For the elite global professional, operating through a foreign corporation is a strategic move for efficiency and growth. But this structure introduces a critical checkpoint in your U.S. tax compliance: the Subpart F regime. Think of it as the U.S. government looking over your shoulder, ensuring you don’t use an offshore company to indefinitely defer U.S. tax on certain types of “movable” income.
Normally, the profits of a foreign corporation are only taxed in the U.S. when distributed to you as a dividend—a principle known as deferral. Subpart F is the powerful exception. This anti-deferral regime identifies specific income categories it considers high-risk for tax avoidance. If your Controlled Foreign Corporation (CFC) earns this income, the law forces you to include your share on your personal U.S. tax return the year it is earned, whether or not the cash is ever sent to you. This "deemed dividend" transforms a theoretical foreign profit into a very real, current U.S. tax liability, typically taxed at higher ordinary income rates.
Confronting these rules shouldn't cause anxiety; it should inspire intelligent business design. The objective is not to memorize the tax code, but to understand the strategic guardrails it creates. By navigating two key checkpoints—one for ownership, one for income—you can proactively structure your operations, turning a compliance hurdle into a source of professional confidence.
Before analyzing a single dollar of revenue, you must answer one foundational question: is your foreign company even on the Subpart F radar? This is the gateway to the entire regime. If your business doesn’t meet this initial ownership test, the complex income rules simply do not apply.
A foreign corporation becomes a "Controlled Foreign Corporation" (CFC) when "U.S. Shareholders" collectively own more than 50% of its stock, measured by either voting power or value.
Crucially, not every American owner counts. A "U.S. Shareholder" is defined as a U.S. person who owns 10% or more of the foreign corporation. An American with a 2% stake, for example, is not a U.S. Shareholder, and their ownership is ignored in the 50% control test.
For the solo global professional, this two-part test is deceptively simple. If you are a U.S. citizen and the sole 100% owner of your foreign company, the math is unavoidable:
Instantly, your company is a CFC. This isn't a failure; it is a factual classification that directs you to the next checkpoint. If you have partners, map your ownership structure with precision to remove all ambiguity.
In this scenario, only your 60% stake counts. Since 60% is more than 50%, the company is a CFC. You now know for certain that you must proceed to the next step: analyzing your income.
Confirming your company is a CFC directs your attention from who owns the company to what the company earns. The Subpart F rules target specific, "movable" income streams the IRS views as easily shifted to low-tax jurisdictions. Your task is to diagnose your revenue to see if it falls into these high-risk categories.
Here are the primary red flags that define Subpart F income:
Imagine you own a U.S. S-Corp and a Maltese CFC. The profit your Maltese CFC makes from the following transaction is classic FBCSI, as it had no real economic connection to Malta:
Consider a consultant who owns a U.S. S-Corp and an Estonian OÜ (a CFC). A client pays the S-Corp for a project. The S-Corp then pays the Estonian CFC a fee to assist, and the consultant flies to France to perform the work. The fee paid to the Estonian CFC is likely Subpart F income. Why? The service was performed for a related party (the S-Corp) outside of the CFC's country of incorporation (Estonia).
Diagnosing your revenue streams allows you to shift from defense to offense. Building a resilient global business isn't about finding loopholes; it's about making deliberate structural choices that align with the intent of U.S. international tax law. This framework will prepare you for an intelligent, focused conversation with your tax professional.
The intricate machinery of U.S. international tax is not a barrier to your global ambition; it is a system designed to be navigated with purpose. The anxiety you once felt about the "unknown unknowns" can now be replaced with the quiet confidence that comes from mastering the rules of the road.
You have fundamentally shifted your position from reactive to proactive. You are no longer just a passenger on your global journey—you are at the helm. Let's recap the powerful sequence you now possess:
This framework transforms compliance from a source of dread into a tool for empowerment. You can now have a focused, cost-effective, and deeply strategic discussion with your tax advisor. You can pinpoint concerns, ask incisive questions, and collaborate on sophisticated solutions. You are in control of the narrative, ready to build your global enterprise with intention and confidence.
A certified financial planner specializing in the unique challenges faced by US citizens abroad. Ben's articles provide actionable advice on everything from FBAR and FATCA compliance to retirement planning for expats.
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