Understanding Subpart F income: Complete guide for US shareholders

Subpart F income is certain income of a CFC that a US shareholder may have to include in current US taxable income even without a distribution. For the 2025 tax year, the rules still use GILTI terminology; NCTI changes apply to later CFC years.

A foreign company can therefore create current US tax before cash reaches its owner. Review TFX’s controlled foreign corporation (CFC) guide first if you are unsure whether the company is a CFC.

So, what is Subpart F income? It is income of a CFC targeted by sections 951–954, including specified passive, related-party sales, services, and insurance income, subject to exclusions and limits.

The following 3 points give the 2025 rules at a glance:

• CFC: US shareholders must own more than 50% of the foreign corporation’s vote or value.
• US shareholder: A US person generally must own at least 10% of the vote or value, including ownership determined under attribution rules.
• Reporting: Category 4, 5a, or 5b shareholders commonly report inclusions on Form 5471, Schedule I.

The IRS states that certain taxpayers related to foreign corporations must file Form 5471. A $10,000 initial information-return penalty can apply when required information is not timely furnished.

Based on a client scenario: a US shareholder owns 100% of a CFC that earns passive interest and keeps every dollar abroad. The shareholder can still have a current US income inclusion for 2025 even though the CFC pays no dividend.

Historical origin and progression of Subpart F rules

Congress enacted these rules in 1962 to limit deferral of specified earnings of a CFC, while the 2017 TCJA added GILTI for a broader current-inclusion regime. For a 2025 return filed in 2026, both regimes can matter, but later OBBBA changes require separate effective-date treatment.

The following 3 milestones explain the progression:

• 1962: The Revenue Act of 1962 added sections 951–964 and the CFC anti-deferral regime.
• Policy purpose: Certain mobile or passive foreign earnings became currently includible rather than waiting for a dividend.
• 2017: The TCJA added GILTI and other international changes, expanding current US taxation of CFC earnings.

TFX’s GILTI tax guide explains the tested-income regime. Our section 962 election guide covers a separate election available to eligible individuals.

What changes for CFC years beginning after 2025

Public Law 119-21 (the One Big Beautiful Bill Act) changes several rules for foreign-corporation tax years beginning after December 31, 2025:

• The section 954(c)(6) look-through exception for related-CFC payments becomes permanent.
• Section 958(b)(4) is restored, limiting downward attribution from foreign persons, and new section 951B applies to certain foreign-controlled US shareholders.
• A shareholder’s pro rata share covers any part of the CFC year in which the shareholder held the stock, not only the last day.
• The section 951A inclusion is renamed net CFC tested income (NCTI).

Calendar-year CFCs still apply the 2025 rules on 2025 returns.

Who is affected by the Subpart F rules?

For 2025, a foreign corporation is generally a CFC when US shareholders own more than 50% of its vote or value, and a US shareholder generally meets a 10% vote-or-value test. Direct, indirect, and constructive ownership can change both tests, so minority holdings still need review.

The following 3 checks tell you whether to keep reading:

• Confirm you are a US person that meets the 10% US-shareholder test.
• Confirm the foreign company meets the more-than-50% CFC ownership test.
• Trace direct, indirect, and constructive ownership under the applicable 2025 attribution rules.

TFX’s IRS constructive ownership rules guide shows how family and entity attribution can change ownership percentages.

For 2025, the key decision is whether the 10% shareholder test and more-than-50% CFC test are met after applicable attribution.

 

 

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Key categories of Subpart F income

For 2025, the main income buckets are FPHCI, FBCSI, FBCSvI, and insurance income. The category determines which exclusions, deductions, high-tax rules, and Form 5471 lines apply to the CFC income. Worksheet A separates these 4 categories before amounts reach Schedule I.

TFX’s foreign company tax reporting guide covers how entity classification and ownership connect to US forms.

The 4 core categories differ by the source of income, related-party activity, and where sales or services occur.

 

The following 4 triggers deserve the fastest review:

• Passive receipts such as interest, dividends, rents, and royalties.
• Related-party goods bought or sold across country lines.
• Related-party services performed outside the CFC’s country of organization.
• Insurance or reinsurance arrangements involving covered US shareholders or related persons.

