Subpart F Passive Income Tax Calculator for CFCs — 2026 Edition

What Is Subpart F Passive Income?

Subpart F passive income is a category of Foreign Personal Holding Company Income (FPHCI) earned by a Controlled Foreign Corporation (CFC). Under IRC §951(a)(1)(A), this income is taxed to U.S. shareholders in the tax year it is earned — regardless of whether the CFC distributes it. The purpose is to prevent U.S. taxpayers from indefinitely deferring U.S. tax by parking passive income in a foreign corporation.

The U.S. tax code specifically targets FPHCI because it represents income that could easily be shifted to a low-tax jurisdiction. Congress concluded that active business income deserved deferral, but passive income did not. The Subpart F rules ensure that U.S. shareholders pay tax on this income as if the CFC had distributed it.

Categories of Subpart F Passive Income (FPHCI)

Under IRC §954(c), Foreign Personal Holding Company Income includes:

• Dividends — Distributions from other corporations, including from related CFCs (subject to the look-through rule under §954(c)(6)).
• Interest — Interest income from any source, including from related parties.
• Rents — Rental income from real or personal property. However, rents derived from an active trade or business are excluded if the lessor provides significant services.
• Royalties — Royalty income from patents, copyrights, trademarks, and other intellectual property.
• Annuities — Income from annuity contracts and similar financial instruments.
• Capital Gains — Gains from the sale or exchange of property that is not inventory or depreciable business property.
• Commodities Gains — Gains from commodities transactions, unless the CFC is actively hedging business risks.
• Foreign Currency Gains — Gains from foreign currency transactions that are not directly related to the CFC's active business.
• Factoring Income — Income from factoring trade receivables. This is specifically listed as FPHCI under §954(c)(1)(E).

The table below summarizes the main categories of Subpart F income and whether they are considered passive for FPHCI purposes:

Key distinction: FPHCI is the Subpart F category that specifically targets passive income. Other Subpart F categories — Foreign Base Company Sales Income (FBCSI) and Foreign Base Company Services Income (FBCSvI) — target tainted active income rather than passive income. This calculator focuses on FPHCI (passive income) because it is the most common category for CFCs with investment holdings.

What Is a Controlled Foreign Corporation (CFC)?

A Controlled Foreign Corporation (CFC) is a foreign corporation in which U.S. shareholders own more than 50% of the total combined voting power of all classes of stock entitled to vote, or more than 50% of the total value of all stock. This definition is found in IRC §957.

The CFC classification triggers Subpart F tax on U.S. shareholders. Without CFC status, Subpart F rules do not apply. This threshold is the gateway to the entire Subpart F regime.

Who Is a U.S. Shareholder?

Under IRC §951(b), a U.S. shareholder is a U.S. person who owns (directly, indirectly, or constructively) 10% or more of the total combined voting power of all classes of stock of a foreign corporation.

• U.S. person includes citizens, residents, domestic corporations, domestic partnerships, estates, and trusts.
• 10% voting power threshold — not value — is the key test. A U.S. person who owns 10% of the voting stock but less than 10% of the value is still a U.S. shareholder.
• Constructive ownership rules under IRC §958 attribute ownership from family members and related entities. For example, stock owned by a spouse, children, parents, or grandchildren is attributed to the U.S. person.

CFC Determination — A Practical Example

Constructive Ownership Rules

Under IRC §958, ownership is attributed in two ways:

• Attribution from related persons: Stock owned by a spouse, children (under 21), parents, or grandchildren is attributed to the U.S. person.
• Attribution through entities: Stock owned by a partnership, estate, trust, or corporation is attributed proportionally to its partners, beneficiaries, or shareholders who are U.S. persons.

Once a foreign corporation is classified as a CFC, the Subpart F rules apply to U.S. shareholders holding 10% or more of the voting power. The next section explains the step-by-step calculation methodology.

Categories of Subpart F Income

Subpart F income is divided into several categories under IRC §954. Understanding these categories is essential for determining which income is included in the Subpart F calculation. This section focuses on the Foreign Personal Holding Company Income (FPHCI) category — passive income — and briefly explains the other categories for completeness.

