Business & international structures

The IRS classifies a foreign business as a corporation, a partnership, or a disregarded entity, and that classification decides how — and when — you pay US tax on its profits. Some foreign entities, such as a UK plc, a German AG, or a French SA, are always treated as corporations. Most others get a default classification: an entity whose owners all have limited liability, like a UK Ltd or a German GmbH, is a corporation by default. A single owner with unlimited liability is disregarded, and two or more owners with at least one unlimited owner form a partnership. If the default doesn't suit you, you can often change it by filing Form 8832. The check-the-box election on Form 8832 generally must be filed within 75 days of the date you want it to take effect.

Yes — as a US citizen or green card holder, you owe US tax on your share of a foreign company's income, but how and when you pay depends on how the IRS classifies it. If your foreign company is treated as a disregarded entity or partnership, its profits flow straight onto your personal return each year. Earned income may qualify for the Foreign Earned Income Exclusion, but self-employment tax can apply. If the company is treated as a corporation, which is the default for most foreign limited-liability companies, its profits generally aren't taxed to you until you take salary or dividends. The exception is a controlled foreign corporation: its US owners can owe tax on Subpart F income and net CFC tested income (formerly GILTI) even when nothing is paid out. See our guide to foreign company tax reporting.

A controlled foreign corporation (CFC) is a foreign corporation in which US shareholders together own more than 50% of the voting power or value. A "US shareholder" here is a US person — a citizen, green card holder, US company, or certain trusts — who owns at least 10% of the corporation's vote or value. So an American living in Germany who owns 100% of a GmbH controls a CFC, and so do three US partners holding 20% each of a Hong Kong company. CFC status matters because it removes most of the tax deferral that foreign corporations otherwise enjoy. US shareholders must report the company every year on Form 5471 and may owe current US tax on its Subpart F income and net CFC tested income. Read more about controlled foreign corporation rules.

Run two tests: identify every US shareholder, then check whether their combined ownership is more than 50%. First, list each US person who owns at least 10% of the company's total voting power or total value. Ownership includes shares held directly, indirectly through other entities, and constructively, which means shares owned by close family members such as your spouse, children, or parents may be counted as yours. Second, add up the stakes of only those 10%-plus US shareholders. If their total exceeds 50% of the vote or value at any point during the year, the company is a CFC. A sole US owner always passes both tests. If your company doesn't qualify, it may still be a passive foreign investment company, which has its own harsh rules. Compare PFIC vs CFC to see which applies.

Yes — if a single-member foreign LLC is classified as a corporation for US tax purposes and its owner is a US person, it is a CFC. Most foreign single-owner companies, such as a UK Ltd, a Dutch BV, or a German GmbH, are treated as corporations by default because the owner has limited liability. A US owner holding 100% easily meets the CFC tests, so Form 5471 and the Subpart F and net CFC tested income rules apply. If the entity is eligible, you can instead elect on Form 8832 to treat it as a disregarded entity. It then stops being a CFC: its income is reported directly on your personal return, and you file Form 8858 instead of Form 5471. This can simplify reporting, but it also removes any deferral. Learn more about foreign disregarded entities and Form 8858.

No — there's no size-based exemption, so a one-person consulting company is subject to the same CFC rules as a multinational. What small business owners can use are the relief provisions built into the rules. The high-tax exception excludes income taxed abroad at an effective rate above 18.9% from both Subpart F income and net CFC tested income. A de minimis rule removes Subpart F treatment when a CFC's Subpart F-type income is less than 5% of its gross income or $1 million, whichever is lower. Individual owners can make a Section 962 election to be taxed at corporate rates on their inclusions. And a dormant foreign corporation with almost no activity can qualify for simplified Form 5471 reporting. For owners in countries with corporate tax above 18.9%, the GILTI high-tax exception often eliminates US tax on the company's profits.

Yes — owning a CFC triggers an annual Form 5471 filing for each US shareholder, along with several related forms. Form 5471 reports the company's income, balance sheet, shareholders, and transactions with related parties, and it's attached to your Form 1040 by the return's due date, including extensions. Which schedules you complete depends on your filer category, usually Category 4 or 5 for CFC owners. You'll also file Form 8992 to calculate your net CFC tested income, and Form 1116 if you claim foreign tax credits. If the company's bank accounts exceed $10,000 combined and you own more than 50% or have signature authority, you report them on an FBAR. Your shares may also belong on Form 8938, and transferring cash or property to the company can require Form 926.

