US Expats Who Own Foreign Businesses: CFC, Subpart F, and NCTI (2026 Guide)

Starting or buying a company abroad doesn't let you defer US taxes the way your foreign competitors can. If US citizens own more than half the foreign corporation, it becomes a Controlled Foreign Corporation — and a set of anti-deferral rules (Subpart F and NCTI) force active and passive profits onto your US return whether or not you took a distribution. Here's how the rules work after the OBBBA changes that took effect January 1, 2026.

What Is a Controlled Foreign Corporation?

A foreign corporation becomes a Controlled Foreign Corporation (CFC) when US shareholders — each individually owning at least 10% of vote or value — collectively own more than 50% of the total voting power or total value of the corporation.¹

Both tests are applied separately. A group of 10 US citizens each owning exactly 5% fails the test — no CFC. Five US citizens each owning 15% creates a CFC: collectively 75%, each above 10%. Ownership through US entities counts; the constructive ownership rules (§958) can attribute shares through chains of entities and family members.

Starting in 2026, the OBBBA expanded the "inclusion shareholder" rule: a US shareholder who owns 10%+ of a CFC at any point during the year must include their share of Subpart F income and NCTI — not just if they hold shares on the last day of the year.²

Form 5471: The Compliance Obligation

US persons with interests in CFCs must attach Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) to their annual Form 1040.³ This is a multi-schedule information return, not a payment. But failure to file carries automatic penalties regardless of whether any tax is owed.

Who must file — the five categories:

• Category 2: US officers or directors of a foreign corporation in which any US person has acquired 10%+ interest during the year.
• Category 3: US person who acquires or disposes of stock, crossing the 10% threshold up or down.
• Category 4: US person with control (more than 50%) of a CFC at any point during the year.
• Category 5: US shareholder who owned stock in a CFC on any day during the CFC's tax year (expanded under OBBBA from last-day-only requirement).
• Category 1: Applies to §965 specified foreign corporations (one-time transition tax — mostly resolved, but if you have §965 legacy positions, you may still file Category 1).

Most business-owner expats fall into Categories 4 and 5. The form requires balance sheet, income statement, Schedule E (earnings and profits), Schedule J (accumulated E&P), Schedule O (acquisitions/dispositions), and Schedule P (PTEP — previously taxed E&P) — every year, even if there is no taxable inclusion that year.

Penalty: $10,000 per year per CFC for failure to file, continuing to $50,000 if not cured after IRS notice — maximum $60,000 per corporation per year. No statute of limitations runs on any item of the US return until Form 5471 is filed.³

Subpart F Income: Passive Profits Taxed Immediately

Subpart F (IRC §§ 951–965) requires US shareholders to include certain categories of CFC income in their gross income in the year the CFC earns it — no distribution required. The most common category is Foreign Personal Holding Company Income (FPHCI): dividends, interest, rents, royalties, and gains from the sale of property that generates passive income.⁴

Why this matters for operating businesses: Even if your CFC runs an active business (a software company, consulting firm, import/export operation), passive income earned inside that same corporation — idle cash parked in a bank account earning interest, dividends from minority investments, rent from a property the business owns — all create immediate Subpart F inclusions for US shareholders.

Key exceptions and thresholds:

• De minimis rule: If total Subpart F income is less than the lesser of 5% of the CFC's gross income or $1 million, no Subpart F inclusion is required for the year. Small companies with occasional passive income often fall below this threshold.
• Full inclusion rule: If more than 70% of the CFC's gross income is Subpart F income, all of the CFC's income is treated as Subpart F — even the active portion. This catches holding companies and investment vehicles masquerading as operating companies.
• High-tax exception: Subpart F income subject to an effective foreign tax rate exceeding 18.9% (90% of the US 21% corporate rate) can be excluded from Subpart F inclusions under Treas. Reg. §1.954-1(d).
• Same-country exception: Rents and royalties earned in the CFC's country of incorporation, derived from the active conduct of a trade or business, are excluded from FPHCI.

Subpart F inclusions are taxed at ordinary individual rates — up to 37% — with no preferential rate, and no indirect foreign tax credit available at the individual level. The foreign tax credit limitation applies separately to Subpart F income in its own basket.

NCTI: Active Profits Are Also Taxable in 2026

Starting with the 2026 tax year (per OBBBA), the GILTI regime — renamed Net CFC Tested Income (NCTI) — taxes the active business profits of your CFC that escape Subpart F. Effectively, all CFC income is now in scope: Subpart F catches passive income; NCTI catches active income.²

How NCTI is calculated:

1. Start with the CFC's "tested income" — total income minus Subpart F income, effectively connected income, and a few other carve-outs. (Pre-2026, you also subtracted a 10% deemed return on tangible assets. OBBBA eliminated this QBAI deduction for 2026+ years.)
2. Each US shareholder includes their pro-rata share of the CFC's net tested income — the NCTI amount.
3. That NCTI amount lands on Form 8992 and flows to the US return as a gross income item.

