Controlled foreign corporations, and the two percentages that decide everything
A United States shareholder owns 10% or more of a foreign corporation by vote or value. The company is a controlled foreign corporation when those shareholders together own more than 50%. Both are measured including stock you own constructively.
You are a United States shareholder of a foreign corporation if you own, directly, indirectly or constructively, 10% or more of its total combined voting power or value. The corporation is a controlled foreign corporation if United States shareholders together own more than 50% of it. Reaching both tests brings Form 5471 and the current-inclusion regimes with it.
Two tests, applied in order, and the second one is collective
The first test is about you. You are a United States shareholder if you own 10% or more of the total combined voting power or value of shares of all classes of stock. Vote OR value: a holding that carries little voting power can still qualify on value alone.
The second test is about the company, and it counts everybody. The corporation is a controlled foreign corporation when United States shareholders TOGETHER own more than 50% of it. They do not have to know each other, act together, or be aware that the others exist.
That collective test is the one that surprises people. Four unrelated Americans owning 15% each control the company for this purpose, at 60% between them, while none of them controls anything in any ordinary sense of the word and none of them can do anything about the others.
What the instructions say about the shareholder test
The quote below is the sentence this figure was read from, stored with a hash of the text as it stood on 06 September 2026. If the document changes, the hash stops matching and the change is surfaced rather than absorbed.
“person who owns (directly, indirectly, or constructively, within the meaning of section 958(a) and (b)) 10% or more of the total combined voting power or value of shares of all classes of stock of a section 965 SFC. See section 951(b).”
That is Instructions for Form 5471, U.S. shareholder, IRC 951(b) and 958, from Instructions for Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, read on 06 September 2026. The sentence above is archived with a hash of its text as it stood that day, so a change at source shows up here rather than being absorbed silently.
The rule also carries a note from the ingest, which is worth reading because it is the sort of thing normally left where only a maintainer would see it: “Voting power OR value, and ownership counted directly, indirectly AND constructively. The constructive rules attribute stock between family members and through entities, which is how somebody who owns nothing on paper becomes a United States shareholder of a company a relative controls.”
Constructive ownership is where the arithmetic stops being obvious
Both tests count stock owned directly, indirectly and constructively. The constructive rules attribute stock between family members and up and down through entities, which means the percentage that decides your position is frequently not the percentage on your share certificate.
Somebody who owns nothing at all can be a United States shareholder because a spouse, a child or a parent owns enough. Somebody who owns 5% directly can cross 10% once a sibling's holding is attributed to them. And a company nobody thought was American-controlled can cross 50% once the attributions are drawn.
This site holds the two thresholds as rules and does not hold the attribution rules, which are a system rather than a number. This page therefore states the thresholds precisely and refers you to the instructions for how ownership is counted, rather than paraphrasing a set of rules whose whole difficulty is in the edges.
Worked ownership cases
| Ownership of the foreign corporation | US shareholders | Combined US ownership | A CFC |
|---|---|---|---|
| One American at 100% | One | 100% | Yes |
| One American at 60%, foreign partners at 40% | One | 60% | Yes |
| Four unrelated Americans at 15% each | Four | 60% | Yes |
| Six unrelated Americans at 9% each | None: each is below 10% | 0% counted | No |
| One American at 40%, one at 12%, rest foreign | Two | 52% | Yes |
| One American at 45%, rest foreign | One | 45% | No |
- The fourth row is the counter-intuitive one. Six Americans holding 54% between them do not create a controlled foreign corporation, because none of them individually reaches 10% and only the holdings of United States shareholders are counted toward the 50% test.
- The last row shows the same threshold from the other side: a single American at 45% is plainly a United States shareholder and the company is still not a controlled foreign corporation.
- Every row assumes no constructive ownership between the parties. Attribution changes several of these answers and is the reason the direct percentages are a starting point rather than a conclusion.
What the instructions say about the control test
The quote below is the sentence this figure was read from, stored with a hash of the text as it stood on 06 September 2026. If the document changes, the hash stops matching and the change is surfaced rather than absorbed.
“More than 50% of the total combined voting power of all classes of stock of the foreign corporation entitled to vote, or 2. More than 50% of the total value of shares of all classes of stock of the foreign corporation.”
That is Instructions for Form 5471, Controlled foreign corporation, IRC 957(a), from Instructions for Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, read on 06 September 2026. The sentence above is archived with a hash of its text as it stood that day, so a change at source shows up here rather than being absorbed silently.
The rule also carries a note from the ingest, which is worth reading because it is the sort of thing normally left where only a maintainer would see it: “Measured across ALL United States shareholders together, not per person. Four unrelated Americans owning fifteen percent each control the company for this purpose even though none of them controls anything in the ordinary sense.”
What follows from being caught
Form 5471 is the visible consequence and the least of them. It is an information return with several schedules, filed with the return, and the penalty regime for not filing it is severe.
The substantive consequence is current inclusion. Subpart F has long taxed certain categories of a controlled foreign corporation's income to its United States shareholders as it arises, whether or not anything is distributed. Global intangible low-taxed income extended that to most of the remaining active income, which means the deferral that made a foreign company attractive largely no longer exists for an individual shareholder.
The individual's position is worse than a corporation's here, because several of the reliefs that make the regime tolerable were written for corporate shareholders. That asymmetry is the reason a single-owner consultancy incorporated abroad is a substantially different proposition after these tests are met than before.
The overlap with the PFIC rules, and which one wins
A foreign company can look like both a controlled foreign corporation and a passive foreign investment company, and the two regimes are not cumulative for a shareholder caught by both. Where you are a United States shareholder of a controlled foreign corporation, the PFIC rules generally give way for that stock.
The practical effect is that a small holding in a foreign company can move between regimes as ownership changes around you, without you doing anything. A holding under the $25,000 PFIC filing exception one year can be inside the controlled foreign corporation rules the next because other American shareholders arrived.
Why this page states two figures and no computations
The inclusion computations under subpart F and the global intangible regime involve a deemed return on tangible assets, a deduction whose rate steps down over time, and an interaction with the foreign tax credit that differs for individuals and corporations. Each of those is a figure, and this site holds no rule for any of them.
Stating them from memory would be exactly the failure this site is built to refuse, and stating them with a citation to a summary of the law rather than the law would be the same failure with better manners. The two thresholds are what the store holds, so they are what this page states.
How to check a figure you found somewhere else
The reason this subject is unreliable online is not that writers are careless. It is that the figures change annually, they are published in documents nobody reads for pleasure, and a page that was right when it was written stays online long after it stops being right. A page with no date on the figure is not making a claim you can check.
Which tax year does this apply to?
And is that the year the income was earned or the year the return is filed? The two are different years and most pages do not say which they mean.
What document set it?
Does the page name the section, or does it name the website? A citation to a government home page is not a citation to anything a reader can check.
When was it read?
And does the page say? A figure with no read date is a figure whose staleness cannot be assessed, which is the same as an unsourced one.
Applied to the controlled foreign corporation tests, those three questions are answerable from this page: every figure names its tax year, its source document and section, and the date it was read, and the sentence it came from is archived with a hash so a change at source shows up rather than being absorbed silently.
That standard is not a courtesy. A calculator or a guide that quietly serves last year's figure produces an answer no reader can distinguish from the right one, which is worse than an obvious error and far harder to notice.
Where this sits alongside the calculators
Reporting obligations and tax liability are different questions and they are answered by different parts of this site. This page is about the controlled foreign corporation tests: a threshold or an amount set by a document, which either applies to you or does not.
The calculators answer the other question. They take a gross salary in one of the jurisdictions this site models and compute what is actually deducted from it, band by band, with each rate carrying the rule behind it. Every one of those jurisdictions has been checked against the average tax rates the OECD publishes for a single person at three different incomes, and any jurisdiction that missed by more than half a percentage point is not published at all.
Somebody working abroad usually needs both. The domestic calculation tells you what the country you live in takes. Pages like this one tell you what your home country still wants to know about. Neither substitutes for the other, and a page that blurs them is the reason so many people abroad discover a reporting obligation years late.
What this site does not do
It does not give advice, and it does not model your situation. Everything here assumes a single person on employment income with no dependants and no reliefs beyond those stated, because that is the only shape that can be computed identically across jurisdictions and compared honestly.
It does not model treaty relief, foreign tax credits, remittance rules, self-employment, or the interaction between two countries taxing the same income. Those are real and they change answers, and each of them requires facts about you that a page cannot know.
What it does do is state the underlying figures accurately, with their sources, and compute the domestic position in each jurisdiction it covers. That is the input every adviser asks for first, and it is the part most often wrong on the pages that rank above this one.
Every figure on this page, and where it came from
Every figure above is a rule in a store, carrying the document it came from, the section that set it, the date it was read and an archived copy of the sentence. Where this site holds no rule for a fact, the fact is not stated. Here is the whole set, so the page can be checked rather than believed.
Questions about the controlled foreign corporation tests
What makes me a US shareholder of a foreign company?
Owning 10% or more of the total combined voting power or value of its stock, counting shares you own directly, indirectly and constructively. Vote or value: either one is enough.
What makes a foreign company a controlled foreign corporation?
United States shareholders together owning more than 50% of it. The test is collective, so several unrelated Americans who have never met can create one between them, provided each of them separately reaches 10%.
I own 9% of a foreign company. Am I caught?
Not on those figures alone, since 9% is below the 10% shareholder test, and your stock would not count toward the 50% control test either. Constructive ownership can change that: stock held by close family or through entities is attributed to you.
Does incorporating abroad still defer US tax?
Largely not, for an individual. Subpart F has long taxed certain income currently, and the global intangible low-taxed income rules extended current inclusion to most of the rest. Several of the reliefs that soften the result were written for corporate shareholders rather than individual ones.
Can a company be both a CFC and a PFIC?
It can meet both definitions, but a shareholder who is a United States shareholder of a controlled foreign corporation is generally taken out of the PFIC rules for that stock. Which regime applies to you can change as other people buy and sell, without any action on your part.
What if my question is about the PFIC rules or the foreign tax credit instead?
Each has its own page here, built the same way from its own rules. If the question is what you owe on a salary rather than what you must report, the calculators are the other half of this site. And the controlled foreign corporation tests carries its tax year on every figure, because the year a rule applies to is not the year you file it.
Related, and built the same way
These come up in the same conversation as the controlled foreign corporation tests, and for the same reason: the obligations in this subject overlap, and meeting one of them says nothing about whether another applies.
PFICs, Form 8621, and why a foreign index fund is the problem
Form 8621 is not required where your aggregate PFIC stock is worth $25,000 or less, or $50,000 or less on a joint return, and there is no excess distribution or disposition. An excess distribution is the part above 125% of the average of the three preceding years.
Renouncing US citizenship, and the three tests that decide what it costs
A covered expatriate is somebody whose average annual net income tax exceeds $211,000 for 2026, or whose net worth is $2,000,000 or more, or who cannot certify 5 years of tax compliance. Their deemed gain is reduced by $910,000.
The foreign tax credit, and when you can skip Form 1116
A foreign tax credit of $300 or less ($600 filing jointly) can be claimed straight on the return with no Form 1116. Above that the form is required, and with it comes a carryback of 1 year and a carryover of 10.
Ruleset sha256:fe993d9d072cbcac. This guide turns on 2 rules, all at ingested status. Method on methodology, full provenance on the source of record, every reading on the changelog, and anything we got wrong on corrections.
Written by Usain Olivard, who is not a qualified tax adviser. The most recent figure on this page was read from its source on 06 September 2026, which is the same date this page reports as its last modification.