If you own or control a business organized outside the United States, US tax law treats that entity as a foreign affiliate, and the rules that apply depend almost entirely on how much of it you own and what kind of income it earns. The heaviest regime, the Controlled Foreign Corporation or CFC regime, forces you to pay US tax on certain foreign earnings the year they are earned, whether or not any cash comes home, and it comes with a stack of information returns whose penalties start at $10,000 per form per year. Foreign affiliate US tax rules also reach partnerships, disregarded entities, branches, and smaller equity stakes that fall outside the CFC net, and each of those carries its own filing requirements. Major changes took effect for tax years beginning in 2026, including the replacement of GILTI with a broader net CFC tested income regime that captures more foreign earnings than before.
When a Foreign Corporation Becomes a CFC
A foreign corporation is a CFC when US Shareholders collectively own more than 50 percent of either its voting power or the total value of its stock on any day during the tax year.1Office of the Law Revision Counsel. 26 US Code 957 – Controlled Foreign Corporations; United States Persons The test is not based on all US owners. Only those who individually qualify as “US Shareholders” count, and that status requires owning at least 10 percent of the corporation’s voting power or total stock value.2Legal Information Institute. 26 USC 951(b) – United States Shareholder
So the analysis runs in two steps. First, identify which US owners individually meet the 10 percent threshold. Then, add up the ownership of only those people. If that sum tops 50 percent, the corporation is a CFC.
How Ownership Is Counted
Section 958 stops taxpayers from evading the thresholds by spreading ownership across family members, trusts, and layered entities. Stock owned through foreign corporations, partnerships, and trusts is treated as owned proportionally by the US persons behind them.3Office of the Law Revision Counsel. 26 US Code 958 – Rules for Determining Stock Ownership Separate constructive ownership rules attribute stock between family members, between a partner and a partnership, and between a corporation and its shareholders.
The Tax Cuts and Jobs Act eliminated a longstanding rule that stopped stock from being attributed downward from a foreign person to a US person. Before that repeal, a foreign parent’s ownership of a foreign subsidiary would not be pushed down to a US subsidiary of the same group. Now it can be, and foreign subsidiaries that used to sit outside the CFC rules can be pulled in.3Office of the Law Revision Counsel. 26 US Code 958 – Rules for Determining Stock Ownership Limited IRS relief exists where the foreign parent has no 10 percent US owner, but any multinational group with US entities in the ownership chain should assume the broadest possible attribution applies.
How CFC Earnings Are Taxed
Two overlapping regimes force current-year US inclusion of a CFC’s earnings, even when no dividend is paid.
Subpart F Income
Subpart F targets earnings that can easily be shifted to a low-tax jurisdiction without real business substance.4Internal Revenue Service. Overview of Subpart F Income for US Individual Shareholders The largest bucket is foreign personal holding company income: dividends, interest, rents, royalties, annuities, and certain gains from property and currency transactions.5eCFR. 26 CFR 1.954-2 – Foreign Personal Holding Company Income Insurance income and certain sales and services income earned outside the CFC’s home country also fall under Subpart F.6Office of the Law Revision Counsel. 26 US Code 952 – Subpart F Income Defined
Each US Shareholder includes a proportional share of the CFC’s Subpart F income on their own return for the year the CFC earns it. The income is taxed at the shareholder’s ordinary rate.
Net CFC Tested Income
For tax years beginning in 2026, what was called Global Intangible Low-Taxed Income (GILTI) has been renamed net CFC tested income, or NCTI. The name change matters less than the substance: the old exemption for a 10 percent return on Qualified Business Asset Investment (QBAI) is gone.7Office of the Law Revision Counsel. 26 USC 951A – Net CFC Tested Income Capital-intensive CFCs that produced little or no GILTI can generate large NCTI inclusions under the new rules.
