Subpart F and GILTI for Small Foreign Company Owners: Which Rules Actually Apply to You

Do Subpart F and GILTI Apply to Your Foreign Company?

If you own a foreign company and you are a US person (citizen, permanent resident, or US tax resident), the IRS requires you to report certain categories of income under two separate regimes: Subpart F and GILTI (Global Intangible Low-Taxed Income). Both rules can trigger US tax on money your company earns abroad—even if you haven't brought a penny home. Understanding which rule applies, and when, is essential to avoiding penalties and filing accurately.

What Is Subpart F?

Subpart F is the older of the two regimes. It targets specific categories of income that the IRS considers highly mobile and easy to defer or shift: foreign personal holding company income (dividends, interest, rents, royalties), foreign base company sales income, and foreign base company services income.

Subpart F rules are codified in IRC sections 951–964. The logic is straightforward: if you own a foreign corporation and the corporation earns one of these "bad" income types, you (the shareholder) must report your pro-rata share on your US tax return in the year the company earns it—regardless of whether the company distributes it.

When Subpart F Applies

Subpart F applies if:

• You are a US person who owns, directly or indirectly, 10% or more of the voting power of a Controlled Foreign Corporation (CFC).
• The foreign corporation earns Subpart F income (e.g., passive income, services income, or sales income earned outside the country where the corporation is incorporated).
• The income is "current-year" Subpart F—meaning it accrues in the corporation during the tax year.

A CFC is simply a foreign corporation where US persons own more than 50% of the voting power or value, measured at any point during the year.

Common Subpart F Traps for Small Owners

Many small business owners are surprised to learn:

• You don't need to be the majority owner. If you own 10% or more of a CFC, and other US persons collectively own enough to trigger the 50% threshold, you are caught by Subpart F.
• Passive income counts. If your foreign company earns interest, dividends, or rental income from sources outside its home country, that is typically Subpart F income.
• Accrual, not cash. You owe tax on Subpart F income when the company earns it, not when it pays you out.
• Failure to report is severe. Late or missing Subpart F disclosure on your tax return can result in accuracy-related penalties and statute-of-limitations suspension.

What Is GILTI?

GILTI is a newer rule, introduced in the 2017 Tax Cuts and Jobs Act. Rather than targeting specific categories of income, GILTI applies a net approach: it requires US shareholders of CFCs to report and pay tax on a deemed amount of the CFC's "global intangible income" that exceeds a routine return on tangible assets.

GILTI is defined in IRC section 951A. In plain language: if your foreign company is earning unusually high profits relative to the tangible property (equipment, inventory, buildings) it uses, GILTI requires you to include a portion of those excess profits in your US taxable income.

How GILTI Works in Practice

The GILTI calculation is broad but mechanical:

1. Start with the CFC's net income from all sources worldwide (with some carve-outs).

2. Subtract a "routine return" on tangible assets—currently pegged at 10% of the cost of depreciable tangible property.

3. The remainder is GILTI. You (the US shareholder) must include your pro-rata share in taxable income.

Unlike Subpart F, GILTI does not care what type of income your company earns. It is purely formulaic: high profits + low tangible asset base = GILTI.

The GILTI Deduction (Partial Relief)

To soften the blow, US shareholders can claim a deduction of up to 37.5% of GILTI (under the current prevailing rules). This effectively reduces the tax rate on GILTI to around 10.5% at the federal level, depending on the shareholder's tax bracket. However, this deduction is complex and subject to several limitations (foreign tax credit limitations, net operating loss restrictions, and more).

Confirm the current GILTI deduction percentage with your tax advisor, as this figure is subject to legislative change.

Subpart F vs. GILTI: Which Applies?

They Often Overlap

A single item of income can be both Subpart F income and GILTI. For example, if your foreign company earns foreign base company sales income, you report it under Subpart F. That same income also flows into the GILTI calculation. To avoid double-taxation, the law includes a mechanic: income taxed as Subpart F is excluded from GILTI in the same year.

Key Differences

| Feature | Subpart F | GILTI |

|---------|-----------|-------|

| Trigger | Specific income categories | High profits relative to tangible assets |

| Applies to | 10%+ owners of CFCs | All US shareholders of CFCs |

| Calculation | Category-by-category; full amount included | Net, after tangible-asset deduction |

| Relief | Foreign tax credit (on certain items) | GILTI deduction (up to 37.5% under current rules) |

| Intent | Block passive or shifted income | Tax "excess" intangible returns |

Do You Have a Reporting Obligation?

Form 5471: The Master Disclosure

If you own a foreign corporation and meet the CFC definition (or own 10% of a CFC), you must file Form 5471, Information Return of US Persons with Respect to Certain Foreign Corporations. This form is not filed as part of your individual tax return; it is filed separately with the IRS, though it must accompany your return when you submit it.

