Only US shareholders count toward the 50%. A US shareholder is a US person who owns 10% or more of the vote or value. Shares held indirectly, through other entities, count too. So do shares the tax code treats as yours under the constructive ownership rules. That means ten unrelated Americans with 6% each own 60% between them, and the company is still not a CFC. The test is met if the line is crossed on any day of the company’s tax year.
A US shareholder is taxed every year on a share of the CFC’s income, paid out or not. That share includes subpart F income, which covers dividends, interest, royalties and rents, with some exceptions. It also includes net CFC tested income, which reaches most of the CFC’s other income. The share follows only stock you own directly or through foreign entities. Constructive ownership can make you a US shareholder, but it adds no income.
Most US shareholders file Form 5471 with their return, by its due date including extensions. The penalty for not filing is $10,000 for each year of each foreign corporation. After an IRS notice, it can grow by up to $50,000 more. The foreign tax you can credit can also be cut, by 10% at first and by more if the failure continues after the notice.
The passive foreign investment company (PFIC) rules do not reach a CFC’s US shareholders while it stays a CFC. An owner with less than 10% gets no such exception. For them, the same company is a PFIC if it meets the PFIC income or asset test.
Sources
- 26 U.S.C. § 957, Controlled foreign corporations; United States persons
- 26 U.S.C. § 951, Amounts included in gross income of United States shareholders
- IRS, Instructions for Form 5471 (Rev. December 2025)
- 26 U.S.C. § 6038, Information reporting with respect to certain foreign corporations and partnerships
- 26 U.S.C. § 1297, Passive foreign investment company
Reviewed and updated September 2026. General information, not advice for your situation.