If you are a U.S. shareholder of a controlled foreign corporation, Subpart F income is the rule most likely to put the company's profits on your personal tax return before you ever take a distribution. It is the oldest piece of the U.S. anti-deferral system, dating to 1962, and it still governs how passive and mobile income earned inside a foreign company is taxed to its U.S. owners. This guide breaks down what counts as Subpart F income, the categories of foreign base company income, the exceptions that can shrink or eliminate the inclusion, and how the 2026 OBBBA changes affect it.
What Is Subpart F Income?
Subpart F income is the portion of a controlled foreign corporation's earnings that U.S. shareholders must include in income currently, whether or not the CFC distributes anything. It is defined in Internal Revenue Code Sections 951 through 964 and exists to stop U.S. owners from shifting easily movable income, interest, royalties, and related-party profits, into a low-tax foreign corporation and deferring U.S. tax indefinitely.
The mechanism is simple in concept. Each U.S. shareholder, a U.S. person who owns 10% or more of the CFC by vote or value, takes into income their pro rata share of the CFC's Subpart F income for the year. That amount becomes previously taxed earnings and profits (PTEP), so when the CFC later distributes it, the distribution is tax-free and basis is adjusted to avoid double taxation.
What Are the Categories of Subpart F Income?
The largest piece of Subpart F income is foreign base company income, which itself breaks into several categories under Section 954. Insurance income is taxed under a separate but parallel set of rules. Understanding the categories is what lets you tell currently taxable income apart from income that escapes Subpart F.
The Core Subpart F Categories
Reference- Foreign personal holding company income (FPHCI): the passive bucket, dividends, interest, rents, royalties, annuities, and net gains from property that produces passive income or from commodities and foreign currency. This is the most common category for holding companies and investment vehicles.
- Foreign base company sales income (FBCSI): income from the purchase or sale of personal property involving a related party, where the goods are both manufactured and sold for use outside the CFC's country of incorporation. It targets routing sales through a low-tax middleman.
- Foreign base company services income (FBCSvI): income from services performed for, or on behalf of, a related party outside the CFC's country of incorporation.
- Insurance income: premiums and related income from insuring risks located outside the CFC's country, taxed under Sections 953 and 954.
Foreign base company oil-related income was a separate category but was repealed for tax years beginning after 2017.
The two related-party categories, sales and services income, are the ones that catch operating businesses by surprise. A foreign distribution company that buys finished goods from a related U.S. or foreign manufacturer and resells them into other countries can generate FBCSI; a foreign company that performs engineering or consulting services for an affiliate in another country can generate FBCSvI. Income a CFC earns from its own genuine manufacturing or from services in its home country generally is not Subpart F income.
What Income Is Excluded From Subpart F?
Not every dollar in a Subpart F category is actually taxed. Several rules narrow the base, and getting them right is where good planning lives.
The De Minimis and Full-Inclusion Rules
- De minimis rule: if the CFC's total foreign base company income and insurance income is less than the smaller of 5% of gross income or $1 million, none of it is treated as Subpart F income for the year.
- Full-inclusion rule: at the opposite extreme, if that income exceeds 70% of the CFC's total gross income, the entire gross income of the CFC is treated as foreign base company income.
The Section 954(b)(4) High-Tax Election
If an item of income was taxed by a foreign country at an effective rate above 90% of the top U.S. corporate rate, currently more than 18.9% (90% of 21%), the U.S. shareholder may elect to exclude that income from Subpart F under Section 954(b)(4). The premise is that income already bearing a high foreign tax does not need U.S. anti-deferral treatment. For CFCs in countries like Germany, France, Japan, or Australia, the high-tax exception frequently removes most or all Subpart F income.
Two more important exclusions:
- Same-country exceptions: certain dividends, interest, rents, and royalties received from a related corporation organized in the same country as the CFC, and rents and royalties from the active conduct of a trade or business, are excluded from FPHCI.
- Section 954(c)(6) look-through: dividends, interest, rents, and royalties a CFC receives from a related CFC are not Subpart F income to the extent attributable to the payer's non-Subpart-F income. OBBBA made this rule permanent beginning in 2026, ending years of temporary extensions.
How Is Subpart F Income Taxed to U.S. Shareholders?
