Controlled Foreign Corporations

¨Controlled Foreign Corporation¨ (CFC) is a really nasty designation to have put on a foreign corporation in which you own shares. For a corporation to be labeled ¨CFC¨ U.S. shareholders have to own or control more than 50% of the stock. Please note that this is NOT ¨50% or more¨ but ¨more than 50%¨. That means that a corporation in which a foreign national owns 50% or more, cannot be labeled ¨CFC¨ no matter how many U.S. shareholders there are. OK, so what is the definition of a U.S. shareholder? I thought you´d never ask. A U.S. shareholder is a ¨person¨ who owns 10% or more of the corporation´s voting stock. Notice that´s ¨10% or more¨ NOT ¨more than 10%¨. Gotta´ watch these things folks. It can be tricky. It means that, if your ownership of voting stock in a foreign corporation ever exceeds 9.99999999...%, YOU are a U.S. shareholder of a foreign corporation. You can read an official quick summary here. The definition of a ¨person¨ probably is the following from an IRS bulletin:

United States Person The term “United States person” means (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.

This is the only definition I could find in recent publications and refers to FBAR which is closely related to CFC in intent. If I find another, different definition, I´ll publish it ASAP.

So, why is ¨CFC¨a bad label. It means several things but for one; filing the form 5471 is required and it´s not fun. If you want to have a look click here. Failure to file can generate penalties up to US$ 70,000. Look at the instructions and see.

Please realize that the IRS imputes ¨foreign corporation¨ status to foreign limitadas, LLCs and partnerships; so using one of those vehicles DOES NOT remove liability in the eyes of the IRS. Be warned.