Foreign Personal Holding Company Income (FPHCI) — Passive Income

FPHCI is the most common Subpart F category for CFCs with investment portfolios, real estate holdings, or intellectual property. Under IRC §954(c), FPHCI includes:

• Dividends — Distributions from domestic and foreign corporations. Dividends from related CFCs are eligible for the look-through rule under §954(c)(6), which can exclude them from Subpart F.
• Interest — Interest income from any source, including bank deposits, bonds, and loans to related parties.
• Rents — Rental income from real property (land, buildings) and personal property (equipment, vehicles). Exception: Rents derived from an active trade or business are excluded if the lessor provides significant services.
• Royalties — Income from patents, copyrights, trademarks, trade names, and other intangible property. Exception: Royalties from active licensing businesses may be excluded if the CFC actively manages the intellectual property.
• Annuities — Income from annuity contracts and similar financial instruments.
• Capital Gains — Gains from the sale or exchange of property that is not inventory or depreciable business property. This includes gains from securities, real estate, and other investment assets.
• Commodities Gains — Gains from commodities transactions, including futures and options. Exception: Gains from active hedging of business risks are excluded.
• Foreign Currency Gains — Gains from foreign currency transactions that are not directly related to the CFC's active business.
• Factoring Income — Income from the purchase and collection of trade receivables. This is specifically listed as FPHCI under §954(c)(1)(E).

Foreign Base Company Sales Income (FBCSI)

Under IRC §954(d), FBCSI is income from the purchase and sale of goods (or the sale of goods produced by the CFC) where:

• The goods are purchased from a related person or sold to a related person, AND
• The goods are manufactured, produced, grown, or extracted outside the CFC's country of incorporation.

FBCSI targets income from related-party sales transactions that are structured to shift profits to low-tax jurisdictions. It is not passive income — it is tainted active income — but it is still included in Subpart F.

Example: A CFC incorporated in Bermuda purchases inventory from its U.S. parent and sells it to customers in Europe. The income from these sales may be FBCSI, subject to Subpart F tax.

Foreign Base Company Services Income (FBCSvI)

Under IRC §954(e), FBCSvI is income from services performed for a related person where the services are performed outside the CFC's country of incorporation. Like FBCSI, it targets tainted active income — specifically, services income that is shifted to low-tax jurisdictions.

Example: A CFC incorporated in Singapore provides consulting services to its U.S. parent. The services are performed in Singapore. This income may be FBCSvI, subject to Subpart F tax.

Insurance Income

Under IRC §954(i), insurance income earned by a CFC is included in Subpart F if the insured risk is in the U.S. or if the income is earned from insuring related persons. This category targets offshore insurance companies that insure U.S. risks.

Other Subpart F Income

Two additional categories are included in Subpart F:

• Boycott Income — Income from participation in international boycotts (e.g., the Arab League boycott of Israel) under IRC §999.
• Illegal Bribes and Kickbacks — Payments made to foreign officials or other illegal payments under IRC §162(c).

The table below summarizes all Subpart F categories:

Our Subpart F calculator focuses on FPHCI (passive income) because it is the most common category for CFCs with investment holdings. If your CFC has FBCSI or FBCSvI, you should consult a tax professional for a comprehensive Subpart F analysis.

How to Calculate Subpart F Passive Income Tax

Calculating Subpart F passive income tax requires a systematic, step-by-step approach. Below is the complete methodology, from identifying gross income to determining the final tax liability on Form 5471.

The 6-Step Calculation Methodology

The Calculation Formula

The Subpart F passive income tax calculation can be expressed as:

Numerical Example — Complete Walkthrough

Once you have calculated your Subpart F inclusion, the next step is reporting it on Form 5471, Schedule I. We cover this in detail in the next section.

Subpart F Exceptions You Need to Know

Not all Subpart F income is taxable. Several exceptions can exclude income from Subpart F entirely or reduce the inclusion amount. Understanding these exceptions is essential for accurate tax planning. This section explains each exception in detail with practical examples.

1. De Minimis Rule

Under IRC §954(b)(3)(A), the de minimis rule exempts Subpart F income from inclusion if it falls below the lesser of the following thresholds:

• 5% of the CFC's gross income, AND
• $1,000,000 (the "dollar threshold").

The de minimis rule requires meeting both thresholds (less than 5% and less than $1M) to exempt the income. This is a powerful exception for CFCs with relatively small amounts of passive income.

2. High-Tax Exception

Under IRC §954(b)(4), the high-tax exception excludes Subpart F income that is subject to a high effective foreign tax rate. The threshold is 90% of the U.S. corporate tax rate (currently 21%), which equals 18.9%.