A U.S. shareholder includes their pro rata share of Subpart F income as ordinary income in the year the CFC earns it. Unlike GILTI/NCTI, Subpart F income gets no Section 250 deduction, so for an individual it is generally taxed at full ordinary rates.
The result for an individual U.S. shareholder is often a high current tax with no automatic credit for the corporate-level foreign taxes the CFC paid. That is why the Section 962 election matters: an individual can elect to be taxed on Subpart F income at the 21% corporate rate and claim the deemed-paid foreign tax credit, often slashing the current bill. The cost is that previously taxed amounts are taxed again as a dividend when distributed, to the extent they exceed the U.S. tax already paid.
Subpart F vs GILTI/NCTI: How They Coordinate
ImportantThe two regimes are designed to fit together, not overlap:
- Income that is Subpart F income is excluded from the NCTI "tested income" base, so the same dollar is not taxed twice.
- Subpart F captures passive and related-party income at full ordinary rates with no special deduction.
- NCTI captures most of the remaining active business income and allows the 40% Section 250 deduction (for tax years beginning after 2025), producing a lower effective rate.
A well-run CFC analysis assigns every dollar of the CFC's income to Subpart F, NCTI, or an exclusion, then optimizes the high-tax election and Section 962 election across both regimes.
What Changed for Subpart F Under OBBBA in 2026?
The One Big Beautiful Bill Act made targeted but meaningful changes to Subpart F effective for tax years beginning after December 31, 2025.
OBBBA's Subpart F Changes
2026 Update- Last-day ownership rule repealed. Previously, only a U.S. shareholder who owned CFC stock on the last day of the CFC's year picked up Subpart F income. OBBBA repealed this, so any U.S. shareholder who owned the stock during any part of the year now includes a pro rata share. This closes a planning technique of selling before year-end to avoid the inclusion. (The last-day rule still applies to Section 956 investments in U.S. property.)
- Section 954(c)(6) made permanent. The related-CFC look-through rule, which had been renewed on a temporary basis for years, is now a permanent part of the Code.
- Section 958(b)(4) restored. Downward attribution from foreign persons to U.S. persons is again limited, which removes many foreign-parented companies and their unrelated U.S. minority owners from accidental CFC and Subpart F status, paired with new Section 951B to prevent abuse.
How Do You Report and Plan for Subpart F Income?
Subpart F income is computed on Form 5471 (primarily Schedule I and the income schedules) and flows through to the U.S. shareholder's return. Because the calculation depends on the CFC's earnings and profits, its category-by-category income, and the elections you make, accurate bookkeeping at the CFC level is essential.
A practical planning checklist for closely held CFCs:
- Classify income by category every year. The line between Subpart F income and active income that escapes it (or falls into NCTI) drives the entire result.
- Test the de minimis rule first. Many small operating CFCs with only incidental interest income fall under the 5% / $1 million threshold and have zero Subpart F income.
- Model the high-tax election. For CFCs in normal-tax countries, electing out under Section 954(b)(4) often eliminates Subpart F income entirely, but it must be modeled against the NCTI result because the elections interact.
- Decide on Section 962 annually. For individuals, corporate-rate treatment plus the deemed-paid credit frequently beats ordinary-rate inclusion.
- Keep PTEP records. Track previously taxed earnings and profits and your stock basis so later distributions come out tax-free as intended.
- File Form 5471 on time. The $10,000-per-corporation penalty and the open-statute-of-limitations exposure make timely, complete filing the single most important compliance step. See our Form 5471 filing guide.
Bottom Line
Subpart F income is the rule that taxes a CFC's passive and related-party earnings to its U.S. shareholders in real time, with no deferral and no special deduction. The categories, foreign personal holding company income and foreign base company sales and services income, are well defined, and the de minimis rule, same-country exceptions, and high-tax election can shrink or eliminate the inclusion when applied carefully. OBBBA's 2026 changes broaden who picks up Subpart F by repealing the last-day rule, while making the related-CFC look-through permanent.
If you own a controlled foreign corporation and want to know how much Subpart F income it generates, whether the high-tax or de minimis rules apply, and whether a Section 962 election would cut your bill, our international tax and cross-border tax teams can run the full analysis and prepare your Form 5471. Have questions about Subpart F income? Contact TS CPA for a free consultation. We respond within the same day.