Legal Definitions - CFC

CFC stands for Controlled Foreign Corporation.

A Controlled Foreign Corporation (CFC) is a foreign company where more than 50% of its voting stock or value is owned by "U.S. Shareholders." A "U.S. Shareholder" is generally a U.S. person (such as an individual citizen, a U.S. corporation, or a U.S. partnership) who owns 10% or more of the foreign company's voting stock. This classification is significant under U.S. tax law because it can require U.S. Shareholders to pay U.S. taxes on certain types of the CFC's income, even if that income has not yet been distributed to them. The purpose is to prevent U.S. taxpayers from deferring taxes by accumulating profits in foreign entities they control.

• Example 1: "GlobalTech Solutions Inc.," a U.S.-based software company, establishes a wholly-owned subsidiary in Ireland to manage its European sales and licensing operations. GlobalTech Solutions Inc. owns 100% of the voting shares of this Irish subsidiary. Since GlobalTech Solutions Inc. is a U.S. company that owns more than 50% of the foreign corporation (and individually more than 10%), the Irish subsidiary would be classified as a Controlled Foreign Corporation. This means GlobalTech Solutions Inc. may have to pay U.S. taxes on certain types of the Irish subsidiary's income, even if that income remains in Ireland.

• Example 2: Four U.S. citizens, each owning 25% of a newly formed textile manufacturing company incorporated in Vietnam, collectively own 100% of the foreign entity. Since each entrepreneur is a U.S. person owning at least 10% of the voting stock, and their combined ownership exceeds the 50% threshold, the Vietnamese manufacturing company qualifies as a Controlled Foreign Corporation. Each U.S. owner would need to consider the U.S. tax implications related to their share of the CFC's income.

• Example 3: Dr. Elena Rodriguez, a U.S. citizen and successful investor, acquires 65% of the voting shares in a promising medical device startup incorporated in Germany. No other U.S. person owns 10% or more of the German company. Because Dr. Rodriguez is a U.S. person owning more than 10% (in this case, 65%) of the foreign company, and her ownership alone exceeds the 50% threshold for U.S. Shareholder control, the German medical device startup is considered a Controlled Foreign Corporation. Dr. Rodriguez would therefore be subject to specific U.S. tax rules regarding the income generated by this German entity.