New IRC Section 951B Rules May Trigger Form 5471 Filings

My old tagline on LinkedIn was “I’m not GILTI, I swear!” Unfortunately, the days of GILTI puns are over, as the H.R. 1 – One Big Beautiful Bill Act has officially changed the name from Global Intangible Low-Taxed Income (“GILTI”) to “Net CFC Tested Income.”

Rather than the boring name change,  I wanted to focus on the implications of the new code section introduced under IRC Section 951B and the interaction with IRC Sections 958 and 951 so we can be aware of any potential filing requirements in tax years beginning after December 31, 2025.

Before we get into some nuanced examples, the basics are that IRC Sections 951B and 958(b) reintroduce the concept of downward attribution of stock ownership. This means a U.S. individual or entity may become a U.S. Person to file Form 5471 purely through constructive ownership through said downward attribution.

This downward attribution can be thought of as you owning what your parent company owns. So, if your parent company owns a foreign corporation, you may be considered to own that same foreign corporation through downward attribution.

In addition, IRC Section 951B introduces a new scary term, “foreign controlled foreign corporations,” or “FCFC,” that may throw a wrench into many current structures that do not currently have a filing requirement, nor an income inclusion for their ownership in a foreign corporation.

Compared to the term “CFC”, or controlled foreign corporation, that most are familiar with, an FCFC is a foreign corporation controlled by foreign persons, without the at least 10% share or value ownership requirements, to be included in the overall foreign control test of greater than 50%.

This means you could have 51 foreign individuals or entities (“foreign persons”) that each owns 1%, or even 1,000 foreign persons that own .051%, turning an otherwise unsuspecting foreign corporation into an FCFC for purposes of IRC Section 951B and form 5471 filing requirement testing.

Once the poor foreign corporation is deemed an FCFC, any U.S. person is considered a U.S. shareholder for purposes of IRC Section 951B and must file a Form 5471 to report their ownership and potential income inclusions. The definition of a “U.S. Person” retains the definition for CFC testing of owning at least 10% either directly, indirectly, or constructively of the vote or value of the foreign corporation.

If you think about it, that is crazy! Under the new code section, a U.S. person who does not directly or indirectly own at least 10% of a foreign corporation, but is part of either a group of U.S. or foreign persons that collectively control the foreign corporation, may now be treated as a U.S. shareholder with income flowing through to them. As a result, amounts includible under Subpart F or what is now termed “Net FCFC tested income” (IRC  Section  951B’s term for what IRC Section 951A previously referred to as net CFC tested income, formerly known as GILTI) can be included in the income of such U.S. taxpayers, even if their prior tax planning under the TCJA would have excluded Subpart F or GILTI inclusions.

Even if a U.S. person does not have an income inclusion, they are still required to file form 5471 if they are a U.S. shareholder under Section 958(b). This includes Category 5 filers who are U.S. shareholders of a CFC or FCFC.

Luckily, under IRC Section 951B, a U.S. person must have ownership under Section 958(a) (direct or indirect) to be subject to income inclusion rather than IRC Section 958(b). Otherwise, the constructive ownership under IRC Section 958(b) could be used to determine whether a person is a U.S. shareholder and whether a foreign corporation is a CFC or FCFC, and trigger income inclusion by itself.

But this is not the case. Direct or indirect ownership is still required under IRC Section 951(a), before any inclusion can be considered under IRC Sections 951, 951A, or 951B, as that determines the U.S. person’s pro-rata share for inclusion of any income rather than the general 10% ownership filing requirement rules (which can include constructive, and now downward attribution allocation of shares).

Most recently, I was working with a client where we were considering a structure with three founders. One was a U.S. citizen, and the other two were foreign individuals from separate countries. Each wanted to work in their own country and the service they were preparing would have clients all over the world. They wanted a certain percentage split of the entity’s profits, and wanted to know how to best structure their entity/entities and where.

