Subpart F is the set of rules under IRC §§951-965 that require US shareholders of controlled foreign corporations to include certain types of income in their US taxable income currently - even if the foreign corporation never distributes a dividend. The rules were enacted in 1962 to prevent US persons from using offshore companies to permanently defer US tax on passive and mobile income. After six decades of evolution and the TCJA and OBBBA rewrites, Subpart F remains the foundational layer of US international tax for anyone with a foreign business interest.
Step 1: Is the Foreign Corporation a CFC?
Subpart F only applies to Controlled Foreign Corporations (CFCs). A foreign corporation is a CFC if US shareholders own more than 50% of the corporation's total voting power or total value on any day of the corporation's tax year. IRC §957(a).
A "US shareholder" for this purpose is a US person who owns 10% or more of the foreign corporation's voting power or value. IRC §951(b). Constructive ownership rules under IRC §958 apply - you are treated as owning shares held by related parties, through entities, and through certain family members.
TCJA Changed the Constructive Ownership Rules - Watch the Downward Attribution Trap
Before TCJA (2017), the constructive ownership rules did not attribute stock ownership downward from a foreign parent to a US subsidiary. TCJA eliminated that exception under IRC §958(b), creating the "downward attribution" problem: stock owned by a foreign parent can now be attributed to a US subsidiary, potentially making the US subsidiary a "US shareholder" of its own foreign affiliates and turning those affiliates into CFCs. This was an unintended consequence that created CFC status for thousands of foreign subsidiaries of multinational groups that were never intended to be CFCs. IRS issued relief notices (Notice 2019-1, Notice 2020-69) but the underlying statute was not fixed until OBBBA, which retroactively restored the pre-TCJA rule for certain attribution situations.
Step 2: Is the Income Subpart F Income?
Not all CFC income is Subpart F income. The rules target specific categories of income that are passive, mobile, or related-party driven - income that could easily be shifted to a low-tax jurisdiction with no real economic substance. The CFC's operating business income from genuine commercial activity in its home country is generally not Subpart F income.
Foreign Personal Holding Company Income (FPHCI)
IRC §954(c)
The largest and most commonly triggered category. Includes: dividends, interest, rents, and royalties (unless from active business with unrelated parties), annuities, gains from property producing FPHCI, gains from commodities transactions, foreign currency gains, and income equivalent to interest. The "look-through" rule under IRC §954(c)(6) provides an exception for certain inter-company dividends, interest, rents, and royalties between related CFCs.
Foreign Base Company Sales Income (FBCSI)
IRC §954(d)
Income from buying property from (or selling to) a related party where the property is manufactured and sold for use outside the CFC's country of organization. Designed to prevent "base company" structures where a CFC in a low-tax country buys from a related manufacturer and sells to related customers elsewhere, capturing the profit in the low-tax jurisdiction without any real activity there.
Foreign Base Company Services Income (FBCSvI)
IRC §954(e)
Income from performing services for or on behalf of a related person, where the services are performed outside the CFC's country of organization. Prevents routing service income through low-tax offshore entities when the services benefit related parties elsewhere.
Insurance Income
IRC §953
Income from insuring or reinsuring risks of US persons or risks in the US. Prevents offshore captive insurance arrangements from sheltering premium income in low-tax jurisdictions without being subject to US tax. The captive insurance rules under IRC §831(b) for domestic micro-captives are a separate (and heavily scrutinized) issue.
International Boycott Income
IRC §952(a)(3)
Income from operations associated with international boycotts (principally the Arab League boycott of Israel). Rarely relevant in practice for most taxpayers.
Bribes and Illegal Payments
IRC §952(a)(4)
Income associated with illegal bribes, kickbacks, or similar payments in violation of US law (including FCPA). Subpart F income regardless of other categories.
The De Minimis and Full-Inclusion Rules
If total Subpart F income for the year is less than the lesser of 5% of gross income or $1,000,000, all Subpart F income for that year is treated as zero (de minimis rule). IRC §954(b)(3)(A). Conversely, if Subpart F income exceeds 70% of gross income, the entire gross income of the CFC is treated as Subpart F income (full-inclusion rule). IRC §954(b)(3)(B).
The High-Tax Exclusion
Income that was subject to an effective rate of foreign income tax greater than 90% of the US maximum corporate rate is excluded from Subpart F income. IRC §954(b)(4). At the current 21% US corporate rate, the threshold is 18.9%. Income taxed at more than 18.9% by the foreign jurisdiction can be excluded. Taxpayers can elect this exclusion item-by-item.
Step 3: How Much Is Included on the US Return
A US shareholder includes in gross income their pro-rata share of the CFC's Subpart F income for the CFC's tax year that ends in or with the US shareholder's tax year. IRC §951(a). The inclusion is treated as a dividend for certain purposes (foreign tax credit eligibility) but is actually an income inclusion - not a distribution - so no actual cash changes hands.
