Get to know the author
Connect on LinkedInIf you’re a U.S. citizen who owns a company abroad, its profits can affect your U.S. tax return—even when the business operates entirely overseas and hasn’t paid you a dividend.
That’s because the United States has special rules for foreign companies largely owned by U.S. shareholders. Congress changed these controlled foreign corporation rules in 2025, replacing the old year-end ownership test with a system based on when each shareholder owned their shares.
In August 2026, Treasury and the IRS proposed the detailed instructions for making that calculation. Here’s what changed, and why it matters for you.
What is a controlled foreign corporation?
A controlled foreign corporation, or CFC, is a foreign company in which U.S. shareholders own more than 50% of the voting power or total value.
Two ownership thresholds matter:
- A U.S. person counts as a U.S. shareholder when they own at least 10% of the company’s voting power or value.
- Those U.S. shareholders must collectively own more than 50% of the company for it to qualify as a CFC.
For example, if two U.S. citizens each own 30% of a foreign corporation, their combined ownership is 60%, making the company a CFC.
The IRS does not look only at shares held in your own name. Direct ownership, shares held through another entity and shares attributed to you under the constructive ownership rules can all count.
Before applying these tests, you also need to establish that the foreign entity is treated as a corporation for U.S. tax purposes. Its legal classification in another country does not always determine its U.S. classification.
| Term | What it means |
| Foreign corporation | A company incorporated abroad and treated as a corporation for U.S. tax purposes |
| U.S. shareholder | A U.S. person who meets the 10% ownership threshold |
| Controlled foreign corporation | A foreign corporation more than 50% owned by U.S. shareholders |
| Domestic corporation | A company created or organized in the United States |
| Foreign subsidiary | A foreign company owned or controlled by another company |
| Pro rata share | The portion of the CFC’s income allocated to a particular U.S. shareholder |
A foreign company does not become a CFC simply because an American owns some of its shares. Both ownership thresholds must be met.
Why does CFC status matter?
CFC status matters because the United States does not always wait for a foreign company to distribute its profits before taxing its U.S. shareholders.
For a qualifying U.S. shareholder, the CFC rules can require you to:
- File Form 5471: This form gives the IRS information about the foreign company, its finances and its owners.
- Report certain passive income: Some interest, dividends, rents and royalties fall under rules known as Subpart F.
- Report a share of the company’s other profits: This is calculated under rules now called net CFC tested income.
- Track profits already taxed by the United States: This helps prevent the same income from being taxed again when the company eventually distributes it.
- Keep detailed records: You will need information about the company’s finances, ownership and distributions.
- Pay tax without receiving a dividend: U.S. tax can become due while the money remains inside the company.
You may also come across the term GILTI, which stands for Global Intangible Low-Taxed Income. The Tax Cuts and Jobs Act (TCJA) introduced this calculation in 2017 to determine how much of a CFC’s profits a U.S. shareholder had to report. From 2026, an updated calculation called net CFC tested income replaces it.
A foreign company does not need to be based in a tax haven to become a CFC. CFC status is based on who owns the company, not where it is located or how much foreign tax it pays.
💡 Pro Tip:
Don’t assume there is nothing to report because the company made no distribution. Form 5471 and other CFC reporting can still be required when you received no money from the business.
What changed under the 2025 tax law?
Before 2026, the CFC regime focused largely on who owned shares at the end of the company’s tax year. The new law looks at ownership throughout the year instead.
The revised rules apply to taxable years of foreign corporations beginning after December 31, 2025.
| Previous rule | Revised rule |
| A U.S. shareholder generally had to own shares on the last day the company was a CFC | Owning shares on any day during the CFC year can result in taxable income |
| Income was allocated largely according to ownership at year-end | Income is allocated according to when each shareholder owned their shares |
| Selling shares before year-end could prevent the seller from having to report CFC income | A seller will have to report income for the part of the year they owned the shares |
| The calculation used hypothetical distributions, with adjustments for acquisitions and dividends | The new calculation follows changes in ownership more directly |
The most important change for individual business owners is the “any day” rule. If you buy, sell or transfer shares during the year, part of the company’s income can now be added to your U.S. taxable income even if you no longer own the shares at year-end.
