Controlled Foreign Corporation (CFC): Ownership, GILTI, and Form 5471

A controlled foreign corporation, or CFC, is a foreign corporation in which U.S. shareholders together own more than 50 percent of the voting power or stock value on any day of its tax year.¹ The label matters because it pulls certain categories of the corporation’s income onto its U.S. shareholders’ returns each year, whether or not any cash is distributed. Several rules change for tax years beginning in 2026 under the One Big Beautiful Bill Act.

The 50 Percent Ownership Test

A foreign corporation becomes a CFC when U.S. shareholders collectively own more than 50 percent of its total combined voting power or more than 50 percent of the total value of its stock.¹ The test is applied every day of the corporation’s tax year. Cross the threshold on a single day and the corporation is a CFC for the whole year.

What matters is collective ownership by qualifying U.S. shareholders, not any one person’s stake. Five unrelated U.S. shareholders each holding 11 percent add up to 55 percent, which is enough.

Who Counts as a U.S. Shareholder

Not every American with shares in a foreign corporation counts toward the 50 percent test. Only a U.S. person who owns at least 10 percent of the corporation’s total voting power or 10 percent of its total stock value qualifies as a “U.S. shareholder.”² Owners below 10 percent are ignored for both the CFC classification and the current-year income inclusions that follow.

So the analysis runs in two steps. First, identify every U.S. person who owns at least 10 percent. Then add up those shareholders’ ownership. If the total is more than 50 percent, the corporation is a CFC and each 10 percent owner faces current-year U.S. tax on certain income categories.

How Ownership Is Measured

The code counts stock three ways.³

Direct ownership is stock registered in your own name. Indirect ownership is stock you hold through a foreign corporation, partnership, trust, or estate, prorated by your interest in that intermediary. Own 50 percent of a foreign partnership that holds 40 percent of a foreign corporation, and you indirectly own 20 percent.

Constructive ownership sweeps in stock held by close family and certain related entities. Shares held by a spouse, child, grandchild, or parent can be attributed to you, and similar rules run between individuals and entities they control.⁴ These attribution rules prevent families and related-party groups from splitting ownership to slide under the 10 percent or 50 percent thresholds.

Subpart F Income

A U.S. shareholder of a CFC pays tax each year on a proportional share of the corporation’s Subpart F income, whether or not the CFC pays out a dime.⁵ The category mainly targets passive and related-party income that is easy to shift between countries.

Subpart F income covers, among other things:

Foreign personal holding company income: dividends, interest, royalties, rents, annuities, and gains on certain property and commodities transactions⁶
Foreign base company sales income: profits from buying or selling goods involving a related party, where the goods are made and sold outside the CFC’s country of incorporation
Foreign base company services income: fees for services performed for or on behalf of a related party outside the CFC’s home country
Insurance income from insuring risks outside the CFC’s country of organization
Income tied to participation in international boycotts, and any bribes or kickbacks⁵

Two thresholds cushion the extremes. If the CFC’s combined foreign base company income and insurance income is less than the lesser of 5 percent of gross income or $1 million, none of it is treated as Subpart F income. If those categories exceed 70 percent of gross income, the CFC’s entire gross income is treated as Subpart F income.⁶

A high-tax exception is available too. If the CFC’s income is already taxed abroad at an effective rate greater than 90 percent of the top U.S. corporate rate, the shareholder can elect to exclude that income. With the corporate rate at 21 percent, the trigger is an effective foreign rate above 18.9 percent. The IRS has conformed the Subpart F election with the parallel GILTI election so a single annual choice covers both.⁷

GILTI: The Broader Current Tax

Global Intangible Low-Taxed Income (GILTI) catches CFC profits that Subpart F leaves behind. Start with the CFC’s “tested income,” which is essentially all income not already picked up by Subpart F or another excluded category, then subtract 10 percent of the CFC’s adjusted tax basis in its tangible depreciable property. The excess is your GILTI inclusion, taxable in the year the CFC earns it.⁸

The two regimes hit different profiles. Subpart F zeroes in on passive investment returns and related-party transactions. GILTI scoops up virtually all active business income above the deemed 10 percent return on tangible assets. A foreign manufacturer with slim margins and heavy equipment can generate little or no GILTI, while a software company with few physical assets abroad may face a substantial inclusion even though the underlying profits are ordinary business income.

The 2026 Rate Change for GILTI

Corporate U.S. shareholders can deduct a portion of their GILTI inclusion under Section 250.⁹ For tax years 2018 through 2025 the deduction was 50 percent, producing an effective federal rate of about 10.5 percent. For 2026 the deduction drops to 40 percent, and the effective rate rises to about 12.6 percent.

Corporate shareholders are also deemed to have paid 90 percent of the foreign taxes their CFCs paid on tested income, and can claim those taxes as a foreign tax credit.¹⁰ Together, the Section 250 deduction and deemed-paid credit often reduce residual U.S. tax on GILTI to a small figure when the CFC pays a reasonable foreign rate.

