This is one of the most common questions we receive from clients with foreign company ownership.
Short Answer:
A controlled foreign corporation, or CFC, is a foreign corporation that is more than 50 percent owned by U.S. shareholders who each own at least 10 percent, taking into account certain attribution rules.
Explanation:
CFC status is determined based on total U.S. ownership. If U.S. shareholders collectively own more than 50 percent of a foreign corporation, additional U.S. tax reporting and anti-deferral rules may apply.
A U.S. shareholder generally means a U.S. person who owns at least 10 percent of the foreign corporation, either directly, indirectly, or through certain attribution rules.
Attribution rules can cause ownership held by family members, entities, or related parties to be treated as owned by another U.S. person for purposes of determining CFC status and related filing obligations.
CFC status can trigger additional filings and potential U.S. taxation on certain categories of foreign income.
Example:
Three U.S. individuals each directly own 20 percent of a foreign company. Because U.S. shareholders collectively own more than 50 percent, the company is treated as a controlled foreign corporation.
In other situations, ownership attribution rules may cause a U.S. person to be treated as owning shares held by related parties, even where direct ownership appears lower.
Common Mistake:
Looking only at direct ownership percentages and overlooking indirect or attributed ownership.
When to Get Help:
Controlled foreign corporation rules and attribution rules can become complex quickly, especially when multiple owners, family members, trusts, or foreign entities are involved. We would be happy to review your structure and determine how these rules apply.
If this situation applies to you, we would be happy to review your structure and confirm your filing requirements.