Glossary
Controlled Foreign Corporation (CFC)
Definition
A controlled foreign corporation is a non-U.S. corporation in which U.S. shareholders, each owning at least 10%, together own more than 50% of the vote or value. CFC status can make some of its income taxable to the U.S. owners even without a distribution.
The ownership test
A “U.S. shareholder” is a U.S. person owning at least 10% of the foreign corporation, counting certain indirect and attributed ownership. If such shareholders together own more than 50%, the company is a CFC. A U.S. citizen who owns all of a foreign company is a typical case.
Tax consequences
U.S. shareholders may have to include certain income, such as Subpart F income and GILTI, on their own return in the year it is earned by the CFC, whether or not it is paid out. Foreign tax credits and elections may reduce the cost in some cases.
Reporting
Many U.S. persons connected to a CFC must file Form 5471 each year, and penalties for missing or incomplete forms can be significant. Check the filing categories carefully, since they cover more than just majority owners.
Practical example
For example, suppose Tomás, who recently became a U.S. resident, owns 100% of a small company incorporated in Spain. The company is likely a CFC, so Tomás may need to file Form 5471 and look at whether any of its income must be included on his U.S. return.
General information, not tax advice
This page provides general educational information about U.S. federal tax rules. It is not individualized tax, legal or accounting advice, and it does not create a client relationship. Results depend on each taxpayer's specific facts.
Written by Roger I. Chirino, founder of Chirino USA Accountants & Advisors P.A.
Supported by licensed CPAs, IRS Enrolled Agents (EAs), and experienced U.S. tax professionals focused on cross-border compliance and planning.
Related questions
Do foreign companies owned by U.S. taxpayers need to be reported?
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