Controlled Foreign Corporations (CFCs)

Controlled foreign corporations (also known as CFCs) are one category of foreign corporations. Foreign corporations are corporations that are incorporated or organized outside the U.S. However, when U.S. shareholders control more than 50% of the foreign corporation, it becomes a CFC.

Control of a foreign corporation can also occur if a taxpayer is related to the actual shareholder, at which point stock ownership can be attributed to the taxpayer. However, the attribution rules are complex and vary depending on the type of relationship.

It is important to be careful with the term “corporation” because a CFC is not necessarily the same as a controlled foreign company. This is because being called a “company” or “corporation” under the laws of a foreign country does not automatically make it a “corporation” for U.S. tax purposes. The inverse is also true where an entity that is not called a corporation or company in a foreign nation may be a corporation for U.S. tax purposes. A controlled foreign company could potentially be a foreign partnership, foreign disregarded entity, foreign trust, or even foreign estate for U.S. tax purposes.

The determination of whether a foreign corporation is a CFC can have major tax implications in terms of recognizing income, filing Form 5471, potentially Form 926, as well as falling under the new tax rules from the Tax Cuts and Job Act of 2017.