What Is a Controlled Foreign Corporation?
A Controlled Foreign Corporation is a tax classification for foreign companies controlled beyond a statutory threshold by domestic shareholders, with criteria set by national law.
Also known as: CFC, Controlled Foreign Company.
How Controlled Foreign Corporation works
Controlled Foreign Corporation status arises when shareholders resident or treated as domestic in one country together hold more than a specified share of a foreign company's votes, value or profits, and the status then allows CFC rules to tax those shareholders on certain undistributed income of the company. Under Internal Revenue Code section 957, a foreign corporation is a Controlled Foreign Corporation if United States shareholders own more than 50 percent of total voting power or total value on any day of the tax year, counting direct, indirect and constructive ownership. A United States shareholder is a United States person owning at least 10 percent of voting power or value, so a United States citizen living abroad who wholly owns a foreign company generally meets the definition, and each United States shareholder then includes a pro rata share of Subpart F income currently. Under the EU Anti-Tax Avoidance Directive, control means more than 50 percent of voting rights, capital or profit entitlement held by a corporate taxpayer alone or with associated enterprises, combined with a low-tax test, while the UK regime charges UK resident companies only to the extent they hold at least 25 percent of a controlled foreign company's chargeable profits. Thresholds, attribution rules and exemptions differ between jurisdictions, so a company may be a Controlled Foreign Corporation for one country and not for another.
Controlled Foreign Corporation vs Passive Foreign Investment Company (PFIC)
Unlike a Passive Foreign Investment Company, classified by the composition of income or assets regardless of ownership, a Controlled Foreign Corporation is defined by the ownership share held by domestic shareholders.
| Controlled Foreign Corporation | Passive Foreign Investment Company (PFIC) | |
|---|---|---|
| Classification test | Ownership: more than 50 percent held by United States shareholders under section 957 | Composition of income or assets, regardless of who owns the company |
| Who is affected | United States shareholders owning at least 10 percent of vote or value | United States persons holding shares, generally whatever the size of the holding |
| Typical consequence | Current inclusion of Subpart F income and other specified income | Special regimes for distributions and gains, with elections such as QEF available |
Example
Illustrative example: A United States citizen resident in Country A owns an illustrative 60 percent of a Country B company, and a Country A resident who is not a United States person owns the remaining 40 percent. Because the citizen is a United States person owning at least 10 percent, the citizen is a United States shareholder, and because United States shareholders own more than 50 percent, the company is a Controlled Foreign Corporation for United States purposes. Country A may separately test the same company under its own CFC rules for the Country A resident shareholder, applying different thresholds and low-tax tests. If the citizen's stake fell to 40 percent with no other United States shareholders, the company would generally fall outside the section 957 test, although constructive ownership rules could change the result.
Common misconception
Myth: A foreign company owned by an American living abroad falls outside US tax rules because neither the owner nor the company is in the United States.
Reality: A United States citizen remains a United States person wherever resident, so a foreign company more than 50 percent owned by United States shareholders is generally a Controlled Foreign Corporation under section 957.
Frequently asked questions
What is a controlled foreign corporation?
A Controlled Foreign Corporation is a foreign company controlled beyond a statutory threshold by domestic shareholders; under United States law, more than 50 percent of voting power or value must be owned by United States shareholders.
What makes a company a CFC?
A company becomes a Controlled Foreign Corporation under section 957 when United States shareholders together own more than 50 percent of total voting power or total value on any day of the tax year, counting direct, indirect and constructive ownership.
Who is a US shareholder of a CFC?
A United States shareholder of a Controlled Foreign Corporation is a United States person owning, directly, indirectly or constructively, at least 10 percent of total combined voting power or total value of the foreign corporation's stock.
What is the difference between a CFC and a PFIC?
A Controlled Foreign Corporation is identified by the ownership share of United States shareholders, while a Passive Foreign Investment Company is identified by passive income or assets, and the two regimes carry different reporting and taxation consequences.
Related terms
- CFC Rules — Regime applied once Controlled Foreign Corporation status exists
- Passive Foreign Investment Company (PFIC) — Other US foreign-company regime often confused with CFC
- CFC Subpart F Income — Income category included by United States shareholders
- Global Intangible Low-Taxed Income (GILTI) — Further US inclusion for Controlled Foreign Corporation earnings
- Form 5471 — US information return for Controlled Foreign Corporation owners
Related guides
- Global tax reform and US digital nomads — US international tax context for owners abroad
- Incorporation options for location-independent entrepreneurs — Foreign company options which may create CFC status
- US expat tax reform debate — Policy debate affecting US owners of foreign companies
Sources
- 26 U.S. Code section 957 (govinfo, 2024 edition)
- 26 U.S. Code section 951 (govinfo, 2024 edition)
- Council Directive (EU) 2016/1164 (ATAD)
- HMRC International Manual INTM194500
Last verified: 2026-10-08. This entry is general information, not tax or legal advice; rules vary by country and change over time.