Avoiding Double Tax When Earnings Come Home

Because the U.S. shareholder is already taxed on Subpart F and GILTI income currently, three mechanisms keep those same dollars from being taxed again when the CFC distributes them.

Previously Taxed Earnings and Profits

Amounts included under Subpart F or GILTI become “previously taxed earnings and profits.” When the CFC later distributes them, the shareholder excludes the distribution from income and adjusts stock basis downward.¹¹

Foreign Tax Credits, With a 2026 Haircut

A U.S. shareholder is deemed to have paid the foreign income taxes the CFC bore on Subpart F inclusions, and can claim them as credits.¹⁰ For GILTI, the deemed-paid figure is 90 percent of the CFC’s tested foreign income taxes.

The One Big Beautiful Bill Act adds a wrinkle. When PTEP tied to GILTI is later distributed, 10 percent of the foreign taxes associated with that distribution are disallowed as credits. The rule applies to distributions of GILTI-related PTEP from shareholder tax years ending after June 28, 2025.¹⁰

Section 962 Election for Individuals

The Section 250 deduction and deemed-paid credit are built for corporate shareholders, which puts individuals at a structural disadvantage. A Section 962 election lets an individual U.S. shareholder be taxed on CFC inclusions as if they were a domestic corporation: 21 percent instead of a rate that can reach 37 percent, with access to the deemed-paid credits.¹² The trade-off is that later distributions can trigger additional tax to the extent they exceed what was paid under the election. The election is annual and requires a statement attached to the return along with Forms 8992, 8993, and 1116.

Filing Form 5471

A U.S. shareholder of a CFC files Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, with the annual return.¹³ The form calls for financial statements, ownership schedules, and income breakdowns for each CFC. Filers fall into numbered categories (1 through 5) based on their level of ownership and control, and the category determines which schedules are required. Form 5471 attaches to Form 1040 for individuals or Form 1120 for corporations and is due with the return, including extensions.

Late or incomplete filings carry real cost. The initial penalty is $10,000 per CFC, per year. If the failure continues more than 90 days after the IRS sends a notice, an additional $10,000 accrues for each 30-day period, capped at $50,000 per CFC.¹⁴ These penalties apply per corporation, so a shareholder in three unfiled CFCs faces $30,000 in initial penalties alone. A missed filing can also cut into available foreign tax credits and extend the statute of limitations on the whole return.

The 2026 Restoration of the Downward Attribution Block

Before 2018, a longstanding rule blocked “downward attribution,” which is the treatment of a foreign parent’s stock in foreign affiliates as constructively owned by the parent’s U.S. subsidiaries. The 2017 Tax Cuts and Jobs Act repealed that blocking rule, and many foreign corporations became CFCs by accident, dragging U.S. subsidiaries into filing and inclusion obligations for entities they did not really control.

The One Big Beautiful Bill Act restores the blocking rule for tax years of foreign corporations beginning after December 31, 2025. From 2026 forward, stock owned by a foreign parent is not attributed downward to its U.S. subsidiaries for CFC purposes. A U.S. company caught by an inadvertent CFC designation in recent years should be released from those obligations going forward.

1
Office of the Law Revision Counsel. 26 U.S. Code 957 – Controlled Foreign Corporations; United States Persons
2
Office of the Law Revision Counsel. 26 U.S. Code 951 – Amounts Included in Gross Income of United States Shareholders – Section: (b)
3
Office of the Law Revision Counsel. 26 U.S. Code 958 – Rules for Determining Stock Ownership
4
Office of the Law Revision Counsel. 26 U.S. Code 318 – Constructive Ownership of Stock
5
Office of the Law Revision Counsel. 26 U.S. Code 952 – Subpart F Income Defined
6
Office of the Law Revision Counsel. 26 U.S. Code 954 – Foreign Base Company Income
7
Federal Register. Guidance Under Sections 951A and 954 Regarding Income Subject to a High Rate of Foreign Tax
8
Office of the Law Revision Counsel. 26 U.S. Code 951A – Global Intangible Low-Taxed Income Included in Gross Income of United States Shareholders
9
Office of the Law Revision Counsel. 26 U.S. Code 250 – Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income
10
Office of the Law Revision Counsel. 26 U.S. Code 960 – Deemed Paid Credit for Subpart F Inclusions
11
Office of the Law Revision Counsel. 26 U.S. Code 959 – Exclusion from Gross Income of Previously Taxed Earnings and Profits
12
Office of the Law Revision Counsel. 26 U.S. Code 962 – Election by Individuals to Be Subject to Tax at Corporate Rates
13
Internal Revenue Service. Instructions for Form 5471
14
Office of the Law Revision Counsel. 26 U.S. Code 6038 – Information Reporting With Respect to Certain Foreign Corporations and Partnerships