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Foreign personal holding company income (FPHCI)

For 2025, FPHCI under section 954(c) covers passive receipts such as dividends, interest, rents, royalties, and gains. It can also reach commodity, currency, and financial-contract income, while active-business and same-country exceptions can remove qualifying items from this bucket entirely.

The following 6 common items can fall within FPHCI:

• Dividends.
• Interest and income equivalent to interest.
• Rents and royalties that do not meet an active-business exception.
• Net gains from certain property transactions.
• Certain commodity gains.
• Certain foreign-currency gains and financial-contract income.

See TFX’s foreign dividend tax guide for shareholder-level dividend rules that are separate from the CFC classification step.

The following 3 items are usually outside FPHCI when the statutory conditions are met:

• Active rents or royalties received from an unrelated person.
• Certain same-country related-party dividends, interest, rents, or royalties.
• Income excluded under the 2025 section 954(c)(6) look-through rule.

The passive-income test turns on the statutory character of each receipt, not merely whether cash came from an investment account.

Foreign base company sales income (FBCSI)

For 2025, FBCSI can arise when a CFC buys or sells personal property with a related person and the statutory country tests are met. Section 954(d) focuses on related-party trading structures, while manufacturing and same-country rules can change the result for a specific transaction.

The following 3 checks screen a transaction for FBCSI:

1. A related person is involved in the purchase or sale.
2. The property is manufactured, produced, grown, or extracted outside the CFC’s country under the applicable test.
3. The property is sold for use, consumption, or disposition outside that country.

Based on our client scenario at TFX: a Singapore CFC buys finished goods from a related Hong Kong company for $300,000 and resells them to unrelated Australian customers for $420,000. The $120,000 gross margin requires an FBCSI analysis before deductions and exceptions.

In this 1-row example, the $120,000 gross margin is screened for FBCSI before deductions and statutory exceptions.

 

The following 3 branches form a quick decision tree:

• No related person? The transaction generally does not meet the related-person FBCSI test.
• Related person, but same-country requirements are satisfied? Review the statutory exception before including the income.
• Related person plus foreign-country mismatch? Continue to the manufacturing and other exceptions.

Foreign base company services income (FBCSvI)

For 2025, FBCSvI covers services a CFC performs for or on behalf of a related person outside the CFC’s country of organization. Section 954(e) can reach technical, managerial, engineering, and similar work, while same-country performance and regulatory exceptions can change the result.

The key 2025 test is related-party service activity performed outside the CFC’s country of organization.

 

An employee serving unrelated customers is not automatically within FBCSvI. The related-person and geographic tests still matter, and facts such as where people perform the work can be decisive.

Business structure can affect which entity earns service income. TFX’s business structures for expats guide covers entity choices separately from the section 954(e) classification test.

Insurance and certain related income

For 2025, section 953 can treat specified CFC insurance income as currently includible, including income connected with certain policies covering US shareholders or related persons. The high-tax exception can apply to qualifying items taxed above 90% of the 21% Section 11 rate, meaning above 18.9%.

A special section 957(b) rule can use a more-than-25% CFC ownership threshold for insurance-income purposes when the statutory premium test is met, including its 75% premium condition.

The following 3 insurance items warrant review:

• Premium income connected with covered insurance or reinsurance.
• Underwriting income attributable to policies within section 953.
• Related-person insurance arrangements involving a covered US shareholder or related person.

Insurance classifications are fact-specific because the statute contains separate definitions and exceptions. A foreign insurer with $500,000 of related-person premium income should not assume the whole amount is included without applying section 953 and the high-tax rules.

PFIC rules are a separate regime that can overlap with foreign investment companies. TFX’s PFIC tax guide explains those shareholder-level rules.

Subpart F exceptions and exclusions

For a 2025 CFC year, common carveouts include the section 954(b)(4) high-tax exception, de minimis rules, same-country or active-business exceptions, and the temporary section 954(c)(6) look-through rule. Each has its own tests, and later 2026-law changes must not be backdated.

The following 3 carveouts deserve a separate check before an inclusion is finalized:

• Same-country exceptions: qualifying related-party income can be excluded under section 954(c)(3).
• Active-business exceptions: specified active rents, royalties, dealer items, and other income can fall outside FPHCI.
• Look-through rule: qualifying related-CFC payments can be excluded for 2025 under section 954(c)(6).

