Tax and residency

Controlled foreign corporation

Also called CFC.

A controlled foreign corporation is a foreign corporation in which US shareholders, each holding 10 percent or more of its vote or value, together own more than 50 percent of its vote or value on any day of its tax year, which taxes its undistributed earnings to them personally.

What it decides

26 U.S.C. 957(a) sets the more than 50 percent test and 951(b) defines the United States shareholder as a US person owning 10 percent or more of the vote or of the value. An investor who controls his own overseas company can turn it into a controlled foreign corporation on the day he becomes a US resident, with no transaction of any kind. The inclusions are subpart F income under 951(a) and the annual charge under 951A, which Public Law 119-21 section 70323 renamed from global intangible low-taxed income to net CFC tested income and stripped of the deemed return on tangible assets, for tax years beginning after 31 December 2025. Section 1297(d) keeps the same shares out of the PFIC rules while control lasts. Reporting is Form 5471 under 6038(a), and 6038(b) charges $10,000 for each annual accounting period missed, plus $10,000 for each 30 day period once notice has run 90 days, that continuing piece capped at $50,000, while 6038(c) separately cuts the foreign tax credit by 10 percent.

Governed by 26 U.S.C. 957(a) for the more than 50 percent vote or value test measured on any day of the tax year, 951(a) for the subpart F inclusion, 951(b) for the 10 percent vote or value shareholder, 951A for the annual inclusion, 1297(d) for the PFIC overlap, and 6038(a), (b) and (c) for Form 5471 reporting, the dollar penalties and the 10 percent foreign tax credit cut. Public Law 119-21, approved 4 July 2025, section 70323, renamed section 951A and repealed the net deemed tangible income return, effective for tax years beginning after 31 December 2025. Note that the 2024 edition of the US Code still prints the old section 951A heading, so the public law has to be read alongside it.

Related terms

Passive foreign investment companyA passive foreign investment company is any foreign corporation for a year in which 75 percent or more of its gross income is passive or at least 50 percent of its assets produce passive income, a test that catches almost every foreign mutual fund, ETF or unit trust an investor holds before moving to the United States.
FATCA and Form 8938Form 8938 is the FATCA report of specified foreign financial assets, attached to the income tax return under 26 U.S.C. 6038D, and it is additional to the FBAR rather than a substitute for it. The same Act makes foreign banks report their US account holders to the IRS, which is how the two sides get matched.
Pre-immigration tax planningPre-immigration tax planning is the practitioner label for steps an intending immigrant takes before the residency starting date, after which the same steps are taxed as those of a United States resident.
Worldwide incomeWorldwide income is the rule that a United States resident for tax purposes, including a green card holder whose residence is still conditional, is taxed on income from every source anywhere in the world and not only on income arising inside the United States.

Checked against primary sources on 10 August 2026. Back to the glossary