Subpart F Income Explained for Small Foreign Companies
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Subpart F income is a set of income categories that a controlled foreign corporation's U.S. shareholders must include in their own income each year as earned, before any distribution. It predates net CFC tested income (formerly GILTI) by decades and targets income that moves easily between countries — mainly passive income and certain related-party sales and services. For a small company abroad, it usually comes down to whether the company holds investments.
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What counts as subpart F income?
The categories most relevant to owner-managed companies:
- Foreign personal holding company income: dividends, interest, rents, royalties, annuities, and gains from the sale of property that produces them — in short, the company's investment income.
- Foreign base company sales income: income from buying goods from, or selling to, a related person where the goods are neither made nor used in the company's own country.
- Foreign base company services income: income from services performed outside the company's country for or on behalf of a related person.
- Certain insurance income and a few narrower categories.
A consulting company that invoices unrelated clients in its own country and holds its cash in a checking account typically has little or no subpart F income. The same company sitting on a brokerage portfolio does.
How does it reach my return?
Your pro rata share of the CFC's subpart F income is included in your gross income for the year, reported through Form 5471's schedules and onto your Form 1040 as ordinary income. As with GILTI, an individual gets no deduction and, by default, no credit for the foreign tax the company paid — unless the Section 962 election is made.
Which exceptions matter for small companies?
- De minimis rule: if the company's total subpart F income is less than the lesser of 5% of gross income or $1 million, none of it is subpart F income.
- Full-inclusion rule: the reverse — if subpart F income exceeds 70% of gross income, all of the company's income is treated as subpart F.
- High-tax exception: income taxed abroad at an effective rate above a threshold tied to the U.S. corporate rate can be excluded by election. For companies in high-tax countries this often removes the issue.
- Same-country exceptions: certain rents, royalties, and related-party payments within the company's own country are excluded.
How does subpart F differ from net CFC tested income?
Subpart F captures specific types of income — passive and related-party — regardless of where the company is. GILTI (now net CFC tested income) captures the company's remaining active income after subpart F is removed. Together they reach almost all of a CFC's profit, which is why "leaving money in the foreign company" rarely defers U.S. tax for an individual owner. An item is never in both: subpart F income is excluded from tested income.
When does subpart F actually bite a small company?
- A company that accumulates profit and invests it in funds, bonds, or interest-bearing deposits: the investment income is subpart F.
- A company whose owner moves personal investments into it for local tax reasons.
- A company that acts as an intermediary for a related U.S. business — buying from or selling to it — where the base company rules apply.
- A holding company owning shares in other companies and receiving dividends.
What about previously taxed income?
Amounts included as subpart F income become "previously taxed earnings." When the company later distributes them, the distribution is not taxed again (currency gain or loss aside). Tracking these layers is part of Form 5471's schedules and is where records matter years later.
Frequently asked questions
My company earns interest on its operating cash. Is that subpart F income?
Technically yes, but the de minimis rule usually excludes it when it's a small share of gross income.
Does the check-the-box election remove subpart F?
Yes. A disregarded entity isn't a CFC; its income is simply yours on your return.
Can the high-tax exception be used for both regimes together?
They are separate elections with aligned mechanics; both can apply where the foreign rate is high enough.
Which form reports it?
Form 5471, Schedule I and the related schedules, flowing to your Form 1040.
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. If your foreign company holds investments or deals with a related business, our team can determine what's included and which exceptions apply. See pricing or book a free fit call.
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