Subpart F income is mostly passive or easily shifted income earned by a CFC, and US shareholders are taxed on their share of it in the year the CFC earns it, whether or not it's distributed. The main categories are foreign personal holding company income, such as dividends, interest, rents, royalties, and investment gains; foreign base company sales income from buying or selling goods with related parties outside the CFC's home country; and foreign base company services income from services performed for related parties outside that country. Subpart F income is taxed at ordinary rates on your return. Once taxed, it becomes previously taxed earnings, so a later distribution isn't taxed again. The high-tax exception and the de minimis rule can exclude some of it. Read our complete guide to Subpart F income.

GILTI (global intangible low-taxed income) is a tax on CFC profits that US shareholders must include in income each year, even if the company pays no dividends. It was introduced in 2018 to stop profits from being parked in low-tax countries. GILTI applies to you if you're a US shareholder owning at least 10% of a CFC that earns active business income. Starting with tax years beginning after December 31, 2025, the One Big Beautiful Bill Act renamed GILTI "net CFC tested income" (NCTI) and removed the exclusion for a return on the company's tangible assets, so more income is now taxed. Without a Section 962 election, individuals pay ordinary rates of up to 37% on the inclusion. Find out more about how GILTI works.

GILTI only exists because of CFCs: it's the US shareholder's share of the CFC profits that aren't already taxed as Subpart F income. Each CFC first calculates its tested income or tested loss. That's its gross income minus Subpart F income, high-taxed income excluded under the high-tax exception, and a few other items, minus allocable deductions. You then combine your pro rata shares from all the CFCs you own, so a tested loss in one company can offset tested income in another. Subpart F always comes first and targets specific types of passive or mobile income. GILTI, now called net CFC tested income, picks up most of what's left. Together the two regimes mean that most low-taxed CFC earnings are taxed to US owners in the year they're earned. Compare Subpart F income and GILTI side by side.

Your GILTI, now called net CFC tested income (NCTI), is your pro rata share of the combined tested income of all your CFCs, minus your share of their tested losses. Through tax year 2025, you could reduce that total by a 10% deemed return on the CFCs' tangible business assets, known as QBAI. For tax years beginning after December 31, 2025, the QBAI reduction is repealed, so the full net tested income is included. Individuals add the inclusion to their income and pay ordinary rates. Corporations and individuals who make a Section 962 election deduct 40% of the inclusion (50% through 2025), which produces an effective US rate of 12.6%. They can also credit 90% of the foreign taxes paid on that income, up from 80%. As a result, a CFC taxed abroad at about 14% or more usually leaves no residual US tax. Learn how net CFC tested income works in 2026.

Form 8992 is the form US shareholders of CFCs use to calculate their GILTI inclusion — now called net CFC tested income — for the year. It pulls figures from each CFC's Form 5471, mainly Schedule I-1, and combines them at the shareholder level. The form totals the tested income and tested losses of all your CFCs and computes your inclusion, which then flows to your Form 1040 or corporate return. Through tax year 2025, the form also included the QBAI-based deemed tangible income return that reduced the inclusion. Form 8992 is filed with your income tax return by its due date, including extensions. If you own several CFCs, you file a single Form 8992 with a schedule covering all of them. Read our complete guide to IRS Form 8992.

The Section 962 election lets an individual US shareholder be taxed on Subpart F income and net CFC tested income as if they were a US corporation, at the 21% corporate rate instead of personal rates of up to 37%. Electing individuals also get the 40% Section 250 deduction on NCTI and can credit 90% of the foreign taxes the CFC paid. You make the election each year on a timely filed return, including extensions. It works best when the CFC pays meaningful foreign tax, roughly 14% or more, because the credits can then wipe out the US tax, and when you plan to keep profits in the company. The trade-off is a second layer of tax: when the CFC later pays you a dividend, the amount above the tax you already paid is taxable again. Learn how the Section 962 election affects individual owners.

Failing to file Form 5471 triggers a $10,000 penalty per form for each year, plus up to $50,000 more if you don't file after the IRS notifies you. The additional penalty is $10,000 for every 30 days the failure continues more than 90 days after the IRS notice. The IRS can also reduce your foreign tax credits, and the statute of limitations on your entire return stays open until the form is filed, so the IRS can examine any item on that return indefinitely. You'll also owe any unpaid tax on Subpart F income and net CFC tested income, plus interest and possible accuracy penalties. Willful failures can lead to criminal charges. If you missed filings through non-willful conduct, relief options include reasonable cause statements and the IRS's delinquent filing procedures. Learn more about the Form 5471 penalty.