If you own a meaningful stake in a foreign company, US tax law may reach into that company's profits and tax you on them before a single dollar is distributed to you. That runs against the intuition most business owners bring from domestic corporations, where a C corporation's retained earnings aren't taxed to shareholders until paid out. For controlled foreign corporations (CFCs), Congress built two anti-deferral regimes — Subpart F, dating to the 1960s, and GILTI, added by the 2017 tax law — that pull certain foreign earnings onto your US return in the year they're earned. Get this wrong and you face tax on phantom income plus a $10,000-per-year Form 5471 penalty for the paperwork you didn't file.
The threshold question is whether your foreign company is even a CFC, and whether you're a US shareholder — defined as owning 10% or more of the vote or value. If US shareholders collectively own more than 50% of the foreign corporation, it's a CFC, and its 10% owners are exposed to current taxation on Subpart F income and GILTI. The good news: the same code that creates the problem gives individuals real planning levers — the Section 962 election to be taxed at corporate rates with foreign tax credits, the Section 250 deduction that can halve the GILTI hit, and careful ownership structuring. This article explains how the two regimes work and where the levers are.
Is your foreign company a CFC? The two-part test
Everything downstream depends on this classification. A foreign corporation is a controlled foreign corporation when two conditions are both met, and the definitions are precise enough that ownership just under the lines produces very different outcomes.
Identify the US shareholders
A US shareholder is a US person owning 10% or more of the total combined voting power or value of the foreign corporation. Below 10%, you are not a US shareholder for these rules.
Add up their ownership
If those 10%-or-greater US shareholders together own more than 50% of the corporation's vote or value, the company is a CFC. Attribution rules can pull in shares held by related parties.
Determine your inclusion
Each US shareholder of a CFC includes their share of Subpart F income and GILTI currently — in the year earned — whether or not the company distributes anything.
File Form 5471
US shareholders, officers, and directors generally must file Form 5471 to report the foreign corporation, its earnings, and the inclusions. Missing it triggers the $10,000-per-year penalty.
The attribution rules matter more than people expect. Ownership held by a spouse, certain family members, or related entities can be attributed to you, turning what looks like a minority stake into a controlling one on paper — and turning a foreign company you thought was outside these rules into a CFC.
Subpart F: the original anti-deferral regime
Subpart F targets passive and easily-shifted income — the kinds of earnings a company could otherwise park in a low-tax jurisdiction to defer US tax indefinitely. When a CFC earns Subpart F income, its US shareholders include their pro-rata share currently.
| Subpart F category | Typical examples |
|---|---|
| Foreign personal holding company income | Dividends, interest, rents, royalties, annuities |
| Foreign base company sales income | Buying/selling goods with related parties across borders |
| Foreign base company services income | Services performed for related parties outside the CFC's country |
| Insurance income | Insuring risks located outside the CFC's country |
There's a practical relief valve: the high-tax exception. If the CFC's income was already taxed abroad above a threshold tied to the US corporate rate, that income can be excluded from Subpart F. Combined with the de minimis rule (small amounts of Subpart F income are ignored), many operating companies with genuine local business escape Subpart F on most of their earnings — only to meet GILTI on the rest.
GILTI: the broad catch-all that changed everything
GILTI — Global Intangible Low-Taxed Income — was the 2017 tax law's answer to income that slipped past Subpart F. Despite the name, it isn't limited to intangibles. It's a formula that sweeps in most active foreign business earnings above a routine 10% return on the CFC's tangible depreciable assets. For a services business or any company that's asset-light, that "routine return" carve-out is small, so most of the profit becomes GILTI.
Subpart F
- Targets specific passive / mobile income categories
- Predates GILTI by decades (1962)
- Has a high-tax exception and a de minimis rule
- Often avoidable for genuine active operating income
GILTI
- Broad catch-all for most active foreign earnings
- Added by the 2017 Tax Cuts and Jobs Act
- Allows only a 10% return on tangible assets before inclusion
- Hits asset-light and services businesses hardest
The sting for individual CFC owners is that GILTI, without planning, is taxed at ordinary individual rates and — by default — with no foreign tax credit for the corporate-level foreign taxes the CFC paid. That's the worst-case combination: full US rate on income you never received, no offset for foreign tax. This is precisely where the planning levers earn their keep.
The planning levers: Section 962, Section 250, and structure
The default GILTI outcome for an individual is punishing, but three tools can transform it. The right one depends on how much foreign tax the CFC already pays and how you hold the stock.