The high-tax exception applies if the CFC's foreign taxes on the Subpart F income are at least 18.9% of the income. This exception prevents double taxation — if the foreign country taxes the income at a sufficiently high rate, the U.S. does not also tax it under Subpart F.

3. Full Inclusion Rule

Under IRC §954(b)(3)(B), the full inclusion rule applies when Subpart F income exceeds 70% of the CFC's gross income. In this case, all of the CFC's gross income is treated as Subpart F income — not just the passive portion.

The full inclusion rule overrides the de minimis rule. It is designed to prevent taxpayers from using the de minimis rule when the CFC is predominantly a passive investment vehicle.

4. Look-Through Rule (Section 954(c)(6))

Under IRC §954(c)(6), the look-through rule provides that dividends, interest, rents, and royalties received from a related CFC are not treated as Subpart F income to the extent they are attributable to income that would not be Subpart F if earned directly by the recipient.

This rule prevents double-counting of Subpart F income within a corporate group. It is one of the most valuable exceptions for multinational groups with multiple CFCs.

Exception Comparison Table

Subpart F vs GILTI vs PFIC — What's the Difference?

U.S. international tax law contains three major anti-deferral regimes that U.S. shareholders of foreign corporations must navigate: Subpart F, GILTI, and PFIC. Each regime targets different types of income and has different rules. Understanding the differences is essential for tax planning and compliance.

Subpart F — Passive and Tainted Income

Subpart F (enacted in 1962) targets passive income (FPHCI) and tainted income (FBCSI, FBCSvI) earned by CFCs. It applies to U.S. shareholders who own 10% or more of the CFC's voting power. Subpart F income is taxed immediately to U.S. shareholders, regardless of whether the CFC distributes it.

Key Characteristics:

• Applies only to CFCs (more than 50% U.S. ownership).
• Applies to U.S. shareholders (10%+ voting power).
• Targets passive income (FPHCI) and tainted income (FBCSI, FBCSvI).
• Taxed at ordinary income rates (individual up to 37%; corporate 21%).
• Reported on Form 5471, Schedule I.

GILTI — Catch-All for CFC Income

GILTI (Global Intangible Low-Taxed Income) was enacted as part of the TCJA in 2017 under IRC §951A. It is a catch-all regime that taxes active business income of CFCs that exceeds a 10% return on Qualified Business Asset Investment (QBAI). GILTI applies to CFCs with income that is not already taxed under Subpart F.

Key Characteristics:

• Applies only to CFCs (more than 50% U.S. ownership).
• Applies to U.S. shareholders (10%+ voting power).
• Targets active business income above a 10% QBAI return.
• Taxed at reduced rates (with Section 250 deduction — 50% deduction for C corporations).
• Reported on Form 8992.

PFIC — Passive Foreign Investment Companies

PFIC (Passive Foreign Investment Company) rules under IRC §§1291-1298 apply to foreign corporations where 75% or more of gross income is passive, or 50% or more of assets are passive. PFIC rules apply to any U.S. person who owns PFIC stock, regardless of ownership percentage.

Key Characteristics:

• Applies to any foreign corporation that meets the passive test.
• Applies to any U.S. person who owns PFIC stock (no 10% threshold).
• Targets passive income (75% income test) or passive assets (50% asset test).
• Taxed at highest ordinary rates (up to 37% plus interest) unless a QEF election is made.
• Reported on Form 8621.

PFIC rules are more punitive than Subpart F — they apply to any U.S. person with PFIC stock, not just 10% shareholders, and the tax treatment is generally less favorable (including interest charges on deferred income).

Comparison Table — Subpart F vs GILTI vs PFIC

Practical Examples — Distinguishing All Three

For CFCs with both Subpart F and GILTI income, the Subpart F inclusion reduces the GILTI inclusion dollar-for-dollar. This is because the same income cannot be taxed under both regimes. Our Subpart F calculator helps you estimate the first piece of the puzzle.

How to Report Subpart F Income — Form 5471, Schedule I

After calculating your Subpart F inclusion, the next step is reporting it on Form 5471, Schedule I (Income from Controlled Foreign Corporation). This section provides a line-by-line walkthrough of Schedule I and explains how your calculator outputs map to the form.

