Controlled Foreign Corporation Rules: Subpart F, GILTI, and Section 962

Controlled foreign corporation rules make you pay U.S. tax each year on your share of certain profits earned by a foreign company you partly own, even if the company never sends you a dime. You get pulled in once you own at least 10% of a foreign corporation and U.S. persons collectively hold more than 50% of its stock. From there, passive income flows through under Subpart F and most remaining profits flow through under GILTI. You report all of it on Form 5471, and if you skip the filing the penalties start at $10,000 per company per year and your return stays open to audit indefinitely.

When These Rules Apply to You

Two thresholds decide whether you are caught. The company itself is a controlled foreign corporation (CFC) if U.S. shareholders collectively own more than 50% of its voting power or value on any day during its tax year.¹ You personally are a “U.S. shareholder” with reporting and inclusion obligations if you own 10% or more of the voting power or value.² “U.S. person” here means citizens, residents, domestic corporations, domestic partnerships, and certain trusts and estates.

Both thresholds use constructive ownership rules, and this is where people misread their exposure. You are treated as owning shares held by your spouse, children, grandchildren, and parents, and shares held by partnerships, corporations, trusts, or estates in which you have an interest can also be attributed to you.³ So you can be a U.S. shareholder of a CFC while holding only a small direct stake yourself.

A 2017 change matters if there are foreign persons in your ownership chain. Congress repealed the rule that had blocked “downward attribution” from foreign persons to U.S. persons, so shares held by a foreign individual or foreign parent company can now be attributed down to a related U.S. person or U.S. subsidiary.³ That single change swept thousands of foreign corporations into CFC status.

Ownership levels need monitoring across the year. Buybacks, new issuances, or private transfers can push either the 10% or 50% line past you without warning, and once the 50% mark is crossed for any single day, the corporation is a CFC for the rest of that tax year.

Subpart F: Passive Income Taxed Now

Subpart F identifies specific categories of income that flow straight through to you as a deemed dividend on the last day of the CFC’s tax year, whether or not the company distributes anything.⁴ The biggest categories are:

Foreign personal holding company income, meaning interest, dividends, rents, royalties, annuities, and gains from the property that produces them. This is the broadest bucket.⁵
Foreign base company sales income, which covers profits from buying or selling goods with a related party when the goods are made and sold outside the CFC’s home country.⁵
Foreign base company services income, meaning revenue from services performed for or on behalf of a related party outside the CFC’s country of incorporation.⁵
Insurance income from insuring risks located outside the CFC’s home country.

Subpart F also captures income tied to international boycotts and illegal payments such as bribes to foreign officials.⁴

Two exceptions can wipe out the exposure. Under the de minimis rule, if the CFC’s combined foreign base company income and insurance income is below the lesser of 5% of gross income or $1,000,000, none of it is Subpart F income that year.⁶ Under the high-tax exception, income taxed abroad at an effective rate above 90% of the top U.S. corporate rate is excluded. With the corporate rate at 21%, that means a foreign effective rate greater than 18.9%.⁵ The high-tax test is applied item by item, not on the CFC’s blended rate.

GILTI: Almost Everything Else

Subpart F targets specific income types. Global intangible low-taxed income (GILTI), added in 2017, catches nearly everything else. U.S. shareholders must include each year the CFC’s earnings that exceed a deemed return on its physical assets.⁷

The math: take your pro rata share of the CFC’s tested income (roughly net income after removing Subpart F items and a few others), then subtract a deemed return equal to 10% of qualified business asset investment (QBAI), which is the adjusted basis of depreciable tangible property used in the business.⁷ What remains is your GILTI inclusion. A capital-heavy manufacturer gets a bigger deemed-return shield. A software or consulting CFC with light physical assets gets almost none, so most of its profit shows up as GILTI.

GILTI has its own high-tax exclusion mirroring the Subpart F version. If income was taxed by a foreign country at an effective rate above 18.9%, the CFC can elect to exclude it from the GILTI calculation.⁸ The election is annual and must be applied consistently across related CFCs.

Ways to Reduce the U.S. Tax

The Section 250 Deduction

Domestic C corporations that include GILTI in income can deduct 40% of the GILTI amount under Section 250, dropping the effective rate to 12.6% before foreign tax credits.⁹ Individuals, S corporation shareholders, and partners in partnerships do not get this deduction automatically.

Deemed-Paid Foreign Tax Credits

Domestic corporations can claim credits for foreign taxes the CFC paid on the flowed-through income. For Subpart F, the credit covers 100% of the foreign taxes properly attributable to the inclusion. For GILTI, the credit is limited to 90% of the foreign taxes attributable to tested income, so there is a 10% haircut baked in.¹⁰ In a high-tax country, credits can cover most or all of the U.S. tax. In a zero-tax jurisdiction, the 12.6% minimum still bites.

