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.
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.
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. The underlying statute was not changed until OBBBA §70353, which restored the §958(b)(4) limitation on downward attribution for taxable years of foreign corporations beginning after December 31, 2025 (not retroactively) and added §951B to reach foreign controlled US shareholders of foreign controlled foreign corporations.
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.
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).
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. The election is made by the CFC's controlling US shareholders and binds all US shareholders (Reg. §1.954-1(d)(5)); high-taxed passive FPHCI must be excluded in its entirety or remain subject to Subpart F in its entirety (Reg. §1.954-1(d)(4)(i)).
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). For CFC years beginning after December 31, 2025, the inclusion is made in the shareholder's taxable year that includes the last day on which it owns CFC stock during the CFC year (OBBBA §70354; new §951(a)(3)). 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.
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(b)(2)(A)(i)(II) (as redesignated 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.
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 no deemed-paid foreign tax credit for the CFC's taxes unless a §962 election is made.
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.