By Anthony N. Verni, Attorney at Law, CPA

Series: International Tax Reform 2025 – Part 3 of 6

The Controlled Foreign Corporation Rules—A Cornerstone of U.S. International Tax

When Congress enacted the Subpart F regime in 1962, its goal was to stop U.S. taxpayers from parking passive or easily movable income in low-tax jurisdictions. A Controlled Foreign Corporation (CFC) is any foreign corporation where U.S. shareholders (each owning at least 10% of voting power or value) collectively own more than 50% of the total vote or value. CFC rules ensure that certain categories of foreign income, such as Subpart F income and Global Intangible Low-Taxed Income (GILTI), are taxed currently to U.S. shareholders, even if not distributed.

2025: The New Era of Anti-Deferral

The One Big Beautiful Bill Act (OBBBA) did not repeal CFC or GILTI inclusion but raised the stakes: Lower §250 deductions (now 40%) make inclusions more costly, fewer CFCs qualify for the high-tax exclusion, and the interplay with global minimum taxes limits the benefit of classic deferral models. In short, the easy deferral era is over.

Taxpayers facing these dual exposures often benefit from proactive planning, especially when trying to avoid double taxation, an area explored in depth in how international tax lawyers help mitigate double-tax outcomes.

Practice Insight:

If your client still relies on “offshore deferral” structures set up under 2010–2016 rules, it’s time to re-model them. The effective U.S. tax on foreign income is rising, and “check-the-box” planning alone no longer solves the issue.

Subpart F Income Refresher

Subpart F income typically includes foreign base company income (services, sales, and intangible income), insurance income from related-party risk, and certain foreign personal holding company income (interest, dividends, rents, royalties). Under IRC §952, this income is included by U.S. shareholders under §951(a)(1)(A) in the year earned, even without distribution.

GILTI vs. Subpart F – Parallel but Distinct

The GILTI inclusion under §951A captures active business profits of CFCs that escape Subpart F. The tested income approach applies to all CFCs, offset by a deemed return on qualified business asset investment (QBAI). The OBBBA retains this framework but reduces the §250 deduction to 40%, effectively increasing the U.S. residual tax rate on GILTI inclusions.

The High-Tax Exception and Exclusion

Subpart F High-Tax Exception (HTE): Under Treas. Reg. §1.954-1(d), Subpart F income is excluded if the foreign effective tax rate exceeds 90% of the U.S. corporate rate (currently 18.9%).

GILTI High-Tax Exclusion (HTE): Introduced via Treas. Reg. §1.951A-2(c)(7), this election allows exclusion of high-taxed tested income at the CFC level. Post-OBBBA impact: The higher U.S. effective rate makes this exclusion harder to satisfy, and complex tested-unit grouping rules apply.

Practice Insight:

Before electing the high-tax exclusion, model the combined impact on foreign tax credit (FTC) capacity. Excluding income reduces tested income but also eliminates credits tied to that income.

CFC Attribution and “One-Day” Rule

A CFC determination applies if U.S. shareholders own 50%+ of the vote or value on any day of the year. This means a one-day change in ownership can taint the entire year. If a U.S. corporation acquires a 60% interest in a foreign affiliate on December 31, that entity is a CFC for the entire year.

Reporting and Compliance Requirements

Failure to file Form 5471 correctly can trigger penalties of $10,000 per category per CFC per year, plus continuation penalties. CFC reporting requires income and E&P statements, tested income, QBAI, and foreign taxes paid, as well as Subpart F and GILTI inclusions. LB&I campaigns are targeting missing or inaccurate Schedule I and Schedule J attachments.

Planning and Structuring in 2025

Hybrid Entities and Check-the-Box Elections: Historically, U.S. groups disregarded foreign entities to avoid Subpart F inclusions. With global minimum taxes and a higher GILTI rate, that strategy often backfires by reducing FTC capacity.

Entity Location and Substance: CFCs in jurisdictions with a tax rate below 15% face both U.S. and foreign minimum tax exposure. Reassess whether those subsidiaries should be relocated or converted to branches.

Timing and Dividend Strategy: Dividends may qualify for the §245A deduction if paid from post-2017 E&P. Pre-2018 earnings may still be fully taxable.Increasingly, restructuring foreign subsidiaries requires understanding how foreign corporations are taxed in the digital age, especially under newer global minimum-tax concepts.

Practice Insight:

When repatriating earnings, always map which E&P pools (pre- or post-TCJA) are being tapped. Mismatched distributions may trigger unnecessary inclusions or loss of §245A relief.

Enforcement Trends and IRS Focus

LB&I Campaigns: Focus areas include CFC rules and high-tax exclusion with inconsistent Form 5471 reporting, improper HTE elections, and inaccurate E&P computations. Penalties under §6038 and criminal exposure may arise from repeated failures to report ownership or file FBAR/8938 forms.

Key Authorities and Resources

• IRC §§951–965: Subpart F and GILTI
• Treas. Regs. §1.951A-2, §1.954-1(d): High-tax rules
• IRC §§6038 and 6046: Reporting penalties
• IRS Practice Unit: CFC determinations and Subpart F
• IRM 4.61.2–4.61.7: International exam guidance

Practical Checklist for Practitioners

✓ Identify all entities meeting CFC ownership thresholds
✓ Review Subpart F categories and tested-income computations
✓ Reassess high-tax exclusion elections
✓ Align CFC and FTC modelling for 2026 inclusions
✓ Ensure full Form 5471 and Form 8992 compliance
✓ Verify foreign effective tax rate documentation
✓ Train staff on LB&I international campaign priorities

Conclusion

CFC planning in 2025 demands a fundamental shift. The combined pressure of higher GILTI inclusion, reduced §250 deduction, and foreign minimum-tax regimes means deferral strategies are living on borrowed time. Attorneys and CPAs must transition from deferral-based to coordination-based planning, integrating foreign substance, U.S. inclusion, and FTC strategy into a single model.

Verni Tax Law advises U.S. shareholders, cross-border taxpayers, and multinational groups on international tax laws.Schedule a confidential consultation with Verni Tax.