NCTI is each US Shareholder’s proportional share of a CFC’s “tested income,” reduced by the shareholder’s share of tested losses from other CFCs. Tested income is broadly the CFC’s gross income minus allocable deductions, after stripping out Subpart F income and a few categories taxed under their own rules.
Domestic C corporations can claim a Section 250 deduction equal to 40 percent of their NCTI inclusion and the associated deemed-paid foreign taxes, cutting the effective federal rate on this income to 12.6 percent before foreign tax credits.8Office of the Law Revision Counsel. 26 USC 250 – Foreign-Derived Intangible Income and Net CFC Tested Income Individual shareholders do not get the Section 250 deduction unless they make a Section 962 election.
High-Tax Exclusion
Both Subpart F and NCTI have an escape valve. If an item of income is taxed by a foreign country at an effective rate exceeding 90 percent of the US corporate rate, it can be excluded from the US inclusion. With the corporate rate at 21 percent, the threshold is 18.9 percent. A CFC operating where the corporate rate is 20 percent can qualify to exclude its earnings from both regimes.
Section 962 Election for Individuals
Individuals face a structural disadvantage: Subpart F and NCTI inclusions land on a personal return at ordinary rates up to 37 percent, while the Section 250 deduction and the deemed-paid credit rules are built for corporations. A Section 962 election lets an individual be taxed on CFC inclusions as if they were a corporation, applying the 21 percent rate and the Section 250 deduction. The tradeoff: any later distribution from the CFC that exceeds the tax already paid under the election is treated as a taxable dividend. The election is annual and covers all CFCs the taxpayer owns for that year.
Foreign Tax Credits
When a CFC pays income tax to a foreign government, the US Shareholder can generally claim a foreign tax credit to offset the resulting US tax. Individuals use Form 1116; corporations use Form 1118.9Internal Revenue Service. Foreign Tax Credit
The credit is capped at the US tax that would otherwise apply to the foreign-source income, and it is computed separately for each “basket,” including passive income, general business income, foreign branch income, and NCTI.10Internal Revenue Service. Instructions for Form 1118 For NCTI, the foreign tax credit is limited to 80 percent of the foreign taxes paid. Foreign taxes can be deducted instead of credited, but the credit is almost always more valuable.
When Your Foreign Affiliate Isn’t a CFC
The CFC regime is the heaviest, but plenty of foreign affiliates sit outside it. Where you land determines which forms you file and how the income is taxed.
Passive Foreign Investment Companies
If the CFC thresholds are not met, a foreign corporation may still be a Passive Foreign Investment Company (PFIC). A foreign corporation is a PFIC if 75 percent or more of its gross income is passive, or at least 50 percent of its assets produce or are held to produce passive income.11Office of the Law Revision Counsel. 26 US Code 1297 – Passive Foreign Investment Company
The regime is punitive by design. Without a timely election, gains on PFIC stock and certain distributions are hit with an “excess distribution” tax that applies the highest ordinary rate and adds an interest charge as if the tax had been owed in earlier years. A US shareholder must file Form 8621 for each PFIC owned, directly or indirectly, including PFICs owned through a chain of other PFICs.12Internal Revenue Service. Instructions for Form 8621 – Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund Two elections can soften the outcome: a Qualified Electing Fund election, which requires annual income inclusion similar to Subpart F, and a mark-to-market election for publicly traded PFIC stock. Foreign mutual funds are a common PFIC trap for individuals living abroad.
