Your tax office sees a limited company. The IRS sees a Controlled Foreign Corporation.
Your own European company as a US citizen: CFC, Form 5471 and GILTI
Part of the guide US tax obligations abroad: what your US passport demands every year
To the tax office in your home country, your limited company is an ordinary corporation: it pays its own tax, and you pay tax when it distributes profits. To the US, it becomes something else the moment you are a US citizen or green card holder. It is then almost always a Controlled Foreign Corporation, or CFC, and US law reaches through the company to its profits every year, even without a distribution. On top of that come reporting duties, and missing them can cost more than any tax. This page explains when your company is a CFC, what Form 5471 requires, how Subpart F and GILTI work, what changes for tax years from 2026 and which elections are available. Setting up a company in the US is a different topic; this page is about the company in Europe.
1What your company is to the US
US tax law classifies foreign entities by its own rules, the so-called check-the-box rules. Certain company types are always corporations; the regulations list them country by country, usually the public limited company of each country (such as the AG, plc or ASA/AB). So for the US, such a company is always a corporation.
The private limited company (such as a GmbH) is not on that list, so its classification is elective. Without an election, a foreign company whose owners all have limited liability counts as a corporation, and that applies to a private limited company. With Form 8832 it can instead be treated as a partnership or, if it has only one owner, as disregarded for tax purposes. Different forms then apply: Form 8858 for the disregarded entity, Form 8865 for the partnership. A partnership in which at least one partner has unlimited liability is a partnership without any election. Whether an election makes sense depends on how the classification fits together on both sides of the Atlantic, and that is a question for a consultation, not for trial and error.
The rest of this page assumes the usual case: for the US, your company is a foreign corporation.
2When it is a Controlled Foreign Corporation
A foreign corporation is a CFC if, on any day of the year, its US shareholders together hold more than 50 percent of the voting power or the value of the shares. A US shareholder is any US person holding at least 10 percent of the vote or value. Here too, US persons include US citizens and green card holders, wherever they live.
The upshot is simple: if you, as a US citizen, own all of your company or more than half of it, it is a CFC. If two US citizens hold 30 percent each, it is too. If you hold 20 percent and the other shareholders are not US persons, it is not a CFC.
And it is not only the shares you hold yourself that count. To decide whether someone is a US shareholder and whether the company is a CFC, the law attributes shares held by family members: your spouse, children, grandchildren and parents. Attribution only applies to the extent it makes a US person a US shareholder. So transferring the shares to a spouse without a US passport does not automatically solve the problem.
Even a green card holder who is treated as resident in another country under a tax treaty as a dual resident remains a US person for this question. The regulations coordinating with the treaties give exactly this example: for deciding whether a foreign company is a CFC, the dual resident still counts as a US resident.
3Form 5471: reporting on the company
If you own or run a foreign corporation, you file Form 5471 under certain conditions. The IRS instructions distinguish five categories of filers; for business owners in Europe, those in the table matter most. If you own 100 percent of your company, you are in Category 4 because you control it, and in Category 5 because you are a US shareholder of a CFC. When shares are founded, bought or sold, Category 3 is added.
At its core, Form 5471 contains the company's financial statements in US format, details on shareholders, on transactions between you and the company and on the amounts attributed to you. You attach it to your income tax return and file both by the return's due date, including extensions. The obligation depends on your ownership and role, not on profit: even a company with no profit or no business needs the form.
If it is missing, the law imposes a penalty of $10,000 per year. If more than 90 days pass after an IRS notice, a further $10,000 is added for each 30 days or part of them, up to $50,000 extra in total. And the statute of limitations for the tax on the return concerned does not end until at least three years after the IRS receives the information. If you need to catch up on past years, you will find the options under Catching up on FBAR filings and penalties: the procedure for late information returns when all income was reported, and the Streamlined procedure when income is also missing; there, Form 5471 goes with every late return.
| Category | Who | Typical case |
|---|---|---|
| 2 | US citizen who is an officer or director of a foreign company in which a US person acquires 10 percent or an additional 10 percent | you run the company and a US shareholder buys in |
| 3 | US person who acquires shares and reaches 10 percent, or falls below 10 percent; anyone who becomes a US person while holding 10 percent | founding, buying or selling shares; naturalization or green card with an existing stake |
| 4 | US person with control, meaning more than 50 percent of the vote or value | your own company, 100 percent owned |
| 5 | US shareholder of a Controlled Foreign Corporation | you hold at least 10 percent of a CFC |
Source: IRS, Instructions for Form 5471 (12/2025), Categories of Filers; 26 U.S.C. 6038 and 6046, govinfo.
Form 1040, FBAR and Streamlined for US citizens living in Europe.
4Subpart F: passive income is attributed to you immediately
The older of the two attribution rules is named after its section of the law: Subpart F. It mainly covers the CFC's passive income: dividends, interest, royalties, rents and annuities, certain gains from selling assets that produce such income, and also certain sales and services income with related companies. This income is attributed to you as a US shareholder, pro rata, in the year it arises, even if the company keeps it.
