International Tax for US Business Owners: GILTI, Subpart F, PFIC, and Foreign Tax Credits

By Yarik Yarosh, CPA ·September 5, 2026 ·9 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The United States taxes its citizens and residents on worldwide income regardless of where it is earned. For a US business owner with international operations, this creates a multi-layered tax system. Income earned through a foreign subsidiary (a Controlled Foreign Corporation, or CFC) may be taxed currently under Subpart F (IRC 951-964) or GILTI (IRC 951A), even if the money isn’t distributed to the US owner. Income earned through a foreign investment fund may be subject to PFIC rules (IRC 1291-1298), which impose punitive excess distribution taxation. The foreign tax credit (IRC 901) is the primary mechanism for avoiding double taxation, but it has limitations based on income categories (baskets) and can’t reduce US tax below zero. The TCJA significantly restructured international tax with the introduction of GILTI, the participation exemption (IRC 245A, for C-Corps only), and BEAT (Base Erosion and Anti-Abuse Tax). For small business owners, the most common issues involve CFC ownership, PFIC investments (including foreign mutual funds), foreign tax credits, and the reporting requirements (Forms 5471, 8865, 8621, and 8938).

✓Key takeaway

International tax provisions affecting US business owners:

Provision	What It Taxes	Who It Affects	Tax Rate
Subpart F (IRC 951)	Passive income, sales income, services income earned through a CFC	US shareholders owning 10%+ of a CFC	Ordinary income rates (up to 37%)
GILTI (IRC 951A)	CFC income exceeding 10% of tangible depreciable assets (QBAI)	US shareholders owning 10%+ of a CFC	Individual: up to 37%; C-Corp: 10.5% effective (50% deduction under IRC 250)
PFIC (IRC 1291)	Income/gains from passive foreign investment companies	Any US person owning shares in a PFIC	Punitive excess distribution regime (highest rate + interest charge) or QEF/MTM elections
Foreign tax credit (IRC 901)	Reduces US tax by the amount of foreign taxes paid	Any US taxpayer paying foreign income taxes	Dollar-for-dollar credit (limited by FTC limitation formula)
Participation exemption (IRC 245A)	100% dividends received deduction for foreign-source dividends	C-Corps only (not individuals or pass-throughs)	0% effective on qualifying dividends
BEAT (IRC 59A)	Minimum tax on base-eroding payments to foreign related parties	Corporations with $500M+ gross receipts and 3%+ base erosion percentage	10% minimum tax

Controlled Foreign Corporation (CFC) definitions:

Term	Definition
CFC	A foreign corporation where US shareholders (10%+ owners) collectively own more than 50% by vote or value
US shareholder	A US person owning 10% or more of the foreign corporation (by vote or value)
Attribution rules	Constructive ownership rules (IRC 318) apply (family, entity, option attribution)
Reporting	Form 5471 (Information Return of US Persons with Respect to Certain Foreign Corporations)

How do GILTI and Subpart F affect US businesses?

Hypothetical example

Round numbers. A US business owner (individual, not through a C-Corp) owns 100% of a foreign subsidiary (a CFC) in Country X. Country X has a 15% corporate tax rate.

Foreign subsidiary financials:

Item	Amount
Foreign subsidiary revenue	$1,000,000
Foreign subsidiary expenses	$600,000
Net income before tax	$400,000
Country X corporate tax (15%)	$60,000
Net income after foreign tax	$340,000
Tangible depreciable assets (QBAI)	$500,000

Step 1: Subpart F income analysis

Income Category	Subpart F?	Amount
Foreign personal holding company income (dividends, interest, rents, royalties)	Yes	$50,000 (assumed)
Foreign base company sales income (buy from/sell to related parties)	Yes	$0
Foreign base company services income (services performed for/by related parties outside CFC’s country)	Yes	$0
Active business income (from operations in Country X)	No (not Subpart F)	$350,000
Total Subpart F income		$50,000

Step 2: GILTI calculation (IRC 951A)

Item	Amount
CFC tested income (net income minus Subpart F income)	$350,000
Net deemed tangible income return (10% x QBAI of $500,000)	$50,000
GILTI inclusion (tested income minus DTIR)	$300,000

Step 3: US tax on CFC income (individual shareholder):

Income Component	Amount	US Tax Rate	US Tax
Subpart F income	$50,000	37% (ordinary)	$18,500
GILTI inclusion	$300,000	37% (ordinary, no IRC 250 deduction for individuals)	$111,000
Total US tax before credits			$129,500

