Knowledge Center Tax Advice for Specific Needs

What Is a Controlled Foreign Corporation (CFC)?

According to the IRS, most American business owners abroad operate legitimate companies that pay local taxes where they are based. A Controlled Foreign Corporation (CFC) is simply a foreign business where U.S. shareholders collectively own more than 50% of the voting power or stock value. CFC rules exist to prevent tax evasion through shell companies, not to penalize legitimate entrepreneurs building real businesses overseas.

You’re considered a “U.S. shareholder” if you own at least 10% of the foreign corporation’s voting power or value. If U.S. shareholders who each own at least 10% collectively control more than 50%, your foreign business becomes a CFC. With proper planning, most business owners abroad can minimize or eliminate additional U.S. tax liability on their foreign business income.

If you own a foreign business, you’ll need to file Form 5471 annually. The penalties start at $10,000 per year, but relief procedures are available. CFC rules require you to report your foreign corporation’s income and potentially pay U.S. tax on certain earnings, even without taking distributions. Strategic tax planning (including taking a reasonable salary qualifying for the Foreign Earned Income Exclusion) can significantly reduce your tax burden.

Own a Foreign Company? Make Sure You’re Filing Form 5471 Correctly.

If you own 10% or more of a foreign corporation, CFC rules may already apply. Get expert help confirming your filing requirements before penalties start.

What Makes a Foreign Corporation “Controlled”?

If Americans collectively hold the reins of your foreign business, the IRS considers it controlled.

The ownership test:

U.S. shareholders must each own at least 10%
These U.S. shareholders together must own more than 50% of the total voting power or stock value

Ownership includes more than just the shares in your name. The IRS counts ownership through family members (spouse, children, parents, and grandparents) and entities you control (such as trusts, partnerships, and other corporations). This “constructive ownership” prevents people from artificially splitting ownership to avoid CFC rules.

Example: Sarah owns 40% of a UK company, her husband owns 15%, and their trust owns 10%. The IRS considers her to own 65% through constructive ownership. The company is a CFC because U.S. persons control more than 50%.

Do I Need to File if My Business is Legitimate?

Yes. Form 5471 is an information return the IRS uses to track foreign business ownership by U.S. taxpayers. The IRS requires this filing from anyone who meets the ownership thresholds, regardless of whether your business is legitimate or profitable.

Typical situations requiring Form 5471:

You own a consulting company abroad and are the sole shareholder
You and your American business partner each own 50% of a foreign corporation
You’re a director, and a U.S. person acquires 10% or more of the shares
You sell shares and drop below 10% ownership

Even dormant companies are required to file Form 5471. Most expat business owners run active companies that pay substantial local taxes. You can often use the Foreign Tax Credit to offset your U.S. tax liability dollar-for-dollar.

How Will My Foreign Business Income Be Taxed?

This is where CFC rules differ from regular corporate taxation. Typically, shareholders only pay tax when they receive dividends or sell their shares. But as a CFC shareholder, you may need to report and pay U.S. tax on certain business profits annually, whether or not you take distributions.

Two main tax rules apply to CFCs:

Subpart F targets income that could easily be moved to low-tax countries:

Passive income: Interest, dividends, rents, royalties
Related-party transactions: Buying from or selling to companies you own, when goods don’t physically pass through your CFC’s country
Related-party services: Fees for services performed outside your CFC’s country for companies you own

Example: David owns a British Virgin Islands company earning £100,000 in rental income from UK properties. This is Subpart F income he must report immediately, even if he leaves the money in the company.

2. Global Intangible Low-Taxed Income (GILTI)

GILTI captures active business income that exceeds 10% of your company’s tangible assets. Despite its name, GILTI applies to most types of business income not already taxed under Subpart F.

Example: Maria owns a Spanish software company with €50,000 in equipment. The company earns €200,000 in profit. The GILTI calculation allows a 10% return on tangible assets (€5,000) to be excluded from the calculation. The remaining €195,000 is potentially subject to GILTI taxation. However, if Maria takes a reasonable salary of €130,000 (which qualifies for the Foreign Earned Income Exclusion), and her company already paid substantial Spanish taxes, her additional U.S. tax liability could be minimal or zero.

