Controlled Foreign Corporations: What Expat Business Owners Need to Know

If you own more than 50% of a foreign corporation — measured by vote or value — it's likely a Controlled Foreign Corporation (CFC), which triggers significant US tax reporting and potentially immediate taxation of certain income. Under the Subpart F rules, certain types of passive income earned inside a CFC — called Subpart F income — is taxed to the US owner in the year it's earned, even if it hasn't been distributed. The 2017 Tax Cuts and Jobs Act added the GILTI (Global Intangible Low-Taxed Income) rules on top of Subpart F, which can tax the active business profits of your CFC at a minimum rate. Expats who run their business through a local company abroad may not realize they've created a CFC with annual Form 5471 reporting obligations and potential phantom income. CFC rules are among the most complex in the US tax code, and business owners abroad should get professional advice before structuring their foreign business.