Controlled Foreign Investment Corporation (CFC)
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What is a CFC. A Controlled Foreign Corporation (CFC) is a non-U.S. corporation in which, at any time during the year, more than 50% of the total combined voting power or value is owned—directly, indirectly, or constructively—by U.S. shareholders. A “U.S. shareholder” is a U.S. person that owns (directly, indirectly, or constructively) at least a specified percentage of the foreign corporation’s vote or value (commonly referenced as the 10% threshold in practice). These ownership and attribution rules are intentionally broad and can treat interests held through entities, family members, and certain arrangements as owned by the U.S. person.
Why CFC status matters. CFC status triggers anti-deferral rules that can force current U.S. taxation of certain foreign earnings before any cash is distributed. The two major inclusion regimes are Subpart F (which targets defined categories like foreign base company income and certain passive items) and GILTI (Global Intangible Low-Taxed Income), which captures much of the residual, non-Subpart-F income of CFCs on a current basis. These inclusions are computed at the level of each U.S. shareholder and then reported on the shareholder’s U.S. return.
Subpart F (high level). Subpart F generally picks up foreign base company sales and services income earned through related-party structures, certain insurance income, and a class of passive-type items often grouped as foreign personal holding company income (interest, dividends, certain rents/royalties), subject to numerous exceptions (e.g., same-country, active-business, look-through, de minimis/full-inclusion rules, and high-tax relief where applicable). Amounts included under Subpart F increase the shareholder’s basis in the CFC and create previously taxed earnings and profits (PTEP), affecting later distributions.
GILTI (high level). GILTI is a separate, annual inclusion that aggregates “tested income” across the shareholder’s CFCs and taxes the portion that exceeds a routine return on certain tangible business assets (QBAI). Corporate U.S. shareholders may benefit from special deductions and indirect foreign tax credits under the GILTI rules; individuals sometimes consider an election to be taxed like a corporation (commonly called a “§962 election”) to access parallel treatment, though this can have downstream distribution consequences. A high-tax exclusion election may remove high-taxed CFC income from GILTI under consistency requirements.
Dividends, PTEP, and participation exemption. Actual dividends from CFCs may be non-taxable to the extent paid out of PTEP previously included under Subpart F or GILTI (basis and ordering rules apply). Certain dividends to U.S. C corporations may be eligible for a participation-exemption-type deduction if statutory conditions are met; hybrid payments and holding-period rules can limit this relief. Local withholding taxes and foreign E&P classifications still matter in practice.
Ownership mechanics and year-end tests. CFC status is determined on a control test that can be met on any day during the CFC’s tax year. U.S. shareholders generally include their pro rata share for CFC years in which they are U.S. shareholders on the last day the corporation is a CFC. Entity classification (“check-the-box”) and joint ventures can dramatically affect whether foreign operations are treated as corporations (subject to CFC rules) or as pass-throughs/branches (with different U.S. tax outcomes).
Compliance and penalties. U.S. persons with qualifying ownership or control typically have extensive annual information reporting (for example, Form 5471 with multiple schedules). Penalties for non-filing are significant and apply per-form, per-year, independent of whether tax is ultimately due. Subpart F and GILTI amounts flow through to the return and can interact with foreign tax credits, expense allocation, and state tax rules.
Practical approach. Accurate CFC analysis requires tying legal ownership to constructive ownership rules, modeling Subpart F/GILTI on a per-shareholder basis, classifying E&P (including PTEP layers), and aligning the result with foreign tax data and financial statements. Elections (high-tax, §962), capitalization choices, intercompany pricing, and local distributions should be evaluated together to avoid double-tax or unexpected basis/credit outcomes.
Controlled Foreign Corporations (CFC) – Key Questions
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A controlled foreign corporation is a non-U.S. corporation more than 50% owned (by vote or value) by U.S. shareholders, considering direct, indirect, and constructive ownership, at any time during the year.
Generally, a U.S. person that owns at least a specified percentage of the foreign corporation’s voting power or value (commonly referenced as 10%), including interests attributed through entities and family under the attribution rules.
Attribution can treat stock held by entities, trusts, estates, or family members as owned by a U.S. person, potentially creating CFC status even when direct ownership appears below thresholds.
Subpart F includes defined categories such as foreign base company sales and services income, certain insurance income, and specified passive-type items, with numerous exceptions and thresholds.
GILTI (Global Intangible Low-Taxed Income) is a residual, annual inclusion of certain CFC earnings not otherwise taxed under Subpart F, computed at the U.S. shareholder level.
Subpart F applies first to specified categories; GILTI generally captures remaining tested income. High-tax relief may apply in different ways under each regime.
Qualified Business Asset Investment (QBAI) is the averaged adjusted basis of certain tangible business property used in the CFCs’ tested income production; a routine return on QBAI reduces the shareholder’s GILTI amount.
Yes. Elections exist to exclude certain high-taxed items from Subpart F or GILTI, subject to consistency rules and detailed computations.
Distributions of previously taxed earnings and profits (PTEP) are typically non-taxable but reduce basis; other distributions may be taxable dividends depending on E&P layers and shareholder type.
In some cases, qualifying dividends to U.S. C corporations may be eligible for a participation-exemption-type deduction, subject to holding periods, hybrid/anti-abuse rules, and other limitations.
Individuals may elect to be taxed as if they were C corporations for certain CFC inclusions, potentially accessing corporate-style deductions/credits. Later cash distributions can have separate consequences.
Indirect FTCs may be available for certain CFC taxes deemed paid, subject to baskets, limitation calculations, and (for GILTI) special rules that differ from the general limitation regime.
Form 5471 is an annual information return for U.S. persons with certain interests in foreign corporations (including CFCs). Filing categories depend on ownership, acquisitions/dispositions, and control status.
Significant penalties apply per form, per year, with potential statute-of-limitations and foreign tax credit consequences. Non-filing can also affect other elections and inclusions.
Interests held through partnerships (or trusts) are looked through under attribution rules; multiple small interests can combine to create U.S. shareholder and CFC status.
Yes. Entity classification can convert a foreign corporation into a disregarded entity or partnership (or vice versa), altering whether the CFC rules apply and how income is measured in the U.S.
PFIC rules apply to certain passive foreign corporations regardless of ownership concentration and use different inclusion regimes (e.g., excess distributions, QEF, MTM). A company can be both a CFC and a PFIC, with coordination rules.
CFC status is tested over the year, and inclusions generally depend on being a U.S. shareholder on the last day of the CFC’s tax year when it was a CFC. Short-period rules and E&P allocations may apply.
Foreign base company sales and services rules can create Subpart F income where a CFC earns margins from purchasing/selling goods or performing services for related parties outside its country of organization.
Our cross-border team models Subpart F and GILTI, prepares Form 5471, and aligns foreign tax credits and distributions. See our U.S. Tax Return Service or contact us.
Need help with CFC/Subpart F/GILTI? We integrate the analysis with your U.S. return and foreign tax credit profile. Explore our service or get in touch.