For an operating company that builds machines or sells software, Subpart F is often a side issue. For a holding company that owns securities or rents out property, it is the main issue. Here too there is a high-tax exception: income taxed abroad at an effective rate above 90 percent of the US corporate rate falls outside Subpart F if the taxpayer demonstrates this to the IRS.
5GILTI and Net CFC Tested Income
A second rule attributes the rest of the CFC's profit to US shareholders: Global Intangible Low-Taxed Income, or GILTI. In principle it covers the company's current profit that is not already caught by Subpart F and not excluded as high-taxed. Up to and including tax years 2025, a flat return of 10 percent on the company's tangible assets was exempt.
With the budget law Public Law 119-21, Congress reworked the rule for tax years beginning after December 31, 2025. The law now calls it Net CFC Tested Income. The exempt return on tangible assets is gone, so profit is taxed without that deduction. For US corporations, the § 250 deduction falls from 50 to 40 percent, and the credit for foreign corporate tax rises from 80 to 90 percent.
For you as an individual, the key point is a different one, and it applies before and after the reform: the law grants the § 250 deduction only to domestic corporations, and an individual only gets credit for the corporate tax the company pays in Europe by making a special election. Without that election, the attributed amount is taxed at your normal income tax rate, and the company's corporate tax at home does nothing to offset it.
| Item | Up to tax years 2025 | Tax years from 2026 |
|---|---|---|
| Name in the law | Global Intangible Low-Taxed Income (GILTI) | Net CFC Tested Income |
| Exemption for tangible assets | 10 percent of Qualified Business Asset Investment | repealed |
| § 250 deduction for US corporations | 50 percent | 40 percent |
| Credit for foreign corporate tax for US corporations | 80 percent | 90 percent |
| Individual without a § 962 election | no § 250 deduction, no credit for corporate tax | unchanged: no deduction, no credit |
Source: Public Law 119-21, Sections 70312, 70321 and 70323, govinfo; 26 U.S.C. 250(a), 951A and 962, govinfo (2024 edition). Applies to tax years beginning after December 31, 2025.
6Two ways out: the high-tax exception and the § 962 election
The Section 962 election. It lets an individual who is a US shareholder be taxed on the included amounts as if a domestic corporation had received them: at the corporate rate of 21 percent instead of the individual rate, with a credit for the foreign corporate tax attributable to those amounts. The election is made for a tax year and can only be revoked with IRS consent. The cost shows up later: when the company distributes the profits, the distribution is taxed to you to the extent it exceeds the US tax already paid. Whether the election pays off therefore also depends on the company's distribution policy.
| USA, threshold | more than 90 percent of 21 percent, i.e. more than 18.9 percent effective foreign tax | calculated under US rules, not from the tax assessment |
| Switzerland | federal direct tax of 8.5 percent of net profit, plus cantonal and municipal profit tax | the overall burden depends on the canton |
7Distributions, funds and accounts
Company accounts. If you hold more than 50 percent of the votes or value, the FBAR rules treat you as having a financial interest in the company's accounts. If you are a managing director with bank signing authority, you also have signature authority. Either one puts the business accounts on your FBAR. The shares in the company itself are not an account, but they belong on Form 8938 if its thresholds are met. Details are in FBAR: reporting foreign accounts.
Your US tax question, answered by people who know both sides.
8Forming, buying, moving
Build the US side into your planning before the company is formed or the shares are bought. Formation itself, and any acquisition that takes you to 10 percent, triggers Form 5471; so does becoming a US person while already holding 10 percent, for example through a green card. Whether partnership classification or an asset-holding structure makes sense can be decided at the start with a single form, and later often only changed with tax consequences.
- A European company in which US persons together hold more than 50 percent is a Controlled Foreign Corporation for US purposes; a US shareholder is anyone holding at least 10 percent, including through family members.
- Anyone who controls or holds an interest in such a company files Form 5471 with their tax return every year; if it is missing, penalties of $10,000 per year apply and the statute of limitations stays open.
- The company's passive income (Subpart F) and its remaining profit (GILTI, from 2026 Net CFC Tested Income) are included in your US income every year, even without a distribution.
- If the effective foreign tax exceeds 18.9 percent, the high-tax exception can be elected; the Section 962 election lets individuals be taxed like a US corporation.
- On top of that come the FBAR for the company's accounts and, where applicable, Form 8938 for the shares.
How we help you
- US taxes for US citizens abroadForm 1040, FBAR and Streamlined for US citizens living in Europe.
- US Tax ConsultationYour US tax question, answered by people who know both sides.
- IRS letters and penaltiesMail from the IRS? We reply, request penalty relief and put things right.
- Streamlined FilingCatch up on missed US tax returns and FBARs through the Streamlined procedure.