What did the Treasury and IRS propose in August 2026?
The 2025 law established the new ownership rule. The proposed regulations explain how taxpayers would calculate and report the income.
Under the proposal:
- CFC income would be divided day by day according to who owned the shares.
- The same approach would apply to Subpart F income, tested income and tested losses.
- Separate rules would cover companies with multiple classes of shares or changes in the number of shares.
- A shareholder who sells their interest would report the income in the tax year that includes their final day of ownership.
- The CFC’s taxable year would close when it becomes or ceases to be a CFC.
- Shareholders could choose to close the taxable year after certain significant changes in ownership.
- Form 5471 reporting would be updated under Section 6038, the part of the Internal Revenue Code that requires U.S. taxpayers to provide information about certain foreign corporations.
For this purpose, a significant ownership change generally means that qualifying U.S. ownership falls by more than 50 percentage points.
Closing a CFC’s taxable year does not mean closing the business. It creates a cut-off point for calculating its income, earnings and profits, and foreign taxes before and after the ownership change.
The proposal can still change before it becomes final. The Treasury and the IRS are accepting comments until October 26, 2026.
💡 Pro Tip:
Keep a dated record of every share issue, sale, transfer and redemption. Under the new rules, a year-end ownership summary is no longer enough to calculate each shareholder’s income correctly.
How would the new ownership rule work?
Suppose Maya, a U.S. citizen, owns 100% of a foreign company on January 1, 2026. She sells all her shares to another U.S. shareholder on July 1, and the company remains a CFC for the rest of the year.
Under the old year-end rule, Maya would not have reported a share of the company’s Subpart F income because she no longer owned the company on the last relevant day of its tax year. The buyer would have been responsible for the income inclusion.
Under the new rule, both owners have income to report. The company’s income is divided day by day, with Maya allocated the portion connected to her period of ownership and the buyer allocated the remainder.
The final amounts depend on the company’s income, the exact ownership dates and any changes in its CFC status. The sale can also create a separate capital gain or loss for Maya.
Which U.S. owners are most likely to be affected?
The new “any day” rule matters most when the ownership or status of a foreign company changed during 2026. Pay particular attention if you:
- Bought or sold shares in a foreign company
- Started or closed a foreign business
- Added or removed shareholders
- Issued, redeemed or transferred shares
- Became or ceased to be a U.S. tax resident
- Own shares through another company, partnership or family member
- Hold more than one class of shares
- Took part in a transaction that caused the company to become or cease being a CFC
- Own part of a foreign subsidiary through a domestic corporation
Even if the company’s ownership remained unchanged, the updated net CFC tested income rules can still affect your 2026 calculation.
💡 Pro Tip:
A drop of more than 50 percentage points in U.S. ownership can allow shareholders to close the CFC’s tax year on the transaction date. Because the election requires a written agreement, shareholders should decide whether to use it before the deal closes.
What are Subpart F income and net CFC tested income?
The CFC rules divide company profits into different categories. Two of the most important are Subpart F income and net CFC tested income. Both can require a U.S. shareholder to report income before receiving a dividend.
Subpart F income
Subpart F covers specific types of income that the United States taxes in the year the CFC earns them. These include:
- Foreign personal holding company income: Certain dividends, interest, rents, royalties and capital gains
- Foreign base company services income: Income from some services performed for a related person outside the country where the CFC is organized
- Insurance income: Certain income earned from insuring risks outside the CFC’s country
- Other income: Additional categories listed in the Internal Revenue Code
These labels are a starting point, not the end of the calculation. Some active rents and royalties are excluded, for example, and separate rules apply to highly taxed income.
Net CFC tested income
Net CFC tested income covers a broader share of CFC profits. It is calculated by combining the U.S. shareholder’s share of tested income and tested losses from their CFCs.
This calculation replaces Global Intangible Low-Taxed Income, or GILTI. The Tax Cuts and Jobs Act introduced GILTI in 2017, but the name was misleading: it was not limited to intangible assets or companies in low-tax jurisdictions.
The 2025 legislation changed the calculation and renamed it net CFC tested income for relevant tax years. The proposed regulations explain how tested income and losses should be divided when ownership changes during the year.
