What is Subpart F?
A pre-TCJA anti-deferral regime (Sections 951-965) that taxes US shareholders of CFCs on certain types of "tainted" income immediately, regardless of distribution.
Subpart F is older than GILTI and applies to different income categories.
What types of income are Subpart F?
Foreign Personal Holding Company Income (FPHCI):
- Dividends from non-CFC subsidiaries
- Interest income
- Rent from passive real estate
- Royalty income
- Net gains from passive investments
Foreign Base Company Sales Income:
- Income from buying/selling goods between related parties where neither manufactured nor consumed in CFC's country
Foreign Base Company Services Income:
- Income from services performed for related parties outside CFC's country
Insurance Income
Why do NRIs care?
Most operating Indian Pvt Ltd businesses don't have significant Subpart F income — active income (manufacturing, trading, services to unrelated parties in India) is excluded.
But Indian Pvt Ltd companies often have:
- Idle cash earning interest (FPHCI)
- Indian rental property held in company name (FPHCI)
- Dividends from other Indian companies they own (FPHCI in some cases)
These trigger Subpart F.
Subpart F vs GILTI — relationship
Subpart F first. Subpart F income is excluded from GILTI tested income.
So order:
- Identify Subpart F income → tax in US immediately at full ordinary rates
- Remaining CFC income (active business) → GILTI rules apply
High-Tax Exception (HTE) for Subpart F
Similar to GILTI HTE. If foreign tax rate on Subpart F income > 90% of US rate (i.e., > 18.9% for ordinary income), you can elect to exclude from Subpart F.
Indian Pvt Ltd with 25-30% Indian corporate tax usually qualifies. But the election must be made specifically.
De minimis exception
If total Subpart F income < 5% of gross income OR < $1 million, no Subpart F inclusion (de minimis rule). Useful for small passive income mixed with active business.
Worked example
US-person owns Indian Pvt Ltd. Company has:
- Active operating income (manufacturing): $500K
- Bank interest on cash: $15K
- Rental on small property: $20K
Subpart F analysis:
- FPHCI: $15K interest + $20K rent = $35K
- $35K of $535K gross income = 6.5%
- Above 5% de minimis threshold → Subpart F applies
- Owner's pro-rata share taxed in US at ordinary rates
If active income alone with interest under de minimis threshold:
- Subpart F doesn't apply
- All flows to GILTI calc
Planning to avoid Subpart F
- Keep cash low in operating CFC (transfer back to owner as wages/dividends)
- Hold passive assets in separate entity (not the operating CFC)
- Make HTE election when applicable
- Use de minimis to ignore small passive income
US filing mechanics
Subpart F income reported on Form 5471 Schedule I, then flows to US shareholder's Form 1040.
Common Subpart F mistakes
- Not identifying Subpart F income (mixing with GILTI)
- Missing HTE election
- Holding rental property in operating CFC
- Cash buildup creating FPHCI
Practical advice
- Analyze CFC income types annually
- