Subpart F Income of Controlled Foreign Corporations: What Your Business Must Know

By: Himani Badoni

In general, the earnings of foreign corporations are not taxed in the United States until the foreign corporation pays a dividend to its United States shareholders. In other words, there must be repatriation by the foreign corporation to US shareholders before earnings are taxable.

Certain foreign corporations may be eligible for US tax deferral, meaning that their earnings from foreign sources may not be taxed for long periods of time and perhaps indefinitely.

 Subpart F income is one of the exceptions to deferral. It is used by the Internal Revenue Service (IRS) to capture and tax income that is subject to manipulation – such as mobile income earned in other jurisdictions.1

Basic Subpart F Income Rules

The Subpart F rules apply to US persons who directly or indirectly own 10% or more of voting stock in a foreign corporation that is controlled by US shareholders. Subpart F assumes that shareholders receive a proportionate share of certain categories of a controlled foreign corporation’s (CFC) current earnings and profits.

US shareholders must report Subpart F income in the United States regardless of whether the CFC makes a distribution.

CFCs are defined as foreign corporations that are owned by more than 50 percent (by vote or value) US shareholders. For this purpose, stock owned directly, indirectly, and constructively is considered.2

Categories of Subpart F income

  1. Foreign Base Company Sales Income (FBCSI)3

Foreign base company sales income (FBCSI) includes profits, commissions, and fees derived from buying and selling tangible property in which a related person is buyer or seller. Therefore, Subpart F income will arise if profits are:

  • Generated from related parties.
  • Earned outside the country where the product is manufactured.
  • outside the country where the product is sold for use.


Foreign base company sales income (FBCSI) was developed to reduce abuse by US shareholders using CFCs to shift sales income to low tax rate foreign jurisdictions.

  1. Foreign Based Company (FBC) Services Income4

FBC services income includes income earned from technical, managerial, industrial, and similar services.

Subpart F income will arise in this category if:

  • Services are performed for a related party, and
  • Services are performed outside of the country of incorporation.


FBC services income was developed to prevent abuse when the intention is to separate service-based companies from related corporations and putting them in another country to achieve a low tax rate for service income.

  • Foreign Personal Holding Company Income (FPHCI)5

FPHCI includes a CFC’s income from dividends, interests, annuities, rents, royalties, and gain on disposition of property, among other sources. The provisions of Subpart F require US shareholders to include their prorated share of a CFC’s PFHCI income.


Designed to reduce fraud, FPHCI encourages US businesses to track and report active business operations.

Common Exceptions and Exclusions to Subpart F Income

CFCs are eligible for Subpart F income only for earnings and profits for that taxable year. There are certain exceptions however, which include:

  1. De Minimis Rule exception: Subpart income (certain categories) is less than $1,000,000 or 5% of the CFC’s gross income.
  2. High tax exception: Income taxed at more than 90% of the highest US tax rate is not considered Subpart F income.
  3. Same country sales/use exception: Income derived from the sale or disposition of property within CFC’s country of incorporation is not considered FBCSI.
  4. CFC manufacturing exception: Income derived from the sale of property that the CFC itself manufactures anywhere is not FBCSI.

Changes in the US International Tax System Proposed by the Biden Administration

The Biden administration introduced the Made in America Tax Plan to make American companies more competitive.

The plan includes a proposal to expand upon the Global Intangible Low-Taxed Income (GILTI) regime by

  • Eliminating the GILTI exemption.
  • Doubling the GILTI tax rate, and
  • Eliminating cross-crediting.

The plan further includes increasing the US corporate income tax rate, imposing a new minimum tax on corporate income, creating a system of tax penalties and tax credits to incentivize US manufacturing, and the goal of implementing a global tax system that fairly taxes the digital economy.6


While the Subpart F income law reduced US corporate tax rates and created incentives for multinational corporations to shift profits to both high-tax and low-tax jurisdictions, the Biden administration has proposed increasing the corporate income tax particularly taxes on multinationals. This could substantially raise tax liabilities of US multinationals.

Our accounting experts will closely monitor the changes as they evolve and provide updates when available. For case-specific tax questions, please contact your Chugh CPAs, LLP accounting professional.

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