Income taxed under Subpart F or the tested-income rules is recorded as previously taxed earnings and profits. When the CFC later distributes those profits, the shareholder should not pay U.S. income tax on them a second time, although other currency, basis and reporting calculations still apply.
What should owners of foreign companies do now?
If you own all or part of a foreign company, take these steps before filing your 2026 U.S. tax return:
- Confirm how the foreign entity is classified for U.S. tax purposes.
- Check whether it meets the CFC ownership thresholds.
- Map every change in ownership during 2026.
- Record the dates and terms of share sales, transfers, issuances and redemptions.
- Check whether the company became or ceased to be a CFC during the year.
- Gather records of its gross income, deductions and foreign taxes paid.
- Calculate how Subpart F income and net CFC tested income are divided between shareholders.
- Determine whether the foreign taxes paid qualify for foreign tax credits.
- Update previously taxed income and share-basis records.
- Check whether you need to file Form 5471, an FBAR or other international forms.
Get technical advice before selling shares or restructuring the company. Once a transaction has taken place, your options for managing the U.S. tax consequences are much narrower.
Get help with Controlled Foreign Corporation reporting
CFC reporting is complicated, particularly when a company’s ownership changed during 2026. A Bright!Tax tax professional can determine whether your foreign company is a CFC, identify the forms you need to file and calculate the income that belongs on your U.S. tax return.
If you bought, sold or transferred shares during the year, get advice before filing so those changes are reported correctly.
Get help with your foreign company tax reporting.
Frequently Asked Questions
-
Is every foreign company owned by an American a CFC?
No. U.S. shareholders must collectively own more than 50% of the company’s voting power or value.
A U.S. person must also own at least 10% of the voting power or value to qualify as a U.S. shareholder under the CFC rules. Attribution rules can count shares held through another person or entity.
-
Can one American owner make a foreign company a CFC?
Yes. If one U.S. shareholder owns more than 50% of a foreign corporation’s voting power or value, the company meets the CFC ownership test.
-
Do I have to pay U.S. tax if I own a CFC?
CFC status does not automatically produce a tax bill. The result depends on the company’s income, the shareholder’s ownership and the available deductions, elections and foreign tax credits.
However, Subpart F income and net CFC tested income can become taxable before the company distributes any money.
-
Do all CFC owners have to file Form 5471?
Form 5471 applies to several categories of U.S. owners, officers and directors of foreign corporations. The filing requirement depends on the person’s ownership, how that ownership changed and which reporting category applies.
A person can have a Form 5471 filing requirement even when the company owes no U.S. tax.
-
When is Form 5471 due?
Form 5471 is attached to the shareholder’s U.S. income tax return and follows the same filing deadline, including a valid extension.
It is not filed separately. Extending the tax return also extends the deadline for an attached Form 5471.
-
What is the penalty for failing to file Form 5471?
The standard penalty starts at $10,000 for each form and tax year. Further penalties can follow if the required information is not provided after the IRS sends a notice.
A substantially incomplete Form 5471 can be treated as though it was never filed, even when no U.S. income tax is due.
-
Does owning a CFC create an FBAR requirement?
Not automatically. Form 5471 reports information about a foreign corporation, while the FBAR reports qualifying foreign financial accounts.
Having a financial interest in or signature authority over the company’s bank accounts can create an FBAR requirement. Filing Form 5471 does not replace an FBAR, and filing an FBAR does not replace Form 5471.
-
What happens when a CFC distributes profits that have already been taxed?
Income previously reported under the Subpart F or tested-income rules is tracked as previously taxed earnings and profits. When the company distributes those profits to the same U.S. shareholder, they are not included in income a second time.
The distribution still needs to be reported correctly. It can affect the shareholder’s basis and create a foreign-currency gain or loss.
-
Are the proposed CFC regulations already in effect?
The changes made by the 2025 tax law already apply to taxable years of foreign corporations beginning after December 31, 2025.
The regulations released in August 2026 are not final. Treasury and the IRS expect to finalize them by January 4, 2027, and the final version could change.
Until then, taxpayers can follow the proposed regulations only if they—and relevant related parties—apply all of the proposed rules fully and consistently. They cannot adopt only the provisions that produce a better result.