Here’s the critical strategy: If your foreign business pays you a reasonable salary, that salary can qualify for the Foreign Earned Income Exclusion (up to $130,000 for the 2025 tax year). The salary also reduces your company’s taxable income. Strategic salary planning is often the most effective way to minimize CFC tax liability.

What Forms Do I Need to File?

Form 5471 is your primary reporting requirement. This comprehensive form includes schedules for your income statement, taxes paid to foreign countries, balance sheet, current earnings and profits, and transactions with related parties.

You’ll also need Form 8992 if you have GILTI income to report.

Filing deadline: Form 5471 is due with your personal tax return. For expats, the typical deadline is June 15 (with an automatic two-month extension), with the possibility of extending it until October 15. If multiple U.S. shareholders need to file, you can often coordinate to submit one consolidated Form 5471.

What Are the Penalties for Not Filing?

CFC penalties are severe, but relief is available:

Initial penalty: $10,000 per foreign corporation per year.
Continuation penalty: After 90 days without filing following IRS notice, an additional $10,000 penalty applies for each 30-day period, up to $50,000 additional per corporation.
Foreign tax credit reduction: 10% reduction of available foreign tax credits for late filing.
Statute of limitations: Your entire tax return remains open indefinitely until you file Form 5471.

If you’re behind, the IRS offers Delinquent International Information Return Submission Procedures. You may qualify for penalty relief with reasonable cause. Many Americans who formed legitimate businesses abroad without realizing they needed to file Form 5471 successfully use our Streamlined Filing package to catch up.

How Can I Reduce My CFC Tax Liability?

Smart tax planning makes a significant difference:

1. Take a Reasonable Salary

This is the most effective strategy. Pay yourself a fair market salary for your work. That salary qualifies for the Foreign Earned Income Exclusion (up to $132,900 for 2026), excluding it from U.S. taxation. The salary also reduces your corporation’s taxable income, potentially eliminating GILTI.

Example: Thomas owns a German GmbH earning €180,000 annually. He pays himself a €130,000 salary. His salary qualifies for the FEIE, excluding it from U.S. taxes. The remaining €50,000 is subject to GILTI rules, but Germany’s high corporate tax rates likely eliminate any additional U.S. tax through the foreign tax credit.

2. Leverage Foreign Tax Credits

If your foreign business pays substantial taxes where it operates, you can claim foreign tax credits against your U.S. tax liability. These credits often eliminate the need for additional U.S. tax. Track every tax payment your foreign corporation makes.

3. Time Asset Purchases Strategically

GILTI allows a 10% return on tangible assets before income is taxed. Timing the purchase of equipment, vehicles, or office space can impact your GILTI calculation.

4. Consider Advanced Strategies

Section 962 elections let you be taxed as a corporation on your GILTI income, potentially qualifying for a 50% deduction. Business structure optimization can also help. Never try to avoid CFC status by artificially splitting ownership, as the IRS’s constructive ownership rules catch these arrangements.

Don’t Let CFC Rules Overwhelm You

The IRS estimates Form 5471 takes over 30 hours to prepare correctly. For most business owners, that time is better spent growing their business.

If you’re behind on CFC reporting or worried about getting it wrong, we can help. Greenback is an American company founded in 2009 by U.S. expats for expats. We’ve helped over 23,000 expats file more than 71,000 returns while maintaining a 4.9-star average on Trustpilot. Many of our CPAs and Enrolled Agents are expats themselves living in 14 time zones.

Whether you need to catch up on missed filings, optimize your business structure, or ensure your Form 5471 is filed correctly, our team has comprehensive expertise in CFC taxation. We understand you built a real business abroad, not a tax shelter.

If you’re ready to be matched with a Greenback accountant, click the Get Started button below. For general questions on US expat taxes or working with Greenback, contact our Customer Champions.

We Help Foreign Business Owners File Form 5471 With Confidence.

From Form 5471 to GILTI calculations and salary planning, we help U.S. expats stay compliant while minimizing unnecessary tax.

This article is intended for informational purposes only and does not constitute legal or tax advice. While Greenback makes every effort to ensure the information is accurate and up-to-date, every tax situation is unique. For advice tailored to your specific situation, please consult a qualified tax professional.