A Controlled Foreign Corporation (CFC) is a foreign corporation in which U.S. shareholders (each owning 10%+ of voting power or value) own more than 50% in the aggregate. CFCs are subject to special anti-deferral rules under IRC Subpart F (§§ 951–965) and the TCJA's GILTI regime (§ 951A), which require U.S. shareholders to include certain CFC income in their U.S. taxable income currently — regardless of whether profits are distributed.
The CFC rules (IRC §§ 951–965, full text at govinfo.gov) are the cornerstone of the U.S. international anti-deferral regime. Prior to these rules (enacted in 1962 under the Revenue Act of 1962, Pub. L. 87-834), U.S. companies could defer U.S. tax on foreign subsidiary profits indefinitely by simply not repatriating them. Subpart F ended deferral for specific categories of 'tainted' income regardless of actual distribution. CFC definition (IRC § 957): a foreign corporation is a CFC if U.S. shareholders — U.S. persons who own 10% or more of the voting power or value of the foreign corporation — collectively own more than 50% of the total voting power or total value of the corporation on any day during the foreign corporation's tax year. The attribution rules of IRC § 318 (as modified by § 958) determine constructive ownership. Subpart F income (IRC § 952): the main categories of CFC income currently taxable to U.S. shareholders: (1) Foreign personal holding company income (FPHCI) — passive income: dividends, interest, rents, royalties, annuities, and gains from property. (2) Foreign base company sales income — income from buying from and selling to related parties if the CFC is merely a conduit. (3) Foreign base company services income — income from services for or on behalf of related persons in a country other than the CFC's country. (4) Insurance income. Subpart F income is included in U.S. shareholders' gross income whether or not distributed, on a pro-rata basis proportional to ownership percentage. GILTI (IRC § 951A, enacted TCJA 2017): Global Intangible Low-Taxed Income requires U.S. CFC shareholders to include in gross income their share of CFC net income exceeding a 10% return on tangible depreciable assets (the 'QBAI' threshold). GILTI effectively taxes CFC income that was previously deferrable if it reflected returns to intangible assets (IP, brand, data). C corporations receive a 50% GILTI deduction (reducing the effective rate to 10.5% at 21% corporate rate; to 13.125% after 2025 under current law). Individuals and pass-through entities owning CFCs have no automatic GILTI deduction but can make a GILTI high-tax exclusion election. IRS GILTI guidance: irs.gov/instructions/i8992. For small business borrowers with foreign operations: CFC status creates complex U.S. tax reporting obligations (Form 5471, Form 8992 for GILTI, Form 1118 for foreign tax credits) and potential current-year U.S. tax liability on undistributed CFC profits. Lenders reviewing tax returns for businesses with CFCs should expect to see these forms and the associated income inclusions — which can increase apparent U.S. taxable income without corresponding cash distributions.
If you are a U.S. person (individual, corporation, or partnership) and you own 10% or more of a foreign corporation, and U.S. 10%+ shareholders collectively own over 50% of that foreign corporation, it is a CFC. This is surprisingly common for small businesses with foreign manufacturing subsidiaries, international e-commerce operations, or foreign holding structures. CFC status triggers Form 5471 filing obligations and potential Subpart F and GILTI income inclusions. The IRS's Form 5471 instructions at irs.gov/forms-pubs/about-form-5471 outline the basic requirements — though CFC tax planning requires a qualified international tax advisor.
Subpart F (IRC §§ 951–965) targets specific categories of 'tainted' income — passive income, sales income from related-party conduit transactions, and services income from offshore related parties. It has existed since 1962. GILTI (IRC § 951A, enacted 2017 TCJA) is a broader catch-all that taxes most CFC net income exceeding a 10% return on tangible assets — specifically designed to prevent profit-shifting to low-tax jurisdictions via intangibles (patents, trademarks, algorithms). Both can apply simultaneously to the same CFC; Subpart F income is excluded from the GILTI calculation to avoid double taxation. IRS GILTI instructions: irs.gov/instructions/i8992.
CFC Subpart F and GILTI inclusions increase U.S. taxable income on the tax return without a corresponding cash distribution — creating a 'phantom income' effect. Lenders underwriting based on Schedule K-1 or corporate returns may see higher income than actual cash flow; this can improve apparent debt service coverage on paper while masking cash flow strain. Conversely, foreign tax credits on the CFC income can reduce the actual tax liability below what the gross income line suggests. Be prepared to walk lenders through Form 5471 and Form 8992 attachments — or better, provide a CPA-prepared schedule reconciling CFC inclusions to cash distributions. SBA lender guidance on international business income is in SOP 50 10 at sba.gov/document/sop-50-10-sba-lender-and-development-company-loan-programs.