It was proposed that there be a U.S. entity that was 100% owned by the U.S. citizen; a foreign corporation, with ownership by one of the foreign persons and the U.S. entity; and a third entity would also be split between the U.S. and foreign person, though at a 1-99 U.S.-to-foreign ratio as that entity and the foreign citizen would contribute less and be due less of the pro-rata share of future group dividends and any salary.

The second entity was originally going to be set up with 49% ownership by the U.S. corporation and 51% by the foreign individual. This would be the main operating entity that would provide the services. Because the U.S. individual would be contributing the most, most of the dividends needed to flow up to the U.S. corporation and the rest would be made up with salary, with the foreign individuals receiving their appropriate share of dividends and salary through the foreign corporation.

This structure was designed to reduce the risk of foreign reporting for the U.S. corporation (other than in the first year as a category three filer of Form 5471) and the risk of U.S. filings from the foreign individuals. Prior to the passing of the new code, this would have been acceptable.

With the introduction of IRC Section 951B, this structure no longer works, as the foreign corporation split above leads to an FCFC being created in both cases (with the one having a U.S. person that owns at least 10% of the shares). This means each year there would be a filing requirement for the U.S. corporation as well as an income inclusion at the 49% pro-rata share. The solution to this was to change the split to 50-50, as then it would neither be a CFC nor an FCFC, but this is an indication that there may be other such structures that may need a second look prior to their U.S. tax year 2026.

When I heard the downward attribution was back, I immediately thought back to the situation where there is a brother-sister relationship between a U.S. sub and a foreign sub with the same foreign parent. I was relieved when there was an exemption given to U.S. filers for the downward attribution, and agreed with the reasoning behind it, but this no longer seems applicable when there is an FCFC. 

However, there is at least one silver lining. While they may have a new Form 5471 filing requirement, no income inclusion should apply unless they directly or indirectly own stock under Section 958(a) (see example 3).

Going off the previous example, let’s say a foreign parent owns 100% of a U.S. sub and 99% of a foreign sub, with the remaining 1% directly owned by the U.S. sub.

The U.S. sub is definitely a U.S. person now due to the downward attribution rules, and are considered to own 100% of the foreign sub. But does that mean they have to include 100% of the income of the foreign sub? No. Even though there is direct ownership, the direct ownership is only 1%. Therefore, there would only be a 1% pro-rata share of the income under this simple fact pattern. They will file Form 5471 as a Category 5 filer and include 1% of any subpart F or Net FCFC tested income in the income of the U.S. sub.

Another interesting fact pattern I was imagining is when a U.S. person owns a 10% interest in a foreign partnership that owns 100% of a foreign corporation. Under Section 958(a)(2), the U.S. person is treated as owning a proportionate share of the foreign corporation. Now, because this share is 10% or more, the person is a U.S. shareholder of a foreign corporation.

Given that the foreign corporation is controlled by a foreign entity, it is also now an FCFC, which means the U.S. person is now subject to income inclusion under Section 951B and subpart F (when there was no prior income inclusion or filing requirement of form 5471).

While there may be some uncertainty surrounding the future treatment of FCFCs, it is best to start planning now, given that the 2026 U.S. tax year is almost upon us. Some helpful things to consider would be whether:

Lastly, if any of your ownership is direct (or indirect through other foreign entities), you will also likely have an income inclusion requirement on your federal tax form unless planning is done and a way can be found to lower potential ownership in the foreign corporation to below 10%.

Contact your tax accountant or hire a tax accountant with experience in international taxation to help determine whether your specific facts and circumstances meet the fact patterns of the code sections 951 (including A and B).

The penalties for missing form 5471 and the missed taxes from the income inclusions can be quite steep ($10,000 per each form 5471 missed), and the statute of limitation for a missed filing doesn’t begin until it is filed, so the penalty could be assessed for any year that the form has been missed and said penalty has been in place.

To learn more about Section 951B and the implications, contact us.