Subpart F high-tax exception (IRC 954(b)(4))

Foreign base company income and insurance income can be excluded from Subpart F when the CFC shows that the income was subject to an effective foreign tax rate above 90% of the top US corporate rate – 18.9% at the current 21% rate. The test is applied to the specific income item, using foreign income tax actually paid or accrued, not the country’s headline rate. This exception is separate from the GILTI high-tax exclusion for tested income, covered in our guide to the GILTI high-tax exception.

Subpart F de minimis and full inclusion rules

Under the de minimis rule, none of a CFC’s income is treated as foreign base company income or insurance income for the year if the combined amount is less than the lesser of 5% of the CFC’s gross income or $1 million. Both limits apply, so the $1 million figure cannot be used alone. The full inclusion rule works in the other direction: if that combined amount exceeds 70% of gross income, all of the CFC’s gross income is treated as foreign base company income or insurance income, subject to the high-tax exception.

How to calculate Subpart F income

For 2025, start with CFC gross income, classify each item, apply deductions and exclusions, respect the E&P cap, then determine the shareholder’s pro rata share. The de minimis test uses 5%/$1 million, while full inclusion uses a 70% gross-income threshold.

The following 5 steps provide a workable sequence:

1. Identify the CFC’s gross income and the items potentially within sections 952–954.
2. Classify items as FPHCI, FBCSI, FBCSvI, insurance income, or other covered income.
3. Allocate and apportion deductions to the relevant income items.
4. Apply exclusions, the high-tax exception, de minimis/full-inclusion rules, and the section 952(c) E&P limitation.
5. Determine the US shareholder’s pro rata share under the 2025 ownership rules.

Based on our client scenario at TFX: a calendar-year CFC has $500,000 of gross income, including $120,000 of net FPHCI after allocable deductions. It has $300,000 of current E&P, and one US shareholder owns 60% for the full year.

In this simplified full-year ownership example, a $120,000 qualifying inclusion produces a $72,000 shareholder amount before shareholder-level tax rules.

 

This Subpart F income example assumes constant 60% ownership for the full CFC year and no additional limitation. Changes in ownership, deficits, section 956, PTEP, or other CFC provisions can change the result.

 

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Ways to reduce how much Subpart F income gets taxed

For 2025, reduction strategies focus on correct transaction character, documented exceptions, section 954(b)(5) expense allocation, and related-party terms reviewed before year-end. Apply existing law to real business facts; paper-only invoice or contract changes do not change tax treatment.

The Subpart F income tax rate is not a separate statutory rate. For 2025, an individual without a special rule may face ordinary rates of 10%–37%, depending on taxable income; a valid section 962 election can change the computation.

The following 4 planning checks should occur before a transaction is finalized:

• Confirm which entity performs the people, asset, and risk functions.
• Review related-party sale and service terms against sections 954(d) and 954(e).
• Document why any same-country, active-business, high-tax, or look-through exception applies.
• Review properly allocable expenses before the CFC year closes.

TFX’s year-end tax planning guide covers other timing items that may need review before December 31.

Do not do this: Do not move invoices, contracts, or functions on paper while the business facts stay unchanged. Unsupported characterizations can fail under the statutory and regulatory tests.

Based on our client scenario at TFX: a CFC books a $200,000 service fee for work actually performed by staff in another country for a related affiliate. Re-labeling it “local management income” does not change where the services were performed.

A compliant alternative is to document the actual functions, location, related-party terms, and allocable expenses before classification. If the facts still meet section 954(e), the income remains within the services analysis.

Reporting Subpart F income and compliance requirements

For a 2025 return filed in 2026, Form 5471 is the central CFC information return, and Schedule I reports a US shareholder’s pro rata share of specified current inclusions. A required Form 5471 is attached to the income tax return and filed by that return’s due date, including extensions.

So, what is Subpart F income on Form 5471? For Category 4, 5a, or 5b shareholders, Schedule I reports the shareholder’s pro rata share, while Worksheet A supports the category calculations and Schedule I-1 provides section 951A data for GILTI.