1
Determine CFC status. Foreign corporation more than 50% owned (by vote or value) by US shareholders (10%+ each). IRC §957.
2
Calculate CFC's Subpart F income. Apply each category (FPHCI, FBCSI, etc.), apply de minimis / full-inclusion rules, apply high-tax exclusion if elected. IRC §954.
3
Allocate to US shareholders pro-rata. Each US shareholder includes their proportionate share based on ownership percentage and days in the year the stock was held. IRC §951(a).
4
Claim foreign tax credits. US shareholders can claim a deemed-paid foreign tax credit (IRC §960) for the foreign taxes associated with the Subpart F inclusion. The credit goes through the foreign tax credit limitation on Form 1116 (individuals) or Form 1118 (corporations).
5
Track previously taxed earnings and profits (PTEP). Amounts included as Subpart F income increase the shareholder's basis in the CFC stock and create previously taxed E&P. When the CFC later distributes cash to the US shareholder, the distribution is excluded from income to the extent of PTEP - no double taxation. IRC §959.
6
File Form 5471. US persons with certain ownership interests in foreign corporations must file Form 5471 with their annual return. Penalties for failure to file start at $10,000 per form per year. IRC §6038.
NCTI Under OBBBA: How Subpart F Fits Now
OBBBA (P.L. 119-21, July 4, 2025) renamed and rewrote the GILTI regime (IRC §951A) as Net CFC Tested Income (NCTI). Subpart F under IRC §951 was not renamed or eliminated - it remains intact as a separate and cumulative inclusion regime. A CFC shareholder must calculate both Subpart F inclusions (IRC §951) and NCTI inclusions (the successor to GILTI under OBBBA), and both add to the US shareholder's taxable income.
The key relationship: Subpart F income is excluded from the NCTI calculation. IRC §951A(c)(2)(A)(ii) (as modified by OBBBA). Income that is already included under Subpart F is not double-counted as NCTI. Subpart F applies first; NCTI sweeps up residual tested income that is not Subpart F income. See our dedicated GILTI/NCTI guide for the post-OBBBA mechanics.
Form 5471 Penalties Are Automatic and Severe. The IRS assesses $10,000 per CFC per year for failure to file Form 5471, with an additional $10,000 for each 30-day period after IRS notification (up to $50,000 per form). IRC §6038(b). The IRS has the authority to reduce foreign tax credits by 10% for each failure. These penalties are assessed regardless of whether any tax is owed. Statute of limitations for the entire return remains open (no tolling) until the Form 5471 is filed. If you have a foreign corporation that might be a CFC and have not been filing Form 5471, this is a high-priority compliance issue.
Subpart F for Individual US Shareholders
Most Subpart F guidance focuses on corporate shareholders, but individual US shareholders - entrepreneurs, immigrants with foreign businesses, investors - are equally subject to the rules. Individual shareholders face two additional complications:
No §250 deduction. US corporations can deduct 40% of their NCTI inclusion under IRC §250, producing an effective rate of approximately 12.6% on NCTI. Individual shareholders get no §250 deduction. Their Subpart F and NCTI inclusions are taxed at ordinary income rates - up to 37% - with a foreign tax credit offset limited to the taxes allocable to each inclusion.
The §962 election. Individual shareholders can elect under IRC §962 to be taxed on Subpart F and NCTI inclusions as if they were a domestic corporation - getting the 21% corporate rate and the §250 deduction on NCTI. The §962 election does not change the character of distributions when they are later paid out, creating a second layer of tax at the individual level. See our dedicated Section 962 Election guide for the full mechanics.
Authority: IRC §951 (Subpart F inclusions); IRC §951A (NCTI/GILTI as amended by OBBBA); IRC §952 (Subpart F income definition); IRC §953 (insurance income); IRC §954 (foreign base company income - FPHCI §954(c), FBCSI §954(d), FBCSvI §954(e)); IRC §954(b)(3) (de minimis and full-inclusion rules); IRC §954(b)(4) (high-tax exclusion); IRC §957 (CFC definition - more than 50% by vote or value); IRC §951(b) (US shareholder - 10% threshold); IRC §958 (constructive ownership - downward attribution); IRC §959 (previously taxed E&P); IRC §960 (deemed-paid foreign tax credit); IRC §250 (§250 deduction - NCTI, FDDEI); IRC §962 (individual election - corporate tax treatment); IRC §6038 (Form 5471 filing requirement and penalties); IRC §6038(b) (penalty - $10,000 per form); Notice 2019-1; Notice 2020-69 (downward attribution relief); OBBBA P.L. 119-21 (NCTI regime, downward attribution fix, §250 deduction modification).