What makes a foreign corporation a Controlled Foreign Corporation (CFC)?

Under IRC 957(a), a controlled foreign corporation is any foreign corporation in which "U.S. shareholders" own (directly, indirectly, or constructively) more than 50% of the total combined voting power of all classes of voting stock, OR more than 50% of the total value of all shares of stock. This is an "or" test — exceeding either threshold makes the corporation a CFC. Note the threshold is "more than 50%," not "50% or more" — exactly 50% is not enough.

A "U.S. shareholder" under IRC 951(b) is any U.S. person who owns (directly, indirectly, or constructively) 10% or more of the total combined voting power OR 10% or more of the total value of all classes of stock of the foreign corporation. A U.S. person includes U.S. citizens, resident aliens (including green card holders), domestic corporations, domestic partnerships, and certain trusts and estates. In your case, you (30%) and your brother (25%) are both U.S. persons owning 10% or more, so you are both U.S. shareholders.

You own 30% and your brother owns 25%. Together, U.S. shareholders own 55% — which exceeds 50% of total value. Even if we only look at voting power, assuming all shares carry equal voting rights, U.S. shareholders collectively hold 55% of the vote. Your UK company is therefore a CFC. The British co-owner's 45% stake does not count toward the U.S. shareholder threshold because he is not a U.S. person.

The TCJA expanded the CFC definition in 2017 by adding the value test alongside the existing vote test. Before TCJA, only voting power mattered. Now, a corporation is a CFC if U.S. shareholders own more than 50% of either vote or value. This matters when a corporation has multiple classes of stock — for example, a U.S. person might own non-voting preferred shares worth more than 50% of total equity value, which would make the corporation a CFC even though the U.S. person has no voting control.

The IRC 958 constructive ownership rules can attribute stock ownership between related parties, which can unexpectedly push corporations into CFC status. For example, stock owned by a foreign entity can be attributed to its U.S. shareholders under downward attribution rules (though the TCJA repealed certain downward attribution from foreign persons under Section 958(b)(4) — this repeal is currently in effect but has been subject to legislative proposals to restore it). Family attribution rules (IRC 318(a)(1)) also apply, meaning stock owned by your spouse, children, grandchildren, or parents may be attributed to you. These rules can be critical in determining CFC status.

Once a foreign corporation is classified as a CFC, its U.S. shareholders face several reporting and tax obligations: current inclusion of Subpart F income and GILTI, filing of Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations), and potential application of Section 956 (investments in U.S. property). CFC status also triggers extended statutes of limitation and potential penalties for non-compliance.