Tax & legal glossary

Subpart F (IRC §§951-965)

Subpart F is the US anti-deferral regime under IRC §§951-965 that requires US shareholders of a Controlled Foreign Corporation (CFC) to include certain passive and other income of the foreign corporation in their own taxable income — even if no dividend has been distributed. Enacted in 1962, it is the historical precursor to GILTI and the cornerstone of US tax on offshore structures.

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What Is Subpart F?

Subpart F is the informal name for Sections 951 through 965 of the Internal Revenue Code (IRC). Congress enacted it in 1962 to prevent US citizens and businesses from deferring US taxation indefinitely by accumulating profits inside foreign corporations in low-tax jurisdictions. The underlying logic is identical to Europe’s Controlled Foreign Corporation (CFC) regimes: when a corporation controlled by residents of a given country parks passive income abroad, the legislature attributes that income to the resident shareholder as if it had been distributed.

Subpart F was substantially overhauled by the Tax Cuts and Jobs Act of 2017, which also introduced GILTI (Global Intangible Low-Taxed Income) — a complementary regime that extends the inclusion to low-taxed active income.

Who Is Subject

The Subpart F regime applies to US shareholders of a Controlled Foreign Corporation (CFC):

  • US shareholder: a US citizen, lawful permanent resident (green card holder), or US-organized entity owning ≥10% of the stock (by vote or value) of a foreign corporation.
  • CFC: a foreign corporation in which US shareholders together own more than 50% of the stock (by vote or value) on any day during the tax year.

A single-member LLC owned by a US individual is not a CFC — it is a disregarded entity. The structure that creates Subpart F exposure is either a foreign corporation directly or a US LLC that has made a check-the-box election on Form 8832 to be treated as a corporation.

Categories of Subpart F Income

Income subject to immediate inclusion falls into several buckets:

Foreign Personal Holding Company Income (FPHCI): Investment income earned outside the US — dividends, interest, royalties, rents, and capital gains on assets that generate FPHCI. This is the most common category in holding structures.

Foreign Base Company Sales Income (FBCSI): Profit from selling goods when the CFC buys from or sells to a related party and the goods are neither manufactured nor sold in the CFC’s country of incorporation.

Foreign Base Company Services Income: Income from services performed outside the CFC’s country of incorporation for or on behalf of a related party.

Insurance and transportation income: Certain reinsurance and shipping income is also captured by Subpart F.

Reporting Requirements: Form 5471

Any US shareholder with an interest in a CFC must file Form 5471 annually. Schedule I of that form computes the Subpart F inclusion. Failure to file carries a $10,000 penalty per missed form, which rises to $50,000 if the omission continues after IRS notice.

The Double-Inclusion Trap for US Citizens Living in Spain

The most delicate scenario in our practice is the US citizen who has moved to Spain and holds an interest in a CFC. In that situation:

  1. US side (Subpart F, IRC §§951-965): passive CFC income is attributed to the shareholder by virtue of being a US person.
  2. Spanish side (TFI, Art. 91 LIRPF): if the investee entity is established in a low-tax jurisdiction (effective rate < 75% of what would apply in Spain) and earns passive income, Spain’s AEAT can also attribute that income to the shareholder as a Spanish resident.

At BMC we see this trap regularly when a US national moves to Spain and continues to manage a Delaware C-Corp or a foreign holding company. The solution runs through the bilateral Foreign Tax Credit: US tax paid on the Subpart F inclusion can be credited against Spanish IRPF (Art. 80 LIRPF), and vice versa — but the credit ceilings and computation mechanics differ between the two systems. We coordinate both sides before the client puts any structure in place.

Subpart F vs. GILTI

Subpart F remains the primary tool for portfolio income (FPHCI) and related-party sales/services (FBCSI). GILTI overlays it and captures active CFC income that exceeds a normal return on tangible assets. Both regimes can fire simultaneously on different income streams of the same CFC, which demands careful planning of the Foreign Tax Credit basket allocation on Form 1116 (passive / general / GILTI categories).

See also: Transparencia Fiscal Internacional (TFI) · Tax Treaty · Double Taxation

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Frequently asked questions

What is a CFC for Subpart F purposes?
A Controlled Foreign Corporation (CFC) is any foreign corporation in which US shareholders each owning ≥10% together hold more than 50% of the stock (by vote or value). A shareholder who owns ≥10% of a CFC must include their pro-rata share of Subpart F income in their US return for the year it is earned — regardless of whether the corporation distributed anything.
What are the main categories of Subpart F income?
The principal categories are: (1) Foreign Personal Holding Company Income (FPHCI) — dividends, interest, royalties, and capital gains from investment assets; (2) Foreign Base Company Sales Income (FBCSI) — sales to or from related parties when production and market are both outside the CFC's country of incorporation; (3) Foreign Base Company Services Income — services performed outside the CFC's country for or on behalf of related parties.
How is Subpart F reported on a US tax return?
The US shareholder must file Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) with their Form 1040 or 1120. Schedule I of Form 5471 computes the Subpart F inclusion. The included income increases the shareholder's basis in the CFC stock; when dividends are later distributed, they may qualify as Previously Taxed Earnings and Profits (PTEP) to avoid double taxation.
How does Subpart F interact with Spain's CFC (TFI) rules for a US citizen living in Spain?
A US citizen who is also a Spanish tax resident may be subject to both Subpart F (as a US person) and Spain's Transparencia Fiscal Internacional regime under Art. 91 LIRPF (as a Spanish resident with an interest in a low-taxed entity). If both regimes trigger on the same income there is a risk of double inclusion. Coordination requires analyzing whether the Foreign Tax Credit (Art. 80 LIRPF / IRC §901) effectively eliminates the double tax.

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