Tax Talk Thursday: GILTI, Subpart F, and Controlled Foreign Corporations

Internal structure in CFCs

If you're a U.S. person who owns (or has a stake in) a company incorporated outside the United States, three terms should be on your radar: Controlled Foreign Corporation (CFC), Subpart F income, and GILTI. These rules exist to prevent U.S. shareholders from parking profits offshore indefinitely — and they can generate a current U.S. tax bill even if you never see a dividend from the foreign company.

This week, we're breaking down how these three pieces fit together, and what it means for your planning.

What Is a Controlled Foreign Corporation (CFC)?

A foreign corporation becomes a CFC when U.S. shareholders own more than 50% of its total combined voting power or total value, applying attribution rules that can pull in stock owned by related parties. A “U.S. shareholder” for this purpose is any U.S. person who owns 10% or more of the vote or value.

The practical effect: many closely held foreign businesses — a Hong Kong trading company, a UK consulting entity, a family-owned manufacturer abroad — meet this threshold without the owners realizing there's a separate U.S. reporting and tax regime attached to that ownership.

If your entity is a CFC, each 10%-or-more U.S. shareholder generally has an annual Form 5471 filing obligation, along with potential current income inclusions under Subpart F and GILTI.

Subpart F Income: The Original Anti-Deferral Regime

Subpart F has been part of the tax code since 1962, and it targets specific categories of “mobile” or passive-type income earned by a CFC — income Congress viewed as easy to shift offshore for tax deferral purposes. Common categories include:

•      Foreign personal holding company income — dividends, interest, rents, royalties, and certain gains

•      Foreign base company sales income — income from buying/selling goods with

related parties where the goods are manufactured and sold outside the CFC's country of incorporation

•      Foreign base company services income — services performed for or on behalf of a related person outside the CFC's home country

•      Insurance income and a handful of other specific categories

If a CFC generates Subpart F income, each U.S. shareholder includes their pro rata share on their U.S. return in the year earned — regardless of whether any cash was actually distributed. There are de minimis and high-tax exceptions that can reduce or eliminate the inclusion, so this isn't automatic in every case.

GILTI: The Newer, Broader Net

GILTI — Global Intangible Low-Taxed Income — was introduced under the 2017 Tax Cuts and Jobs Act and casts a much wider net than Subpart F. Where Subpart F targets specific passive-type categories, GILTI generally sweeps in most of a CFC's active business income that isn't otherwise Subpart F income and exceeds a routine return on the CFC's tangible depreciable assets.

At a high level, the calculation nets together the “tested income” and “tested loss” of all of a taxpayer's CFCs, then reduces that amount by a deemed return (10%) on qualified business asset investment. What's left is GILTI, and it's includible currently by the U.S. shareholder — again, whether or not cash is distributed.

A few things that matter in practice:

•      Individual shareholders face GILTI without the corporate-level deductions (Section

250 deduction, foreign tax credit at the entity level) that C-corporation shareholders get, which often means a meaningfully higher effective rate.

•      A Section 962 election allows an individual to be taxed on GILTI as if they were a corporation, potentially accessing the Section 250 deduction and indirect foreign tax credits. It's a case-by-case decision — the election has its own mechanics and consequences at the time of actual distribution, so it's worth modeling before making it, not after.

•      Foreign tax credits can offset some or all of the GILTI liability depending on the foreign jurisdiction's tax rate, but the credit basket rules for GILTI don't allow carryback or carryforward of excess credits, so timing matters.

Where This Gets Complicated

These regimes interact, and the interaction is where most surprises happen:

•      Income is Subpart F first; whatever isn't Subpart F income (and isn't otherwise excluded) generally falls into the GILTI calculation.

•      Ownership through multiple related entities or family members can create CFC status even when a single individual's direct stake looks small.

•      The high-tax exceptions available for both Subpart F and GILTI depend on the foreign jurisdiction's actual corporate tax rate compared to a U.S. benchmark — this is a facts-and-circumstances analysis, and reasonable positions can differ depending on how foreign tax is computed and allocated. We don't default to the most conservative read here; we look at what the numbers actually support.

•      Form 5471 itself carries steep penalties for late or incomplete filing — starting at $25,000 per form, per year, separate from any tax due.

Planning Takeaways

•      If you have 10% or more ownership in a foreign corporation, find out now whether it's a CFC. The attribution rules are broader than most people expect.

•      Don't wait for distributions to think about GILTI and Subpart F. These are current inclusions, so the tax consequence happens the year income is earned, not the year it's paid out.

•      Evaluate a Section 962 election before you need it. Once the return is filed, the planning window has closed for that year.

•      Track foreign tax paid at the entity level carefully. It's often the single biggest lever for reducing the net U.S. cost of GILTI and Subpart F.

•      Get current on Form 5471 if you've missed prior years. There are structured ways to address delinquent international information returns before the IRS identifies the gap on its own.

If you own a foreign business — or a stake in one — and aren't sure how CFC, Subpart F, or GILTI rules apply to you, we'd rather help you find out now than after a filing deadline has passed. Reach out to us at info@mkhstaxgroup.com and let's take a look at your structure together.