TL;DR: A foreign company that's more than 50% owned by “US shareholders” — US persons who each own at least 10%. Its US owners can be taxed on its profits before they're paid out.

Two tests, stacked. First, who counts: a US shareholder is a US person owning 10% or more (by vote or value). Second, the company is a CFC if those US shareholders together own more than 50%. Small US investors under 10% don't count towards the 50% and aren't taxed under these rules.

Once a company is a CFC, its US shareholders include certain income annually — passive “Subpart F” income and NCTI. For funds this matters because a US fund partnership is looked through: the test is applied to each partner's indirect stake, so a big US LP can be a US shareholder while the small ones aren't.

When is a foreign company a CFC?Ownership pie: US investor A 30%, US investor B 25%, US investor C 5% (under 10%, does not count), foreign owners 40%. US shareholders hold 55%, so the company is a CFC.A 30%B 25%Foreign40%US shareholders (≥10% each):A 30% + B 25% = 55%US investor C owns 5%→ under 10%, doesn't count55% > 50%→ it's a CFC
Only 10%+ US owners count, and together they need more than half.

Worked example

A US buyout fund buys 70% of a UK company. The fund's two largest US LPs each own about 15% of the fund — about 10.5% of the company indirectly — so they are US shareholders. The company is a CFC, and those two LPs pick up NCTI each year. Smaller LPs don't.

Where you'll see it: Form 5471, structuring of non-US portfolio companies, and the CFC sections of a K-3.

Code: IRC §§ 951(b), 957, 958 · Related: NCTI (“necktie”), PFIC

Full explainer: Section 987 currency gain or loss and the CFC exemption election →

See all 53 terms in the glossary

This glossary is general information, simplified for learning. It is not tax, legal or investment advice, and real structures turn on facts and documents not shown here.