Form 5471 serves several critical functions:

• Confirms CFC status. You declare the ownership structure, voting power, and value of the foreign corporation.
• Discloses Subpart F and GILTI. You report the amounts of Subpart F income and GILTI for the year.
• Supports your US tax return. If you claim a Subpart F exclusion (e.g., the Section 954(c)(1)(D) carve-out for foreign-source intangible income) or a GILTI deduction, Form 5471 is where you document it.

Our dedicated Form 5471 guide walks through the schedules and common pitfalls for small-business owners. If you operate a foreign company, reviewing that resource is a smart first step.

Other Forms You May Need

Beyond Form 5471, you may also file:

• Form 8938 (Statement of Specified Foreign Financial Assets) if your foreign corporation and other foreign financial assets exceed a threshold (typically $200,000 to $600,000, depending on your filing status and residency).
• FATCA forms if your foreign corporation owns "passive" foreign financial assets.
• Form 926 if you transfer property into the foreign corporation in a non-taxable exchange.

Five Practical Scenarios

Scenario 1: UK Consultancy Owner

You are a US citizen living in London. You own 100% of a UK limited company that provides consulting services to UK and European clients. Your consulting revenue is £150,000 per year; you have minimal tangible assets (rented office, laptops).

What applies: Both Subpart F and GILTI. The consulting income is Subpart F (foreign base company services income). It is also GILTI because your profits far exceed 10% of your minimal tangible asset cost basis. You must file Form 5471 and report both. However, a UK tax credit may offset some US tax.

Scenario 2: UAE Trading Company Owner

You are a US tax resident with a UAE limited liability company that trades in goods—buying from India and selling to regional distributors. Annual net profit is 400,000 AED; you own 60% and a friend (non-US person) owns 40%.

What applies: Subpart F and GILTI. Your 60% stake in a CFC triggers both regimes. The trading profit is foreign base company sales income (Subpart F). It is also likely GILTI. However, UAE foreign tax credits are limited and often do not fully offset US tax. Form 5471 is mandatory.

Scenario 3: Canadian Real Estate Investor

You are a US citizen who owns a Canadian corporation that owns and rents out a residential building. The corporation earns 50,000 CAD per year in rental income; it holds 2 million CAD in property and equipment.

What applies: Primarily Subpart F (rental income is passive and foreign personal holding company income). Because your tangible assets are substantial relative to profit, GILTI may not apply materially. You still file Form 5471.

Scenario 4: Small Startup, Minimal Income

You own 40% of a German software startup (incorporated 2022). The company has not yet earned profit; it is still burning through investment capital. Two US investors own 35% each.

What applies: CFC rules apply (US persons own >50%), but if there is no income (or only losses), Subpart F and GILTI are muted. However, you must still file Form 5471 to report the corporation's existence and confirm zero current-year Subpart F and GILTI. Failure to file is a penalty offense.

Scenario 5: Passive Investment in Foreign Company

You own 5% of a Japanese public company; your broker holds it in your US brokerage account. You receive dividends.

What applies: CFC rules do not apply—you own less than 10%, and even if the US persons in aggregate own 50%+, the 10% threshold is the personal test. You simply report the dividend income on your US return (on Schedule B or via other means). No Form 5471 is required; Subpart F and GILTI are not triggered.

How a Licensed Tax Professional Helps

Subpart F and GILTI rules are intricate. A misstep—forgetting a form, misclassifying income, overlooking a foreign tax credit—can cost thousands in penalties and back taxes. Every foreign corporation filing should be reviewed and signed by a licensed professional:

• In the US: A CPA or Enrolled Agent (EA) with international tax experience.
• In the UK: A chartered accountant or tax advisor.
• In the UAE: An FTA-registered tax agent or international tax consultant.

Our team at Next Tax Source specializes in Subpart F and GILTI for expats, entrepreneurs, and small-business owners across the US, UK, and UAE. We prepare and review Form 5471, coordinate foreign tax credits, and ensure your filing is compliant and optimized.

Taking the Next Step

If you own or operate a foreign company, start by confirming whether CFC rules apply to you. Our Form 5471 resource is designed to help you understand the disclosure and calculation process. It covers:

• How to identify Subpart F income.
• GILTI calculation mechanics.
• Common schedules and entries.
• Red flags and audit risks.

Read it alongside this article. Then, schedule a consultation with one of our licensed professionals to review your specific situation, verify your CFC status, and develop a filing and tax-strategy roadmap.

Key Takeaways

• Subpart F targets specific income types (passive, services, sales) earned by foreign corporations you partially own.
• GILTI applies to all foreign profits earned by foreign corporations, taxing excess returns above a routine yield on tangible assets.
• Both can apply simultaneously to the same income, but double-taxation is prevented by law.
• Form 5471 is your primary filing obligation if you own a CFC or 10%+ of any foreign corporation.
• Foreign tax credits and deductions (including the GILTI deduction) can substantially reduce your US tax bill, but they are complex and easily missed.
• A licensed tax professional should review every foreign corporation filing to avoid penalties and optimize your position.

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Have questions about Subpart F, GILTI, or your Form 5471 filing? We are here to help. Book a consultation with a member of our international tax team today.