Form 5471 Overview

Form 5471 is the U.S. tax form used to report information about CFCs. It has several schedules, but Schedule I is where Subpart F income is reported. The form is filed by U.S. shareholders who own 10% or more of a CFC. If you are uncertain about your filing category, use our Form 5471 Category 4 vs 5 Filer Tracker to determine your filing obligations.

Filing Requirements:

• Form 5471 must be attached to the U.S. shareholder's tax return.
• For individuals, it is attached to Form 1040 (along with Schedule E or Schedule D, depending on the income type).
• For corporations, it is attached to Form 1120.
• The filing deadline is the same as the tax return deadline (April 15 for calendar-year taxpayers, or October 15 with extension).

Schedule I — Line-by-Line Walkthrough

Schedule I calculates the Subpart F income that flows to the U.S. shareholder's tax return. The schedule follows the same methodology we covered in Section 4. Below is a line-by-line guide:

Previously Taxed Income (PTI)

Under IRC §959, Previously Taxed Income (PTI) refers to Subpart F income that has already been taxed to the U.S. shareholder. When the CFC later distributes PTI to the U.S. shareholder, the distribution is tax-free because the shareholder already paid tax on it.

PTI rules prevent double taxation. If a CFC earns Subpart F income and the U.S. shareholder pays tax on it, the later distribution of that income is not taxed again. The U.S. shareholder must track PTI to ensure they do not pay tax twice.

For more information on Form 5471 and Schedule I, refer to the IRS Form 5471 instructions.

2026 Subpart F Updates You Can't Ignore

The One Big Beautiful Bill Act (OBBBA) enacted in 2026 introduced several significant changes to Subpart F rules. These updates affect how Subpart F income is calculated, which entities are subject to tax, and what planning opportunities are available. This section summarizes the key changes and their implications for CFC owners.

OBBBA Changes Overview

The OBBBA made several technical corrections and permanent extensions to the Subpart F regime. The most significant changes are:

• Look-Through Rule Made Permanent — Section 954(c)(6), which allows related-party dividends, interest, rents, and royalties to be excluded from Subpart F, is now permanent.
• Section 958(b)(4) Restored — Attribution rules for CFC ownership have been restored, expanding the scope of U.S. shareholders subject to Subpart F.
• Technical Corrections — Several minor clarifications and corrections to Subpart F rules were made, affecting calculations and reporting.

1. Look-Through Rule Made Permanent

IRC §954(c)(6) provides that dividends, interest, rents, and royalties received from a related CFC are not treated as Subpart F income to the extent they are attributable to income that would not be Subpart F if earned directly by the recipient.

Prior to OBBBA, the look-through rule was temporary and required periodic extensions. OBBBA made it permanent, providing long-term certainty for multinational groups.

2. Section 958(b)(4) Restoration

IRC §958(b)(4) was restored by the OBBBA. This section permits attribution from foreign corporations to U.S. shareholders in certain circumstances. The TCJA had repealed this section, limiting the attribution rules that could bring U.S. shareholders into the CFC regime.

The restoration of §958(b)(4) means that U.S. shareholders may be attributed ownership from foreign corporations that they own indirectly. This expands the number of U.S. shareholders who may be subject to Subpart F, particularly in complex international structures.

3. Other Technical Corrections

The OBBBA also made several technical corrections to Subpart F rules, including:

• Clarification of income exclusion rules for certain types of Subpart F income.
• Corrections to calculation methodologies for FPHCI and other Subpart F categories.
• Alignment of definitions between Subpart F and GILTI rules.

These corrections are generally minor but may affect specific fact patterns. Tax professionals should review the OBBBA text for any changes that apply to their clients' situations.

Impact on CFC Owners

The 2026 Subpart F updates have the following practical implications for CFC owners:

Tax Planning Implications

The 2026 Subpart F updates create both opportunities and compliance risks:

• Opportunities: The permanent look-through rule allows for more efficient repatriation of income within multinational groups. Consider restructuring to take advantage of related-party exclusions.
• Risks: The restoration of attribution rules may bring new U.S. shareholders into the Subpart F regime. Review your ownership structure and ensure all reporting obligations are met.
• Compliance: Update your tax calculations to reflect the 2026 rules. Our Subpart F calculator is updated for 2026 rules and includes the look-through rule and other exceptions.

For more information on the OBBBA and its impact on Subpart F, refer to the full text of the OBBBA or consult your tax professional.