If you are a US citizen or green card holder living abroad and own part of a foreign company, you may fall under the Controlled Foreign Corporation (CFC) regime. These CFC rules can require you to report — and sometimes pay CFC tax — even if you receive no distributions from your foreign company. Understanding how the IRS applies Subpart F income, GILTI, and foreign reporting obligations is essential to avoid penalties and stay fully compliant.
Key Summary: Controlled Foreign Corporation
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Controlled Foreign Corporation (CFC) rules apply when US persons own more than 50% of a foreign company, triggering potential US tax and reporting obligations, even with no distributions.
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US shareholders may owe CFC tax through Subpart F income and GILTI, both of which require including certain foreign earnings on a US tax return.
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Major reporting requirements include Form 5471, FATCA Form 8938, and FBAR, with significant penalties for incomplete or late filings.
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Strategic tax planning such as check-the-box elections, Section 962 elections, and treaty analysis can help reduce CFC tax exposure.
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US expats with foreign businesses (GmbH, SARL, Ltd, etc.) are often unaware that CFC rules apply to them, making proactive compliance essential to avoid penalties.
What is a Controlled Foreign Corporation?
A Controlled Foreign Corporation is a foreign company in which US shareholders own more than 50% of the voting power or total value.
A “US shareholder” for CFC purposes is any US person (citizen, resident, or green-card holder) who owns 10% or more of the company’s voting power or value. If these ownership thresholds are met, the entity becomes a CFC, and the shareholder becomes subject to CFC rules and potential CFC tax.
Example:
Four US expats each own 15% of a German GmbH. Together they own 60%. Because US shareholders own more than 50% and each holds more than 10%, the GmbH is a Controlled Foreign Corporation under IRS rules.
Why Were CFC Rules Created?
The purpose of CFC rules is to prevent US taxpayers from shifting income to low-tax jurisdictions and delaying US taxation. CFC rules ensure that certain foreign income is taxed currently, even when the profits stay offshore.
Key goals of the CFC regime:
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Capture Subpart F income (mobile, easily shifted income)
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Prevent erosion of the US tax base
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Tax “excess” foreign profits through GILTI (Global Intangible Low-Taxed Income)
Types of Income Subject to CFC Tax
If you are a US shareholder in a CFC, there are two major areas of tax exposure: Subpart F income and GILTI.
Subpart F Income
Subpart F income includes categories of income that the IRS believes can easily be shifted into low-tax jurisdictions. Examples of Subpart F income include:
- Dividends
- Interest
- Royalties
- Rents
- Certain types of service income
- Gains from commodities or securities trading
If a controlled foreign corporation earns Subpart F income, each US shareholder who owns 10% or more must report their share of that income on their US tax return, even if no actual cash is distributed to them.
GILTI (Global Intangible Low-Taxed Income)
Introduced by the 2017 Tax Cuts and Jobs Act, GILTI applies to most types of income earned by a controlled foreign corporation that exceed a certain return on tangible assets.
GILTI was primarily aimed at large multinational corporations but can also apply to individual expats who own foreign companies. Unfortunately, individual shareholders are not eligible for the same deductions and foreign tax credits as corporations, which can result in significant tax liability if proper planning is not done.
In some cases, it may make sense for an individual shareholder to make an election to treat their foreign company as a disregarded entity (e.g., through a check-the-box election) or to set up a US C corporation to hold the foreign business interests. Each situation is unique and should be evaluated carefully with a tax professional.
Common Scenarios Where CFC Rules Apply
Here are some common situations where CFC rules may apply:
- A US citizen living abroad owns a foreign limited company or corporation (such as an SARL in France, Ltd in the UK, or GmbH in Germany).
- A US-based business expands internationally and sets up a foreign subsidiary that is more than 50% US-owned.
- A US person owns a foreign startup that has received investment from other US individuals.
In all of these cases, the foreign business may be considered a controlled foreign corporation, triggering US tax reporting and possible tax liabilities.
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IRS Reporting Requirements for CFC Owners
If you are a US shareholder of a controlled foreign corporation, you may be required to file several forms with the IRS:
Form 5471
This is the most important form for CFC reporting. Form 5471 requires detailed information about the foreign corporation, its ownership, financials, earnings, and transactions with related parties.
There are multiple categories of filers under Form 5471, each with different filing obligations. The form is attached to your individual income tax return (Form 1040), and failure to file it can result in steep penalties—$10,000 per missed form per year, plus additional penalties for continued noncompliance.
Form 8938 (FATCA)
Under the Foreign Account Tax Compliance Act (FATCA), US individuals with foreign financial assets above certain thresholds must report them on Form 8938. This may include ownership of a foreign corporation.
Form 8938 is separate from the FBAR (Foreign Bank Account Report) and from Form 5471, and filing one does not exempt you from filing the others.
FBAR (FinCen Form 114)
If the controlled foreign corporation has non-US bank accounts and you have signature authority or ownership interest in those accounts, you may also need to file an FBAR if the aggregate value exceeds $10,000 at any point during the year.
Tax Planning Strategies for CFC Owners
Dealing with CFC rules can be challenging, especially for Americans living abroad who are also subject to local tax laws. Here are a few strategies to consider:
- Check-the-Box Election: You may be able to treat the foreign entity as a disregarded entity or partnership for US tax purposes, avoiding CFC rules entirely in some cases.
- Section 962 Election: Individual shareholders subject to GILTI may make a Section 962 election, allowing them to be taxed as if they were a US C corporation, this can provide access to the 50% GILTI deduction and foreign tax credits.
- Tax Treaty Review: Review whether the US has a tax treaty with your country of residence and if any provisions apply to your situation.
- Distribution Planning: In some cases, making regular distributions from the foreign company can help reduce Subpart F or GILTI exposure.
Because the controlled foreign corporation rules are so complex, it is crucial to work with a tax advisor who specializes in international tax and expat issues.
If you own part of a foreign company and are a US person, the IRS may consider that company a controlled foreign corporation. This brings with it significant reporting obligations and potential tax liabilities, especially related to Subpart F income and GILTI.
Form 5471 must be filed each year to report your interest in a CFC, and penalties for missing or incomplete filings can be severe. It is also important to understand how your foreign income will be taxed under the CFC regime and whether tax planning strategies can help reduce your burden.