Portfolio Stakes Under 10 Percent
A US person who owns less than 10 percent of a foreign corporation is not a US Shareholder. That person files no Form 5471, includes no Subpart F or NCTI income, and sits outside the anti-deferral regimes. The corporation may still be a PFIC, though, which brings its own Form 8621 filing and potentially harsher treatment on distributions and gains.11Office of the Law Revision Counsel. 26 US Code 1297 – Passive Foreign Investment Company
Foreign Branches
A foreign branch is not a separate legal entity. It is an extension of the US business, so its income and expenses flow directly onto the US owner’s return in the year earned. There is no Subpart F or NCTI question because there is no separate foreign corporation. A branch does require Form 8858.13Internal Revenue Service. About Form 8858
Foreign Partnerships
Partnerships are pass-through entities, so a US person’s share of the partnership’s income lands on the US return regardless of distribution. The reporting is done on Form 8865, and the penalties for noncompliance are as severe as for CFCs.14Internal Revenue Service. Instructions for Form 8865 (2025)
Forms You Have to File
The IRS uses different forms for different foreign entities and different roles. Missing even one triggers standalone penalties and keeps the entire return open to audit.
Form 5471 for Foreign Corporations
Form 5471 is the core disclosure for US persons connected to foreign corporations. Filing is organized by category: Category 4 covers US persons who control the corporation; Category 5 covers US Shareholders of a CFC.15Internal Revenue Service. Certain Taxpayers Related to Foreign Corporations Must File Form 5471 Other categories apply to officers, directors, and persons who acquire or dispose of stock. The form requires detailed financial statements, a breakdown of earnings and profits, and schedules for Subpart F and NCTI.
Form 8858 for Disregarded Entities and Branches
If a US person owns a foreign entity that is disregarded for tax purposes, or operates a foreign branch, Form 8858 is required.13Internal Revenue Service. About Form 8858 A foreign single-member LLC or a foreign entity that checks the box to be disregarded falls here. The form captures the income statement and balance sheet for the year.
Form 926 for Transfers to Foreign Corporations
A US person who transfers cash exceeding $100,000 to a foreign corporation over any 12-month period must file Form 926. The form is also required for any transfer where the US person holds at least 10 percent of the corporation’s voting power or value immediately after, regardless of dollar amount.16Internal Revenue Service. Instructions for Form 926 Property transfers in tax-free reorganizations and capital contributions also trigger the filing.
Form 8865 for Foreign Partnerships
Form 8865 uses four filing categories:
- Category 1: US persons who control the partnership (more than 50 percent interest).
- Category 2: US persons who own at least 10 percent when the partnership is controlled by US persons owning 10 percent or more each.
- Category 3: US persons who contribute property worth over $100,000, or who hold at least 10 percent after the contribution.
- Category 4: US persons who acquire, dispose of, or experience a shift of 10 percent or more in their partnership interest.
If a Category 1 filer exists for the partnership year, Category 2 filing is not required.14Internal Revenue Service. Instructions for Form 8865 (2025)
FBAR for Foreign Financial Accounts
Foreign affiliates usually mean foreign bank accounts. Any US person with an aggregate balance over $10,000 in foreign financial accounts at any point during the year must file FinCEN Form 114, the FBAR, separately from the tax return.17Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR) The FBAR is filed with the Financial Crimes Enforcement Network, not the IRS, and it carries its own civil and criminal penalties independent of tax return penalties.
Penalties and the Open Statute of Limitations
Penalties for missing international information returns are steep relative to ordinary tax return errors, and they apply per form, per year.
Failing to file a complete Form 5471 triggers an automatic $10,000 penalty for each foreign corporation. If the IRS sends a notice and the form still is not filed within 90 days, an additional $10,000 penalty accrues for each 30-day period the failure continues, up to $50,000 in additional penalties per corporation.18Internal Revenue Service. International Information Reporting Penalties A taxpayer with two CFCs who ignores an IRS notice could face up to $120,000 in penalties before any tax on the underlying income is assessed. Willful failure can also carry criminal exposure.
The most underappreciated risk is what happens to the audit clock. The IRS normally has three years from filing to audit a return. Under Section 6501(c)(8), failing to furnish required international information keeps the statute of limitations open for the entire return until three years after the information is finally provided.19Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection A missing Form 5471 from 2020 can leave every item on that return open to adjustment years later. A reasonable cause exception can narrow the open window to items related to the missing form, but it requires affirmative evidence that the failure was not due to willful neglect.