its own logic.
The rules also extend to the permanent establishments, in Member States or third states, of a Romanian corporate-tax payer, whose profits are not subject to tax or are exempt from tax in Romania.
If both conditions are met, the Romanian taxpayer includes in the taxable base the undistributed income of the entity, arising from the categories below.
Or any other income generated by financial assets.
Or any other income generated by intellectual-property rights.
Dividends and income from the disposal of shareholdings.
Income from financial-leasing operations.
Income from insurance, banking or other financial activities.
Income from companies that earn it from goods and services bought from, and sold to, associated enterprises with no, or little, economic value added.
These are the passive or easily relocated forms of income, which require no physical presence. The last category is the most interesting in practice — it targets the invoicing entity artificially interposed in a group chain, which buys and resells within the group without adding anything; no proof of intent is needed, it suffices that the value added be non-existent or small. Income from real commercial activity — sales to third-party customers, the provision of genuine services — does not appear in the list and is not attributed on this basis.
The substance exception. The provisions attributing income do not apply if the controlled foreign company is tax-resident in, or located in, a Member State or a third state party to the EEA Agreement and carries on "a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances" — that is, exactly what a substantive economic activity supported by staff and assets means.
The geographical limitation almost nobody points out to clients. The substance exception operates only for entities in EU Member States or in states party to the EEA Agreement. A company in a third state — the United Arab Emirates, Switzerland, the United Kingdom, the United States, anything else outside the EU/EEA — cannot invoke this exception, however much real substance it has. You may have your own office, ten employees and equipment: if the entity is outside the EU/EEA, meets the control test and the tax test, and the income is in the listed categories, it is attributed. Substance does not save you under this text outside the EU/EEA perimeter. The only remaining gate is the de minimis exception.
The threshold exception. The following are not treated as controlled foreign companies: the entity or permanent establishment that records, in a tax period, income in the attributed categories amounting to one third or less than one third of the total income recorded in the calculation period; and the financial undertaking that records income of this nature, arising from operations with the Romanian taxpayer or its associated enterprises, amounting to one third or less than one third of its total income.
This is, in practice, the most-used safety valve: a foreign company with real and predominant commercial activity, whose passive income stays below one third of the total, is not a controlled foreign company — whatever the jurisdiction.
The income is included in the taxpayer's taxable base in proportion to their participation in the entity. Inclusion is made in the taxpayer's tax period during which the tax period of the controlled entity or permanent establishment ends — a point that matters for groups with mismatched financial years. Tax losses recorded by a permanent establishment qualifying as a controlled foreign company follow the general regime of the Fiscal Code.
If the entity distributes profit to the taxpayer, and that profit was already included in taxable income under art. 40⁵, the amount of income previously included is deducted in the tax period in which the tax on the distributed profit is calculated.
If the taxpayer disposes of the participation in the controlled entity or of the activity carried on through a permanent establishment, and part of the proceeds was previously included in the taxable base, that amount is deducted in the period in which the tax on those proceeds is calculated.
The taxpayer deducts, from the corporate tax due, the tax paid to a foreign state by the controlled entity or its permanent establishment.
The mechanisms work, but require rigorous record-keeping, maintained over years: you must be able to prove, at the time of distribution, what exactly and in which year was already taxed. Without it, the deduction becomes impossible to sustain, and double taxation occurs in fact, even if the law forbids it on paper.
Art. 23 of the Fiscal Code provides, among non-taxable income, dividends received by a Romanian legal person from a foreign legal person paying corporate tax or a similar tax, situated in a state with which Romania has concluded a double-taxation treaty, on condition that the Romanian beneficiary holds, at the date of their recording, for an uninterrupted period of one year, at least 10% of the payer's share capital. To justify non-taxation, the beneficiary must hold the payer's tax-residence certificate, a declaration by the payer showing that it pays corporate tax or a similar tax, and the documents proving the holding condition.
The logic of the exemption is neutrality: the profit was already taxed at subsidiary level, so it is not taxed again at parent level. But note the condition: the subsidiary must be a payer of corporate tax or a similar tax, in a state with a treaty. Exactly the situation the CFC rules target — very low effective tax — is the one that erodes the premise of the exemption.
Consequently, a Romanian or foreign holding that owns a subsidiary in a very low-tax jurisdiction does not obtain a "neutral" result: if the subsidiary meets the conditions of art. 40⁵ and earns passive income above the one-third threshold, the undistributed profit is attributed annually to the parent, in Romania, regardless of the exemption on distribution. And if the subsidiary is outside the EU/EEA, substance does not help. The structure may also, separately, trigger DAC6 reporting obligations.
The Romanian company is a corporate-tax payer and holds 100% — the control test is met. If the tax actually paid in the UAE is below half of the tax that would have been due in Romania, the tax test is met. If the Emirati company's income is predominantly passive or comes from intra-group resale with no added value, and exceeds one third of the total, the undistributed profit is included annually in the Romanian company's taxable base, in proportion to the holding. Substance is no defence — the UAE and corporate tax are outside the EU/EEA. The credit for the tax paid there remains. If, however, the company has real commercial activity and passive income stays below one third, the de minimis exception takes it out of CFC.
Art. 40⁵ does not apply. Instead: if you manage it from Brașov, the main risk becomes the company's tax residence in Romania, on the place-of-effective-management criterion — with 16% corporate tax on worldwide income. And when you distribute the dividend, you declare it as foreign income and tax it in Romania as a Romanian tax resident.
The conclusion I hold: the choice between the two is not a matter of optimisation, but of correctly identifying the dominant risk. Both have a price; the difference is that it is paid under different articles of the Code.
Not on that criterion. The text requires "more than 50%" of voting rights, capital or profit entitlement. At exactly 50%, the condition is not met through that criterion. Note, however, that holdings are counted indirectly too, and together with associated enterprises, and the criteria are alternative — you could hold 50% of capital but more than 50% of profit entitlement through a statutory clause. The analysis must be run on all three criteria.
That is exactly the purpose of the rule. Taxation does not depend on distribution. Undistributed income in the categories provided by law is included annually in the Romanian taxpayer's tax base, in proportion to the holding. Accumulating profit in the foreign entity does not defer the tax; the CFC rule exists precisely to eliminate that deferral.
No, not under this text. The exception in art. 40⁵(4) applies only to entities resident or located in an EU Member State or a state party to the EEA Agreement. The UAE does not qualify. Real substance remains relevant to other analyses — tax residence, beneficial owner, transfer pricing — but does not take you out of CFC. Check instead whether you fall within the de minimis exception: if passive income stays below one third of the total, the entity is not a controlled foreign company.
No, if you keep records correctly. Amounts already included in the taxable base under art. 40⁵ are deducted in the period when tax on the distributed profit is calculated, and the tax paid in the foreign state by the controlled entity is credited against the corporate tax due. The practical problem is not legal but evidential: you must be able to show, year by year, what amount was already taxed and in which period. Without those records, the deduction cannot be sustained before the tax authority.
Informational material, updated 18 July 2026. It does not constitute legal or tax advice; individual situations must be analysed case by case.
An initial analysis establishes whether the CFC rules apply, whether the substance or de minimis exception is available, and where the real risk lies — before an assessment attributes undistributed profit to you retroactively.