- Section 962 election — an individual elects to be taxed on GILTI/Subpart F at corporate rates and claim a foreign tax credit for the CFC's foreign taxes
- Section 250 deduction — a US C corporation shareholder can deduct a large portion of the GILTI inclusion, cutting the effective rate substantially
- Hold through a US C corporation — combines the Section 250 deduction with an indirect foreign tax credit under Section 960
- High-tax exception — elect out of GILTI on income already taxed abroad above the threshold rate
- Section 250 deduction sunset — the deduction percentage is scheduled to shrink, raising the effective GILTI rate for later years — plan around the change
Without a Section 962 election, an individual pays US tax on GILTI at ordinary rates with no credit for the CFC's foreign taxes. With the election, the individual is taxed as though a domestic corporation earned the income — accessing the lower corporate rate and a foreign tax credit for the foreign taxes the CFC paid. When the CFC already pays meaningful foreign tax, the election can shrink the current US bill to near zero. The trade-off is added complexity and a second layer of tax when the earnings are eventually distributed, so it's a year-by-year calculation, not a set-and-forget choice.
Form 5471: the filing you cannot afford to skip
Whatever the tax outcome, the information return is mandatory and the penalty is severe. Form 5471 reports the foreign corporation's ownership, financials, and your inclusions, and different categories of filers must complete different schedules.
Failing to file a required Form 5471 carries a $10,000 penalty per form per year, with additional penalties if the failure continues after IRS notice. The penalty applies even if you owed no tax on the CFC. Worse, an unfiled Form 5471 can hold your entire tax return's statute of limitations open — meaning the IRS can revisit the whole return for years. File it, and file it complete.
Location helps but doesn't solve this. Living in Florida or another no-income-tax state removes the state layer, but GILTI, Subpart F, and Form 5471 are entirely federal — no state is a shield. The real levers are structural: how you hold the CFC, whether you make the Section 962 election, and whether the high-tax exception applies. Decide these before year-end, because most of them are elections you can't make retroactively.
Putting the playbook together
Owning a foreign company as a US person is workable — thousands do it — but only with the regime understood and the elections made deliberately. Run the analysis in order.
First determine whether your foreign company is a CFC and whether you're a 10% US shareholder — attribution rules can surprise you. If it is a CFC, expect current tax on Subpart F income (passive and mobile earnings) and GILTI (most active earnings above a small routine return). Individuals should evaluate the Section 962 election and the high-tax exception every year; owners who can hold through a US C corporation may access the Section 250 deduction and indirect foreign tax credits. Above all, file Form 5471 completely — the $10,000-per-year penalty and open statute of limitations make it the highest-stakes piece of the whole structure.
Own a piece of a foreign company? Get ahead of GILTI
GILTI and Subpart F can turn foreign earnings into a US tax bill you didn't see coming. Talk to our team about your ownership structure and filing obligations before phantom income catches you by surprise.
Talk to an international tax proSources
- IRS — Instructions for Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
- IRC Section 951 and 951A — Subpart F income and Global Intangible Low-Taxed Income (GILTI)
- IRC Section 250 — Deduction for Foreign-Derived Intangible Income and GILTI
- IRC Section 962 — Election by individuals to be taxed at corporate rates
- IRC Section 6038 — Penalties for failure to file Form 5471; IRS International Tax Gap resources
Frequently asked questions
A CFC is a foreign corporation where US shareholders — each owning 10% or more of the vote or value — together own more than 50% of the corporation. If your foreign company is a CFC, its US 10% owners can be taxed on certain earnings currently, before any distribution, under Subpart F and GILTI.
Subpart F targets specific categories of passive and mobile income (dividends, interest, royalties, certain related-party sales and services). GILTI is a broader, catch-all inclusion that sweeps in most remaining active foreign earnings above a routine return on tangible assets. Both tax a US shareholder currently on undistributed CFC earnings.
Yes. Individuals can make a Section 962 election to be taxed on GILTI at corporate rates and claim a foreign tax credit for the CFC's foreign taxes — often cutting the bill sharply when the foreign company already pays meaningful tax. Structuring ownership through a US C corporation can also unlock the Section 250 deduction that halves the GILTI inclusion.
Generally yes. US persons who are officers, directors, or 10% shareholders of a foreign corporation usually must file Form 5471 with their return. The penalty for failing to file starts at $10,000 per form per year, so it's one of the highest-stakes information returns in the code.