The individual problem: Without a planning election, NCTI is taxed at your ordinary income rate — up to 37%. No §250 deduction is available to individuals. No indirect foreign tax credit is available. This is dramatically worse than the corporate treatment (described below).

The Section 962 Election: Your Most Important Tool

IRC § 962 allows an individual US shareholder to elect to be taxed on Subpart F and NCTI inclusions as if they were a C-corporation.⁵ The election is made on your Form 1040 for the tax year in question and converts your individual NCTI exposure as follows:

High-Tax Exception: When You May Owe Nothing on NCTI

If your CFC's effective foreign tax rate on tested income exceeds 18.9% (90% of 21%), that income can be excluded from NCTI under the high-tax exception election (Treas. Reg. §1.951A-2(c)(7) and OBBBA conforming changes).²

This is most useful for CFCs in high-tax jurisdictions: a UK Ltd paying 25% UK corporation tax easily exceeds the 18.9% threshold. A German GmbH at the 30% combined German rate exceeds it. A French SAS at 25% exceeds it. In these countries, a §962 election may produce minimal or zero incremental US tax on NCTI — the high-tax exception or the FTC absorbs it. In zero-tax or low-tax jurisdictions (UAE, Cayman, BVI), the exception does not apply and careful §962 planning is essential.

PFIC vs CFC: Which Do You Have?

A PFIC (Passive Foreign Investment Company) is a foreign corporation with at least 75% passive income or at least 50% passive assets. A CFC is a foreign corporation more than 50% owned by US persons each holding 10%+.

The two regimes can overlap — a CFC can also be a PFIC — but CFC treatment generally takes priority for US shareholders who meet the 10% threshold. If you hold less than 10% in a foreign company, or US persons don't collectively control it, the company escapes CFC status. But if it passes the passive income or passive asset test, it may be a PFIC — triggering the far more punishing §1291 excess distribution rules (see our PFIC Rules guide).

Practical rule of thumb: If you started or control the foreign company and it runs a real operating business — it's almost certainly a CFC, not a PFIC. If you're a passive minority investor in a foreign fund or investment vehicle — it's almost certainly a PFIC, not a CFC. If you're uncertain: get a specialist to run both tests before filing.

Entity Structure Choices for Expats

Single-member LLC (disregarded entity)

A US LLC wholly owned by one US person is treated as a "disregarded entity" for US tax — its income and expenses flow directly to your Form 1040 as if you ran a sole proprietorship. No Form 5471. No CFC rules. But self-employment tax applies in full on net profit (15.3% up to the SS wage base, 2.9% above), unless a totalization agreement reduces the obligation. For a US citizen in a no-totalization country (UAE, India, Singapore), an LLC can be expensive from a payroll-tax perspective.

Foreign corporation (CFC)

A properly structured CFC — Singapore Pte Ltd, UK Ltd, German GmbH — keeps assets and liability inside the foreign entity, but triggers Form 5471, Subpart F, and NCTI. The payoff: no SE tax on retained corporate earnings (only on salary you pay yourself), potential access to the §962 election and FTC, and the ability to reinvest profits in the business at lower effective rates.

Check-the-box election (Form 8832)

Most foreign entities are eligible to elect US tax treatment as either a corporation or a disregarded entity (for single-member) / partnership (for multi-member) using Form 8832. Electing disregarded-entity status eliminates CFC rules and Form 5471, but restores SE tax exposure. The right choice depends on the country's legal liability rules, the foreign entity's local tax treatment, and your overall income level.

S-corporation — the expatriate trap

IRC §1361(b)(1)(C) prohibits non-resident aliens from being S-corporation shareholders. A US citizen who moves abroad remains a US citizen, so they don't lose S-corp eligibility. But if they become a non-resident alien for US tax purposes — typically by renouncing citizenship or otherwise losing US person status — the S-corp election terminates automatically, converting the company to a C-corporation with all its tax consequences. US citizens living abroad generally remain US persons and can hold S-corp shares; dual-status or treaty elections that classify you as a non-resident alien can accidentally trigger this trap.

Pre-Move Planning for Business Owners

• Run the CFC test before you move. If your existing ownership structure will create a CFC on day one of foreign residency, model the NCTI exposure under §962 with and without the high-tax exception before the move.
• Consider a check-the-box election for simple operating businesses. In low-tax jurisdictions where the high-tax exception doesn't apply and you want simplicity, electing disregarded-entity status eliminates the CFC layer at the cost of SE tax. Model both.
• Sweep the CFC for PFIC-tainted investments. If your CFC holds foreign mutual funds, foreign ETFs, or foreign insurance wrappers, those holdings may be PFICs inside the CFC — creating both Form 5471 and Form 8621 obligations. Clean up the investment portfolio before establishing foreign residency.
• File Form 5471 from year one. The statute of limitations on your entire US return doesn't start running until Form 5471 is filed. Even a zero-income start-up CFC in year one requires the filing.
• Get two advisors. CFC compliance requires a US-licensed CPA or EA with international tax experience and a local tax advisor who understands the foreign corporation's tax treatment in the host country. The §962 FTC calculation requires knowing both the US and foreign tax on the same income.