What Is a Controlled Foreign Corporation (CFC)?

A controlled foreign corporation (CFC) operates in a foreign country but is controlled by U.S. shareholders.

CFC Taxation

When you have a CFC, U.S. tax rules require you to pay tax on your share of the company’s Subpart F income (like interest, dividends, and passive income) and Net CFC Tested Income (formerly known as GILTI), whether or not you actually receive that money.

• Report and pay tax yearly: Your CFC’s earnings must be reported on your U.S. tax return, even if you didn’t receive the money individually.

• Global Intangible Low‑Tax Income (GILTI) or NCTI: Starting in 2018, U.S. shareholders also pay tax on certain active business income from their CFCs. In 2025, the name GILTI was changed to NCTI or Net CFC Tested Income.

These rules aim to prevent deferral or tax avoidance, even if your foreign profits stay invested offshore.

An Example of a Controlled Foreign Corporation

Imagine Yael, an American citizen living in Israel, owns 100% of “YaelTech Ltd.”, an Israeli company she formed to serve customers. That company qualifies as a CFC.

• If YaelTech earns $100,000 in interest income and $200,000 of income from customer services,  Yael must report the $100,000 as Subpart F income on her U.S. tax return for that year.

• If YaelTech doesn’t fall under an exemption or pay enough foreign taxes on the $200,000 active business income,  it qualifies under NCTI. She may also owe tax under those rules (even if she leaves the profits in the company).

In both cases, Yael might not receive any distributions, but she’ll still owe tax in the U.S. based on her ownership.

CFC Reporting

Here’s how to stay on top of your CFC tax obligations:

• Form 5471: Used to report U.S. persons’ interests and CFC income.

• Form 8992: Reports NCTI tax for U.S. shareholders of CFCs.

Filing these forms on time is essential to avoid penalties. Many U.S. citizens abroad can benefit from professional assistance when filling out these forms. If you are one of them and need expert guidance for CFC reporting, please contact our international tax consulting specialists at any time.