Key Takeaways
- A foreign corporation is a CFC if US persons collectively own more than 50% of voting power or value
- 10%+ US shareholders must file Form 5471 and report Subpart F income and GILTI — even without receiving distributions
- Deemed inclusions are taxed at ordinary income rates (up to 37%), not capital gains rates
What Makes a Company a CFC?
Under US tax law, a foreign corporation is considered a Controlled Foreign Corporation if US persons collectively own more than 50% of the total voting power or value. Any US person owning 10% or more is treated as a “US shareholder” for CFC purposes — required to file Form 5471 each year and report certain types of income earned by the CFC, even if not distributed.
What Income Must Be Reported?
Each 10%+ US shareholder is subject to US tax on their pro-rata share of the CFC’s Subpart F income and Global Intangible Low-Taxed Income (GILTI). Subpart F income includes passive income such as interest, rent, royalties, dividends, annuities, and capital gains on assets generating passive income. These deemed inclusions are taxed at ordinary income rates (up to 37%), not the preferential long-term capital gains rate.
The Practical Lesson
If you’re a US person with foreign business interests or equity in foreign startups, don’t assume silence is safe. You may have significant tax and reporting obligations even if you’ve never received a single dollar from the company.