Controlled Foreign Corporations
If U.S. persons own more than half of a foreign company, its income can be taxed to its U.S. shareholders every year, whether or not anything is distributed.
We advise founders, investors and families who own foreign companies: whether the rules apply, what they cost, which elections reduce them and how Form 5471 is filed correctly.
The company’s income becomes your income, on paper, every year.
A controlled foreign corporation is a foreign company more than 50 percent owned by U.S. shareholders, each holding 10 percent or more. Its passive income and certain other income are taxed currently under subpart F.
Most of its remaining income is taxed currently as net CFC tested income, with a deduction and foreign tax credits that depend on how the shareholder holds the company and how it is taxed abroad.
Form 5471 reports all of it. The penalty for not filing starts at $10,000 per form per year, and the statute of limitations on the whole return stays open until it is filed.
The CFC rules in numbers.
From the Code and IRS instructions.
The deduction for net CFC tested income applies to corporate shareholders and to individuals who elect under Section 962 to be taxed as a corporation. Sources: IRS, Instructions for Form 5471; 26 U.S.C. § 951A; IRS, Internal Revenue Bulletin 2026-40.
What we do for CFC shareholders.
CFC determination
Ownership attribution, the 10 percent and 50 percent tests and whether the company is a CFC at all.
Subpart F and tested income
What is taxed currently, what deductions and credits apply and what the shareholder owes.
Section 962 and entity elections
Electing corporate treatment, check-the-box elections and holding company changes that reduce the burden.
Form 5471 preparation and review
Categories of filer, schedules and the information the company must supply.
Missed filings and penalty relief
Streamlined procedures, reasonable cause and voluntary disclosure for years that were never reported.
Sales and liquidations
Gain characterization, previously taxed income and the tax on exit from a CFC.
How a CFC engagement runs.
Ownership, then income, then elections, then filings.
Ownership
Who owns what, directly and by attribution, and when the CFC status began.
Income
Subpart F, tested income and foreign taxes computed from the company’s accounts.
Elections
Section 962, check-the-box and structural options modeled and chosen.
File
Form 5471 and inclusions prepared with your accountant; prior years corrected if needed.
Lawyers who plan the structure and defend it.
Structure before the move, the investment or the sale.
Residency timing, entity choice, trusts and elections are decided together, with the home-country result in view. We coordinate with your accountants and counsel abroad so the plan works in both places.
Compliance and controversy in the same hands.
Foreign asset reporting, penalty exposure, streamlined and voluntary disclosures and IRS examinations. The firm also litigates and arbitrates, so a plan is written knowing how it will be tested.
Form 5471 keeps the entire return open until it is filed.
Not knowing is not a defense, but it can support reasonable cause.
- List every foreign company you own 10 percent or more of
- Get the company’s financial statements in a form the U.S. rules can use
- Ask whether a Section 962 election reduces your tax
- Correct missed years before the IRS raises them
- Assume a small or dormant company is exempt
- Rely on a home-country accountant for U.S. filings
- Distribute profits without checking previously taxed income
- Restructure the company without modeling the U.S. result
From the firm’s writing.
CFC vs PFIC: Complete Guide to Foreign Corp Reporting
Which regime applies and what it requires.
Read the articleInternational Tax Attorney on Form 8832 Elections
Changing the classification of a foreign company.
Read the articleU.S. Pre-Immigration Tax Lawyer for AI & Software Founders
Dealing with a foreign holding company before the move.
Read the articleFrequently asked.
A foreign corporation in which U.S. shareholders, each owning 10 percent or more by vote or value, together own more than 50 percent. Ownership is counted directly, indirectly and by attribution from family members and entities.
Yes, on subpart F income and net CFC tested income, each year. Distributions of income already taxed are generally not taxed again. Tracking previously taxed income is part of the compliance.
An election that lets an individual shareholder be taxed on CFC inclusions as if a corporation, with the corporate rate, the deduction for tested income and foreign tax credits. It changes the tax on later distributions, so it is modeled before it is made.
$10,000 per form per year, increasing by $10,000 for each 30 days after IRS notice up to $50,000 more, plus a reduction in foreign tax credits. The statute of limitations on the whole return stays open until the form is filed.
Non-willful failures can often be corrected through the streamlined procedures with reduced penalties, or with reasonable cause statements. The right path depends on the facts. We review them before anything is filed.
Other areas of the practice.
Inbound and outbound services, from pre-immigration planning to offshore compliance. Back to the overview.
Own a share of a foreign company?
A confidential consultation. We will tell you whether the CFC rules apply, what they cost and what reduces them.