What is Subpart F Income?

How it works

Subpart F (IRC §§951–965) is the original US anti-deferral regime for CFCs, enacted in 1962. The mechanism: certain categories of income earned by a CFC are taxed to the US shareholders in the year earned, regardless of whether cash is distributed. The point is to neutralise deferral on income that's easily mobile across jurisdictions.

The regime applies to US shareholders (10%+ owners) of CFCs (>50% US-owned foreign corporations — see CFC rules).

Categories of Subpart F income

The main categories under §954:

1. Foreign Personal Holding Company Income (FPHCI) — the largest bucket: dividends, interest, royalties, rents, annuities, gains from passive assets, certain commodities transactions. Carve-outs for active rents and royalties from related-party operating businesses.
2. Foreign Base Company Sales Income (FBCSI) — income from sales by the CFC of property bought from or sold to a related party, where the property is manufactured outside the CFC's country and sold for use outside the CFC's country. Targets paper-shifting of trading profits to low-tax jurisdictions.
3. Foreign Base Company Services Income — income from services performed for, or on behalf of, related parties outside the CFC's country.
4. Insurance Income — premiums and other income from insuring risks of related parties or risks located outside the CFC's country.
5. Certain Oil-Related Income — narrow category for foreign-base-company oil income.

Subpart F is computed before GILTI / NCTI in the ordering rules. Income classified as Subpart F is removed from the GILTI / NCTI calculation, then GILTI / NCTI applies to remaining tested income.

Carve-outs and elections

• High-tax exception (§954(b)(4)): Subpart F income subject to a foreign effective tax rate of at least 18.9% (90% × 21% US CIT) can be excluded by election. Same rate as the GILTI / NCTI high-tax exclusion.
• Active financing exception: certain financial services / insurance income earned in the active conduct of a banking, financing or insurance business is excluded.
• De minimis rule: if Subpart F income < the lesser of 5% of CFC gross income or $1M, no Subpart F inclusion.
• §954(c)(6) look-through (for related-party dividends, interest, rents, royalties between related CFCs): excluded from FPHCI in many cases. Recently extended through 2025; OBBBA may have addressed long-term renewal.

OBBBA changes (July 2025)

Per PwC US Significant Developments, the One Big Beautiful Bill Act modified:

• CFC tax years and pro-rata-share rules.
• Attribution rules (downward attribution).
• Interaction with GILTI (now NCTI).

Cross-check with current advisors — Subpart F mechanics evolved meaningfully in 2025.

Examples

• US founder owns 100% of a Cayman company holding intellectual property and licensing it to a UK distributor. Royalty income → FPHCI → Subpart F. US founder taxed in the US on the royalty income annually, regardless of distribution. Cayman 0% tax → no FTC. Effective US rate: founder's marginal (up to 37% federal).
• US-owned UK Ltd manufactures in the UK, sells UK-made products to UK customers. No Subpart F: the trading income is genuinely UK-sourced active operating income, neither FPHCI nor FBCSI. GILTI / NCTI may still apply on excess returns.

Common mistakes

• Assuming "no distributions = no US tax". Subpart F is a current inclusion regime — distribution is irrelevant.
• Confusing FPHCI with FBCSI. Different categories, different facts trigger each. Misclassification can change the tax outcome.
• Forgetting the high-tax exception. A CFC paying 25% local tax (UK, France, Germany) often qualifies for the §954(b)(4) high-tax exception, eliminating Subpart F inclusions. Election required annually.
• Missing Form 5471. Subpart F is reported on Form 5471 by the US shareholder. Missing the form costs $10,000/year + statute-of-limitations remains open on the entire return.