Step 4: Foreign tax credit

Item	Amount
Foreign taxes paid by CFC	$60,000
Taxes allocable to Subpart F income	$7,500 (pro-rata)
Taxes allocable to GILTI	$45,000 (pro-rata, but GILTI has separate basket)
Deemed paid credit (Subpart F)	$7,500
Deemed paid credit (GILTI, limited to 80% for individuals through CFC)	$36,000 (80% x $45,000)
Total FTC	$43,500

Net US tax after FTC	Amount
US tax before credits	$129,500
Foreign tax credit	($43,500)
Net US tax	$86,000
Total tax (US + foreign)	$146,000
Effective total rate	36.5%

If the US business owner used a US C-Corp as the parent:

Item	C-Corp Treatment
GILTI inclusion	Same $300,000
IRC 250 deduction (50% of GILTI for C-Corps)	($150,000)
Taxable GILTI	$150,000
US corporate tax (21%)	$31,500
FTC on GILTI (80% of deemed paid)	($36,000) but limited to US tax on GILTI
Net US corporate tax on GILTI	~$0 (credit exceeds tax)
Effective GILTI rate through C-Corp	~10.5% or less

The C-Corp structure provides a massive advantage for GILTI because of the 50% IRC 250 deduction and the full foreign tax credit. Individual shareholders get no IRC 250 deduction, making the effective rate much higher.

PFIC rules (for investors in foreign mutual funds or companies):

Test	Threshold
Income test	75% or more of gross income is passive (dividends, interest, rents, royalties, capital gains)
Asset test	50% or more of assets produce or are held to produce passive income

If a US person owns shares in a PFIC:

Election	Tax Treatment	Best For
No election (default)	Excess distribution regime: gains taxed at highest rate for each year held + interest charge	Never optimal (punitive)
QEF election (Qualified Electing Fund)	Include pro-rata share of PFIC income currently (like Subpart F)	When PFIC provides required information
Mark-to-market election	Include annual gain/loss as ordinary income	When PFIC is traded on a qualifying exchange

Reporting requirements:

Form	Who Files	When	Penalty for Failure
Form 5471	US shareholders of CFCs (10%+ owners)	With income tax return	$10,000 per year per CFC (plus potential criminal penalties)
Form 8865	US persons with interests in foreign partnerships	With income tax return	$10,000 per year
Form 8621	US shareholders of PFICs	With income tax return	Extends statute of limitations indefinitely
Form 8938 (FATCA)	Specified individuals with foreign financial assets over thresholds ($50K-$200K+)	With income tax return	$10,000 + up to $50,000 for continued failure
FBAR (FinCEN 114)	US persons with foreign bank accounts totaling $10,000+ at any time during year	April 15 (auto-extension to October 15)	Up to $100,000+ per willful violation
Form 3520/3520-A	US persons receiving gifts from foreign persons over $100K, or with foreign trusts	With income tax return	25-35% of amount involved

Planning strategies:

Strategy	How It Works
Use a C-Corp parent for CFC ownership	Access IRC 250 deduction (50% of GILTI) and IRC 245A (100% DRD)
Check-the-box election (Form 8832)	Elect to treat foreign entity as disregarded (branch) to avoid CFC rules (but income flows through directly)
Maximize QBAI (tangible assets in CFC)	Higher QBAI = higher DTIR = lower GILTI inclusion
Locate IP and services income in the US	Reduces Subpart F and GILTI exposure
Avoid PFICs (use US mutual funds instead)	Foreign mutual funds are almost always PFICs; use US-registered funds
Treaty benefits	Tax treaties may reduce withholding rates on dividends, interest, and royalties

Illustrative numbers only, not a real client and not advice for your facts.

What reporting obligations do U.S. business owners have for foreign accounts and entities?

U.S. persons (citizens, residents, and domestic entities) with foreign financial accounts exceeding $10,000 in aggregate value at any point during the year must file an FBAR (FinCEN 114) by April 15 (with automatic extension to October 15). FATCA reporting on Form 8938 applies when foreign financial assets exceed $50,000 at year-end ($200,000 for married filing jointly living abroad). Ownership of a foreign corporation (10% or more) triggers Form 5471 reporting, and ownership of a foreign partnership triggers Form 8865. Foreign trust involvement requires Form 3520 (annual) and Form 3520-A (annual return of the trust). Penalties for non-filing are severe: $10,000 per form per year for Forms 5471, 8865, and 3520, and FBAR penalties range from $16,536 per report (non-willful) to the greater of $165,353 or 50% of the account balance (willful).

Related guides:

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Cite this page

Yarik Yarosh, CPA. "International Tax for US Business Owners: GILTI, Subpart F, PFIC, and Foreign Tax Credits." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-international-tax-gilti-subpart-f-foreign-credit

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.