The following 4 filing steps form the core workflow:

• Determine the CFC, US-shareholder category, and current inclusion.
• Gather CFC financial statements, ownership records, and foreign-tax data.
• Complete the Form 5471 schedules required for the filer category.
• Reconcile the Schedule I amount to the shareholder’s US income tax return.

See TFX’s expat IRS tax form checklist for other international forms that can apply to foreign entities, accounts, or assets.

For a noncorporate US shareholder, 2025 Schedule I amounts generally flow to Schedule 1 (Form 1040), line 8n, while Form 5471 remains the supporting international information return.

 

The following 5 records should be kept with the workpapers:

• CFC financial statements and trial balance.
• Ownership chart and stock records.
• Related-party contracts and invoices.
• Foreign tax returns or tax-payment support.
• Prior-year PTEP and basis schedules, when applicable.

A dormant company can still have Form 5471 duties even with little activity. TFX’s dormant foreign corporations guide explains that separate filing issue.

Also read. Form 5471 categories of filers: Category 1-5 explained

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What Subpart F income is reported on Form 5471 (and where on the form)

For 2025, Worksheet A organizes income at the CFC level before the shareholder’s pro rata share reaches Schedule I. Lines 1a through 1i break down gross foreign personal holding company income (FPHCI) under section 954(c): dividends, interest, royalties, rents and annuities (1a); income equivalent to interest (1b); notional principal contract income (1c); net foreign currency gains (1d); net commodity gains (1e); net gains from certain property transactions (1f); payments in lieu of dividends (1g); amounts under personal service contracts (1h); and certain gains on sales of partnership interests (1i).

The adjusted net amounts for each main category – FPHCI, FBCSI, FBCSvI, and insurance income – are computed at Worksheet A lines 13, 14, 15, and 16/17, respectively, before rolling into the aggregate shareholder inclusion on Schedule I. Schedule I, lines 1e through 1h, take the shareholder’s pro rata amounts from Worksheet A, lines 53, 57, 61 and 67.

Noncorporate shareholders generally carry the relevant Schedule I results to Schedule 1 (Form 1040), line 8n, not Schedule 2. Worksheet A computes the category amounts that feed Schedule I.

For 2025, Worksheet A supports the category computation and Schedule I carries the US shareholder’s pro rata share to the individual return.

 

The following 4 records support these schedules:

• Detailed CFC financial statement with category mapping.
• Ownership percentages and dates for the CFC year.
• Related-party transaction support.
• Foreign tax and PTEP records.

For individuals, the IRC §951(a) inclusion is income reported through Schedule 1, not an additional-tax item on Schedule 2. TFX’s Form 1040 Schedule 2 guide helps distinguish those parts of Form 1040.

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Consequences for ignoring compliance

A missing or incomplete Form 5471 triggers a $10,000 initial penalty per foreign corporation per year, with continuation penalties of up to $50,000 after IRS notice, a possible reduction in foreign tax credits, and an assessment period that stays open for the related items. See Form 5471 penalties for the full rules and relief options.

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How Subpart F interacts with GILTI and NCTI

Subpart F income is determined first. Any income already included under section 951 as Subpart F income is excluded from tested income, so the same income is never taxed under both regimes. For CFC years beginning after December 31, 2025, the section 951A inclusion is called net CFC tested income; see NCTI rules for 2026.

For a full side-by-side comparison of tax rates, foreign tax credits and ordering rules, see Subpart F vs GILTI.

Professional guidance for Subpart F compliance

Professional review is most useful when a 2025 filing has layered ownership, uncertain income characterization, late Form 5471 filings, or overlapping GILTI, FBAR, and PTEP records. A $10,000 initial Form 5471 penalty makes ownership and schedule errors worth resolving before a return is filed.

The following 5 documents make a technical review more efficient:

• CFC financial statements for the full 2025 tax year.
• Current and prior ownership charts with acquisition dates.
• Related-party contracts, invoices, and service-location records.
• Foreign tax returns and proof of tax paid or accrued.
• Prior Forms 5471, PTEP schedules, and Form 8992 workpapers.

TFX’s guide to hiring an expat tax professional explains when international reporting complexity can justify professional support.

A professional review can reduce filing errors and missed inclusions, but the right treatment depends on the CFC’s facts, ownership path, foreign taxes, and tax year.