A US person holding a foreign company is read twice by the US tax code: once as a CFC shareholder, once as a PFIC holder. Where that person is also tax resident somewhere else — an EU member state, Russia, the United Kingdom — a third, domestic regime joins the two US ones. Each has its own ownership trigger, its own set of tests and its own way out.
Tax years beginning after 31 December 2025 run on new parameters. OBBBA (Pub. L. 119-21, signed 4 July 2025) rewrote the US half of the structure, from the name of the regime to the attribution rules. A model built on 2024–2025 figures does not carry to a 2026 return.
Concept
US anti-deferral regimes answer one question — how to stop deferral of US tax through a foreign corporation — from two different angles. The CFC rules look at control: where US shareholders holding 10% or more together own more than half the company, income is included currently at their level. The PFIC rules look at the character of assets and income: a fund-like foreign corporation attracts a punitive regime for any US holder, down to a single share. Overlap is inevitable, and the statute resolves it.
What changed for tax years beginning after 31 December 2025
OBBBA touched nearly every load-bearing parameter of the US CFC mechanics. The summary below follows the current text of the Code.
| Parameter | Tax years before 2026 | Tax years beginning after 31.12.2025 |
|---|---|---|
| Name of the §951A inclusion | GILTI | NCTI — net CFC tested income |
| §250 deduction on that inclusion | 50% | 40% |
| §250 deduction on export income | 37.5% (FDII) | 33.34% (FDDEI) |
| Return on tangible assets (QBAI) | 10% of QBAI reduced the base | repealed |
| Deemed paid FTC under §960(d) | 80% | 90% |
| Downward attribution §958(b)(4) | repealed by TCJA 2017 | restored, §951B added |
The combined effect: the base widened when QBAI went, the rate on the inclusion rose, and the foreign tax credit became more generous.
The ordering rule: §1297(d)
IRC §1297(d) switches off PFIC status as against a particular shareholder for the "qualified portion" of the holding period — the stretch after 31 December 1997 during which the shareholder is a US shareholder under §951(b) and the company is a CFC. The IRS instructions to Form 8621 (rev. 12/2025) say it in terms: such a shareholder "will not generally be subject to the PFIC provisions for the same stock during the qualified portion." The core filing for those years is Form 5471 (Category 5).
Three carve-outs keep advisers honest. Where the stock acquired PFIC status before the qualified portion began and no purging election under §1298(b)(1) was made, the "once a PFIC, always a PFIC" taint survives the ordering rule. Option holders sit outside §1297(d) protection entirely. Attribution under §1298(a)(2)(B) continues to operate inside the qualified portion — the same instructions say so expressly. Below the 10% threshold, PFIC status is tested independently.
CFC mechanics after the rename
Inside the CFC regime the ordering remains statutory: tested income for NCTI excludes amounts already included as Subpart F, and distributions are sorted into PTEP groups under §959. What changed is the rate arithmetic. The §250(a)(1) deduction now equals 40% of the NCTI inclusion, putting the effective corporate rate at 21% × (1 − 0.40) = 12.6% against a previous 10.5%. The deemed paid credit under §960(d)(1) rose from 80% to 90% of the inclusion percentage multiplied by the aggregate tested foreign income taxes, so a foreign rate of roughly 14% still leaves no US residual tax.
One detail breaks planning for private owners: the §250 deduction is addressed to domestic corporations. An individual reaches it through a §962 election — tax on the included amounts is then computed as the tax a domestic corporation would pay under §11, and Reg. §1.962-1(b)(1)(i)(B)(3) admits a share of the §250 deduction into that computation. The price is deferred: §962(d) taxes a later distribution of the same earnings and profits to the extent it exceeds the tax paid under the election. The regime is mapped at US CFC rules; the British construction is compared at UK CFC rules.
PFIC mechanics and their traps
PFIC status turns on the two tests in §1297(a): 75% or more of gross income for the year is passive income, or the average percentage of assets producing passive income or held for its production is at least 50%. One test is enough, and control is irrelevant.
The default §1291 regime punishes deferral. An excess distribution — the amount by which the year's distributions exceed 125% of the average over the three preceding years — is allocated rateably across the days of the holding period; amounts landing on prior PFIC years are taxed at the highest rate in effect for that year and carry interest computed under §6621 for underpayments. Gain on a sale of the stock is taxed the same way. The alternatives are a QEF election under §1295 (which depends on fund reporting) and mark-to-market under §1296 (marketable stock only).
The traps are predictable. A European UCITS fund or an Irish ETF is almost always a PFIC for a US holder, even though the broker sells it as ordinary retail product. Foreign insurance wrappers and unit-linked policies that fail the §7702 tests are not life insurance contracts for US purposes: §7702(g) taxes the income on the contract as ordinary income each year, and the PFIC question then falls to be answered on the underlying funds and on the insurer's own status under §1297.
