Controlled Foreign Company (“CFC’’) rules aim to combat tax evasion situations where a company resident in a high-tax country owns a foreign subsidiary resident in a low-tax country in order to derive tax benefit from the lower corporate tax rate. More specifically, the legislation seeks to avoid the diversion of profit by the taxpayer from his country of residence to a foreign company controlled by that same taxpayer.
Additionally, under an indirect credit system, CFC rules protect the integrity of the deferral of domestic tax afforded to income earned by CFCs but also safeguard the integrity of the exemption of non-portfolio dividends under the exemption system. In the former case, where a country includes non-portfolio dividends in its tax base, CFC rules aim to prevent the deferral of domestic tax income derived by and accrued in CFCs until that income is distributed to the resident shareholders of the CFC. In the latter case, when non-portfolio dividends are not included in the source country’s tax base, CFC rules are designed to prevent the complete avoidance of domestic tax on income derived by and accrued in CFCs. The reason for that is because such income which would normally be subject to residence country tax if earned therein, can be earned without residence country tax by a CFC and then distributed to a CFC’s resident shareholders as tax-exempt dividends.
CFC rules date back to the times of the Marshall Plan and were enacted as a result of the aftermath of World War II as well as many political and economic developments in the United States. As such, these times were characterized with the international expansion of U.S. businesses. Because of that, in 1960 Congress passed legislation that required each U.S. corporation to provide information, along with its tax return, for all foreign corporations that were controlled by U.S. companies (first-tier subsidiaries) and all foreign corporations controlled by a directly controlled foreign corporation (second-tier subsidiaries). First-tier subsidiaries or CFCs were defined as foreign corporations of which more than 50 percent of the voting stock was directly owned by a US company and second-tier subsidiaries were classified as foreign corporations in which more than 50 percent of the voting stock was owned by a directly controlled foreign corporation. The U.S. was the first country to enact such rules, however, since 1990 there is a tendency for most countries to have them in their tax systems.
One step towards countries including such rules in their tax systems, is the recommendations laid out by the 2015 Final Report on Action 3 of the OECD/G20 Base Erosion Profit Shifting (“ BEPS”) Project. The recommendations were primarily regarding the following features of the CFC rules:
➢ the foreign entities to which the CFC rules apply
➢ the level of foreign tax on a CFC’s income and
➢ the type of income attributable to a CFC’s shareholders
The recommendations provide for CFC rules that should be applicable to situations where a company owns more than 50 percent of shares or right to profits, capital and/or assets of a CFC. Furthermore, countries are free to reduce or raise this threshold if they wish to do so. With regards to the level of foreign tax, the Final Report notes that countries should not apply their CFC rules to CFCs that are subject to a tax comparable to the tax that would be levied in the residence country. Lastly, the Report does not lay out any recommendations and states that countries are free to include any type of income within the ambit of CFC rules.
When it comes to CFC rules applicable within the EU MS’ domestic tax systems, the Anti-Tax Avoidance Directive (2016/1164) ‘‘ATAD I’’ enshrines such regulation. With effect from 1 January 2019, the Directive required that the following two conditions or also known as the ‘control test’ to be transposed into each EU Member State domestic tax system:
➢ CFC rules must apply to foreign entities and foreign PEs that are controlled directly or indirectly  by a resident taxpayer and associated enterprises; and
➢ pay foreign tax on their profits of less than the difference between the tax that they would have paid to the country in which their controlling shareholders are resident and the foreign tax paid 
Bulgaria has transposed ATAD I in its Corporate Income Tax Act (“ CITA”). Furthermore, for a foreign entity or a foreign permanent establishment( ‘‘PE’’) to fall within the CFC regime, the following „control test“criteria need to be satisfied :
➢ in case of a foreign entity, the taxpayer owns directly or indirectly more than 50 percent of voting rights, or capital, or profits; and
➢ the actual corporate tax paid by the entity or the PE on its profits, is lower than the difference between the corporate tax that would have been charged on the entity or the PE in Bulgaria and the actual corporate tax paid on its profits by the entity or PE
also lays down the situations in which the CFC rules would not be applicable,
namely, where the CFC carries out substantial economic activity with the help
of the necessary for the activity personnel, equipment, assets and/or premises.
Additionally, in such a case, the burden of proof lies with the taxable person. 
There are also mechanisms put in place for the avoidance of double taxation, namely a tax credit for the tax paid abroad by the CFC and measures dealing with the consecutive distribution of dividends. 
 For this purpose, ‘control’ means direct or indirect participation of more than 50 percent of the voting rights, or more than 50 percent of capital entitlement to more than 50 percent of the profits of that entity
 Art. 7(1) Council Directive (EU) 2016/1164 of 12 July 2016
 Art. 47c(1)(2) CITA
 Art. 47d(7) CITA
 Art. 47d CITA