International Tax for US Business Owners: Subpart F Income, GILTI, FDII, and Controlled Foreign Corporation Rules

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

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

The US is one of the few countries that taxes its citizens and residents on worldwide income, and for US shareholders of foreign corporations, the anti-deferral rules ensure that income earned through foreign entities is taxed currently rather than deferred indefinitely. Under IRC 951 (Subpart F) and IRC 951A (GILTI), a “US shareholder” (a US person owning 10% or more of the total combined voting power or value of a foreign corporation) of a “controlled foreign corporation” (a foreign corporation where US shareholders collectively own more than 50% by vote or value) must include certain income of the CFC in their US taxable income each year, even if the CFC retains all of its earnings abroad. This is a current inclusion, not a deferral. The practical effect is that a US business owner who operates through a foreign subsidiary in a low-tax jurisdiction (such as Ireland, Singapore, or a Caribbean holding company) cannot simply leave the profits offshore and defer US tax. Subpart F captures passive and mobile income (dividends, interest, rents, royalties, and income from transactions with related parties), while GILTI captures the remaining active business income above a deemed return on tangible assets. Together, these two regimes ensure that virtually all CFC income is subject to current US taxation, although the tax rate can be significantly reduced through the IRC 250 deduction (for C-Corp shareholders) and foreign tax credits.

✓Key takeaway

Anti-deferral framework for US owners of foreign corporations:

Regime	What It Captures	Tax Rate (C-Corp)	Tax Rate (Individual)
Subpart F (IRC 951)	Passive/mobile income: dividends, interest, rents, royalties, related-party sales/services income	21% (no IRC 250 deduction)	Up to 37% (ordinary income)
GILTI (IRC 951A)	Active CFC income above 10% return on tangible assets	10.5% (after 50% IRC 250 deduction)	Up to 37% (or ~10.5-21% with Section 962 election)
FDII (IRC 250)	US company income from serving foreign customers	13.125% (after 37.5% IRC 250 deduction)	Not available to individuals
Previously Taxed Earnings (PTEP)	CFC distributions of income already taxed under Subpart F or GILTI	Tax-free (already taxed)	Tax-free (already taxed)

Key definitions:

Term	Definition
US Shareholder	US person owning 10%+ of CFC by vote or value
Controlled Foreign Corporation (CFC)	Foreign corporation with US shareholders owning >50% by vote or value
Subpart F income	Foreign personal holding company income + foreign base company sales/services income + certain other categories
GILTI	Tested income minus (10% x QBAI minus interest expense)
QBAI	Quarterly average of adjusted basis of depreciable tangible property used in the CFC’s trade or business
FDII	Deemed intangible income x (foreign-derived deduction eligible income / deduction eligible income)

How do Subpart F, GILTI, and FDII affect US business owners?

Hypothetical example

Round numbers. A US individual owns 100% of a CFC incorporated in Ireland. The CFC operates a software consulting business. The CFC has the following financials:

CFC financials:

Item	Amount
Gross revenue	$2,000,000
Operating expenses	($1,200,000)
Net income	$800,000
Tangible assets (QBAI: office equipment, servers)	$200,000
Interest income from bank deposits	$20,000
Irish corporate tax (12.5%)	$102,500

Step 1: Subpart F income

Category	Amount	Subpart F?
Interest income	$20,000	Yes (foreign personal holding company income)
Consulting revenue (earned from unrelated US clients)	$2,000,000	Possibly (foreign base company services income if performed outside the CFC’s country on behalf of a related US person)

Assume the consulting services are performed in Ireland for unrelated clients: no Subpart F (not foreign base company services income because performed in the CFC’s country of organization).

Subpart F inclusion: $20,000

Step 2: GILTI calculation

Item	Amount
Tested income (CFC net income minus Subpart F income)	$780,000
QBAI (tangible assets)	$200,000
Net deemed tangible income return (10% x $200,000)	$20,000
Specified interest expense	$0
GILTI inclusion	$760,000 ($780,000 - $20,000)

Step 3: US tax on GILTI (individual shareholder, no election)

Item	Amount
GILTI inclusion	$760,000
Tax rate (ordinary income, 37%)	$281,200
Foreign tax credit (direct, not deemed-paid for individuals)	$0 (individuals cannot claim deemed-paid FTC without 962 election)
US tax on GILTI	$281,200

Step 3 (alternative): Section 962 election The individual elects to be taxed as if they were a corporation on the GILTI inclusion.

Item	Amount
GILTI inclusion	$760,000
IRC 250 deduction (50% of GILTI)	($380,000)
Taxable GILTI	$380,000
Tax rate (corporate rate, 21%)	$79,800
Deemed-paid foreign tax credit (IRC 960)
Irish tax on tested income ($780,000 x 12.5%)	$97,500
Inclusion percentage ($760,000 / $780,000)	97.4%
Deemed-paid FTC (limited to 80% x $97,500 x 97.4%)	$75,984
US tax on GILTI (after 962 election and FTC)	$3,816

Tax savings from 962 election: $277,384

However, when the CFC later distributes the GILTI-taxed earnings as a dividend, the individual pays additional tax:

Item	Amount
Dividend from CFC (previously taxed as GILTI via 962)	$760,000
Tax already paid (as if corporate)	$79,800
Credit for tax already paid	($79,800)
Additional tax on dividend at individual rates	Approximately $200,000+ (depending on exact calculation)

The Section 962 election defers (not eliminates) the individual-rate tax to the year of distribution. If the CFC retains earnings and the individual dies, the stepped-up basis may eliminate the additional tax.

FDII example (US C-Corp selling to foreign customers): A US C-Corp earns $5,000,000 from US customers and $3,000,000 from foreign customers. Total deductions: $4,000,000.

Item	Amount
Total income	$8,000,000
Total deductions	$4,000,000
Deduction eligible income (DEI)	$4,000,000
Foreign-derived DEI (FDDEI)	$3,000,000 x ($4,000,000 / $8,000,000) = $1,500,000
Deemed intangible income (DEI - 10% of QBAI)	$4,000,000 - $100,000 = $3,900,000
FDII = DII x (FDDEI / DEI)	$3,900,000 x ($1,500,000 / $4,000,000) = $1,462,500
FDII deduction (37.5%)	$548,438
Tax savings (21% x $548,438)	$115,172
Effective rate on FDII	13.125% (vs. 21% on domestic income)

Reporting requirements:

Form	Purpose
Form 5471 (Information Return of US Persons with Respect to Certain Foreign Corporations)	Filed by US shareholders of CFCs; penalty: $10,000 per form per year, plus additional penalties
Form 8992 (US Shareholder Calculation of GILTI)	Calculates the GILTI inclusion
Form 8993 (Section 250 Deduction for FDII and GILTI)	Claims the IRC 250 deduction
Form 962 Election	Statement attached to the return
Form 1116 (Foreign Tax Credit)	Claims direct and deemed-paid foreign tax credits

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

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Cite this page

Yarik Yarosh, CPA. "International Tax for US Business Owners: Subpart F Income, GILTI, FDII, and Controlled Foreign Corporation Rules." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-international-tax-subpart-f-gilti-fdii

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