Controlled Foreign Corporation (CFC)
A foreign corporation more than 50% owned, by vote or value, by US shareholders who each own at least 10%, triggering current US tax on its Subpart F income and GILTI/NCTI.
Detailed Explanation
A controlled foreign corporation is any foreign corporation in which US shareholders own more than 50% of the total combined voting power or total value of the stock on any day during the year. Only US shareholders, defined as US persons who each own at least 10% by vote or value, count toward the more-than-50% test, and ownership is measured directly, indirectly through tiers of entities, and constructively through family and related entities under Section 958. Once a company is a CFC, its US shareholders are taxed currently on two categories of income whether or not it is distributed: Subpart F income (passive and certain related-party income) and GILTI, renamed Net CFC Tested Income (NCTI) under the One Big Beautiful Bill Act, which sweeps in most remaining active earnings. Each US shareholder files Form 5471 every year. The OBBBA changes effective for tax years beginning after December 31, 2025 restored Section 958(b)(4) to limit downward attribution, added Section 951B for foreign-controlled structures, repealed the rule that Subpart F is picked up only by last-day owners, eliminated the GILTI/NCTI tangible-asset (QBAI) exemption, and made the Section 954(c)(6) look-through permanent. Individual owners can make a Section 962 election to be taxed at corporate rates and access the deemed-paid foreign tax credit.
Key Points
- More than 50% US ownership (by vote or value) by 10%-or-more US shareholders makes a foreign corporation a CFC.
- A single US person owning a majority of a foreign company always creates a CFC.
- US shareholders are taxed currently on Subpart F income and GILTI/NCTI, with no deferral.
- Reported annually on Form 5471; missing it carries a $10,000 penalty and keeps the return statute open.
- OBBBA (2026) reshaped attribution, repealed the Subpart F last-day rule, and eliminated the QBAI exemption.
- A Section 962 election lets individuals access the 21% corporate rate and the deemed-paid foreign tax credit.
Practical Example
A US resident owns 60% of a manufacturing company in Mexico; two unrelated US investors own the rest 20% each. Because US shareholders together own 100%, the company is a CFC, and all three (each a 10%+ US shareholder) include their pro rata share of its Subpart F income and NCTI on their US returns and file Form 5471.
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Learn about International TaxationRelated Terms
Subpart F Income
Certain types of foreign income earned by Controlled Foreign Corporations that are taxed currently to US shareholders, regardless of distribution.
GILTI (Global Intangible Low-Taxed Income)
A US tax on foreign income earned by Controlled Foreign Corporations in excess of a deemed routine return on tangible assets.
Form 5471 (Information Return of US Persons With Respect to Certain Foreign Corporations)
An informational return required of US persons who own or control foreign corporations, with significant penalties for failure to file.
Passive Foreign Investment Company (PFIC)
A foreign corporation that earns mostly passive income or holds mostly passive assets, subjecting US shareholders to a punitive tax regime under IRC Sections 1291 to 1298. Most foreign mutual funds and ETFs are PFICs.
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