Section 962 Election for Individuals

Individuals otherwise pay tax on Subpart F and GILTI inclusions at ordinary rates up to 37%, without automatic access to the Section 250 deduction or deemed-paid credits. A Section 962 election lets you be taxed on those inclusions as if you were a domestic corporation, so the current rate is 21% and you become eligible for deemed-paid foreign tax credits under Section 960.¹¹ When the CFC eventually distributes those earnings, you owe an additional layer of tax to the extent the distribution exceeds the tax you already paid, so the election defers rather than erases the gap between the corporate and individual rates. The election is made year by year.

Previously Taxed Earnings

Once you have included Subpart F or GILTI income and paid U.S. tax on it, Section 959 excludes that same money from your gross income when the CFC later distributes it.¹² The CFC’s earnings get layered into pools (Subpart F, GILTI, untaxed), and distributions come out in a specific order. Sloppy pool tracking means paying tax twice on the same dollar. Schedule J of Form 5471 is where the tracking lives.

What You File

Every U.S. shareholder of a CFC files Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, as an attachment to the annual income tax return. It is due when your return is due, including extensions.¹³ Individuals attach it to Form 1040; domestic corporations attach it to Form 1120.

The form sorts filers into categories. Category 4 covers U.S. persons who controlled the foreign corporation during its accounting period. Category 5 covers U.S. shareholders who owned stock in a CFC on the last day the corporation qualified as one during the year. Categories 1 through 3 handle more specialized situations, including certain transitions under the 2017 tax reform and acquisitions or dispositions that cross specific thresholds.¹⁴ Your category dictates which schedules you complete, and Category 5 filers carry the heaviest load. Financial data must be translated into English, converted to U.S. GAAP, and expressed in the CFC’s functional currency using appropriate exchange rates.¹⁵

If you have a GILTI inclusion, you also file Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income. Schedule A reports your pro rata share of tested income, tested loss, and QBAI for each CFC. Members of a U.S. consolidated group compute the group-level GILTI on Schedule B.¹⁶

Penalties and Statute of Limitations

Failing to file Form 5471, or filing one with missing information, costs $10,000 per foreign corporation per year as the initial penalty. If the IRS sends notice and you still do not file within 90 days, another $10,000 accrues for each 30-day period the failure continues, capped at an additional $50,000 per corporation.¹⁷ Own interests in several CFCs and ignore them, and the total climbs into six figures in a single year.

The statute of limitations is often the bigger problem. The normal three-year window for the IRS to assess additional tax does not start until you file a substantially complete Form 5471.¹⁸ If you never file, or file with significant omissions, the IRS can audit your entire return indefinitely, and the extended exposure covers every line on that return, not just the CFC items. Reasonable cause can defeat this, but willful neglect cannot. That open-ended audit risk, on top of the dollar penalties, is why the filing gets done even when the CFC owes little or no U.S. tax after credits and deductions.

1
Office of the Law Revision Counsel. 26 USC 957 – Controlled Foreign Corporations; United States Persons
2
Office of the Law Revision Counsel. 26 USC 951 – Amounts Included in Gross Income of United States Shareholders
3
Internal Revenue Service. IRC 958 Rules for Determining Stock Ownership
4
Office of the Law Revision Counsel. 26 USC 952 – Subpart F Income Defined
5
Office of the Law Revision Counsel. 26 USC 954 – Foreign Base Company Income
6
Internal Revenue Service. International Practice Units – Subpart F Income – The De Minimis Rule
7
Internal Revenue Service. Concepts of Global Intangible Low-Taxed Income Under IRC 951A
8
Federal Register. Guidance Under Sections 951A and 954 Regarding Income Subject to a High Rate of Foreign Tax
9
Office of the Law Revision Counsel. 26 USC 250 – Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income
10
Office of the Law Revision Counsel. 26 USC 960 – Deemed Paid Credit for Subpart F Inclusions
11
Office of the Law Revision Counsel. 26 USC 962 – Election by Individuals to Be Subject to Tax at Corporate Rates
12
Office of the Law Revision Counsel. 26 USC 959 – Exclusion From Gross Income of Previously Taxed Earnings and Profits
13
Internal Revenue Service. Certain Taxpayers Related to Foreign Corporations Must File Form 5471
14
Internal Revenue Service. Instructions for Form 5471 (12/2025)
15
Internal Revenue Service. About Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
16
Internal Revenue Service. About Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)
17
Office of the Law Revision Counsel. 26 USC 6038 – Information Reporting With Respect to Certain Foreign Corporations and Partnerships
18
Internal Revenue Service. Monetary Penalties for Failure to Timely File a Substantially Complete Form 5471