Foreign private equity funds are PFICs for their US LPs too: subscription agreements often carry a manager undertaking to issue a PFIC Annual Information Statement, without which no QEF election is possible. The forms are set out at Form 8621, the surrounding reporting at FATCA, FBAR and Form 8938 and at Forms 8865, 8858 and 926.
Attribution after OBBBA
TCJA repealed §958(b)(4) in 2017, and from then on stock of a foreign parent was attributed downward to a US subsidiary, turning sister foreign companies into CFCs with no US owner behind them. OBBBA §70353 put §958(b)(4) back into the Code: subparagraphs (A), (B) and (C) of §318(a)(3) again do not apply so as to treat a US person as owning stock owned by a person who is not a US person. It applies to tax years of foreign corporations beginning after 31 December 2025.
In its place came §951B — "Amounts included in gross income of foreign controlled United States shareholders". A foreign controlled United States shareholder is defined by substituting a "more than 50 percent" threshold for 10 percent while applying attribution without the §958(b)(4) limitation; a foreign controlled foreign corporation is a foreign corporation outside the ordinary CFC definition that meets the test through such shareholders. Inverted structures and foreign groups with a US minority stay inside the inclusion regime, along a narrower route.
Three typical stacks
A green card holder with a Russian CFC. The US side reads the company as a CFC or a PFIC under the rules above; the Russian side applies chapter 3.4 of the Tax Code. The fixed-profit option in art. 227.2 (RUB 27,990,000 for a single CFC from the 2025 tax period, with a minimum of five tax periods of application) removes Russian profit reporting but generates no automatic US credit: the fixed amount is untethered from the company's actual income. The Russian mechanics sit at the CFC master guide and trust and CFC taxation in Russia.
A US person resident in an EU member state. Council Directive (EU) 2016/1164 (ATAD), art. 7(1), requires member states to treat a foreign entity as a CFC where control exceeds 50% of voting rights, capital or profit entitlement and the actual corporate tax paid is lower than the difference between the tax that would have been charged under the member state's rules and the tax actually paid. Art. 7(2) offers a choice between listed categories of passive income with a substantive economic activity carve-out and a non-genuine arrangements test; implementations differ on thresholds.
A foreign fund with US LPs. PFIC status here is a question of election infrastructure; many managers close subscriptions to US persons rather than maintain QEF reporting.
The exits that work
Every route is a test in its own right.
- Check-the-box. Reg. §301.7701-3(a) lets an eligible entity elect its classification on Form 8832. A foreign company that becomes a disregarded entity or a partnership stops being a foreign corporation for US purposes and leaves both regimes at once.
- Limits on check-the-box. Entities on the per se list in §301.7701-2(b) are not eligible; a further change of classification is barred for 60 months after the election (§301.7701-3(c)(1)(iv)); the shift produces a deemed liquidation with possible income recognition.
- QEF or mark-to-market. These replace §1291 with current inclusion and no interest charge. They work on timing: an election in the first year of ownership avoids the "once a PFIC" taint, a late one requires a purging election.
- §962 election. It opens the corporate rate, the §250 deduction and the §960 credit to an individual on CFC inclusions. It is computed annually and does not pay off in every configuration.
- Substance and thresholds. Genuine operations reduce the passive share under both PFIC tests and support ATAD carve-outs, though on their own they do not switch off CFC status — see economic substance. Ownership below the control threshold moves the whole US question into PFIC.
- Treaty positions. A domestic CFC charge may be relieved by credit or exemption under the applicable DTA; the starting point is tax residency and the 183-day rule and the foreign tax credit.
Q/A
A company is both a CFC and a PFIC — which form do I file?
A qualifying shareholder at 10% or more files Form 5471 as a Category 5 filer; during the qualified portion the PFIC regime for that same stock is switched off by §1297(d). Form 8621 remains for periods outside the qualified portion, for purging and other elections, for option interests and for other PFIC holdings in the portfolio.
Is a §962 election worth making on 2026 NCTI?
The calculation moved in both directions: the rate rose to 12.6%, while the deemed paid credit rose to 90% and the foreign rate that eliminates the US residual shifted to roughly 14%. For a CFC in a jurisdiction taxing at 15% or above the election is more often favourable; for a zero-tax jurisdiction it rarely is.
Is an Irish ETF in my European brokerage account a PFIC?
Almost always: the fund meets both the income test and the asset test of §1297(a). The US holder lands in §1291 with throwback and §6621 interest unless a QEF election is made, which is usually impossible for UCITS funds because no PFIC Annual Information Statement is issued.
Does restoring §958(b)(4) close the downward attribution question?
For the classic CFC test, yes, for tax years beginning after 31 December 2025. But §951B creates a parallel test with a "more than 50 percent" threshold for foreign controlled United States shareholders, so structures with foreign control and a US minority are tested twice.
Does check-the-box clean up accumulated PFIC history?
On its own, no. The election changes classification prospectively and usually produces a deemed liquidation with income recognition. Accumulated §1291 taint is cleared by a purging election under §1298(b)(1).