What Is a Controlled Foreign Corporation (CFC)?
The 50 percent test, who counts as a U.S. shareholder, family attribution, and what the label triggers
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A controlled foreign corporation (CFC) is a foreign corporation more than 50 percent owned, by vote or value, by U.S. shareholders — U.S. persons each owning at least 10 percent. CFC status makes each U.S. shareholder file Form 5471 and include their share of the corporation's subpart F income and GILTI every year, whether or not anything is distributed.
On this page
The two thresholds
| Threshold | Test |
|---|---|
| U.S. shareholder | A U.S. person owning 10 percent or more of the total vote or total value (directly, indirectly, or constructively) |
| Controlled foreign corporation | U.S. shareholders together own more than 50 percent of the vote or value |
A U.S. person owning less than 10 percent isn't a U.S. shareholder — their shares don't count toward the 50 percent, and they have no CFC inclusions (though they may have PFIC exposure — the PFIC guide).
Attribution — how family members count
Shares owned by a person's spouse, children, grandchildren, and parents (not siblings) are attributed to them for the U.S. shareholder and CFC tests (section 318(a)(1), applied through section 958(b)) — but section 958(b)(1) never attributes a nonresident alien's shares to a U.S. citizen or resident; shares owned by a corporation, partnership, trust, or estate are attributed proportionally to its owners or beneficiaries (from a corporation, only to those owning 10 percent or more by value); and downward attribution from a foreign person to a U.S. person, allowed since the 2017 repeal of section 958(b)(4), ends for foreign-corporation tax years beginning after 2025 — P.L. 119-21 restored section 958(b)(4) and added section 951B, which reaches only a U.S. person that would own more than 50 percent with downward attribution. Attribution decides status and Form 5471 filing; inclusions follow only shares owned directly or through foreign entities (section 958(a)). So a U.S.-citizen child owning 20 percent of a Canadian family company, with a nonresident Canadian parent owning 80 percent, is a U.S. shareholder, but the parent's shares aren't attributed to the child and the company isn't a CFC — unless the parent is a U.S. resident (for example, after moving to Florida), when U.S. shareholders own all of it (the family business with U.S. heirs guide).
What CFC status triggers
| Consequence | What it means |
|---|---|
| Form 5471 | Annual filing by each U.S. shareholder (the Form 5471 guide) |
| Subpart F | Current inclusion of passive and certain related-party income (the subpart F guide) |
| GILTI (net CFC tested income from 2026) | Current inclusion of low-taxed active income (the GILTI guide) |
| Section 956 | Investments in U.S. property treated as deemed dividends (limited for corporate shareholders) |
| Sale of shares | Gain may be recharacterized as a dividend (section 1248) |
The common Canadian cases
A U.S. citizen living in Canada who owns their Canadian corporation; a Canadian owner who moves to Florida and keeps the company (the kept-Canadian-corporation guide); and a Canadian company with several U.S.-resident owners together above 50 percent.
Frequently asked questions
Is my Canadian corporation a CFC?
It is if U.S. persons each owning at least 10 percent together own more than 50 percent — for example, a U.S. citizen owning all of it.
Does CFC status mean double tax?
Not necessarily — the high-tax exclusion, foreign tax credits through the section 962 election, and careful compensation planning often reduce the U.S. tax substantially.
Do my spouse's shares count?
They can, through family attribution — shares owned by a spouse, children, grandchildren, and parents are attributed for the ownership tests — but a nonresident-alien spouse's shares are never attributed to a U.S. citizen or resident (section 958(b)(1)).
What if I own less than 10 percent?
You're not a U.S. shareholder for CFC purposes, but you may hold PFIC shares if the company is mostly passive.
Official sources
The IRS explains: “Certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations file Form 5471 and schedules to satisfy the reporting requirements of sections 6038 and 6046, and the related regulations.” — Internal Revenue Service, About Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, https://www.irs.gov/forms-pubs/about-form-5471
Next step
Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk and Canadian Tax Desk handle CFC determinations with attribution analysis, Form 5471 compliance, subpart F and GILTI computations, and restructuring for U.S. shareholders of Canadian corporations. See pricing or book a call.
Cross-border taxes, handled in one place
U.S. and Canadian filings prepared together by our U.S. and Canadian Tax Desks.
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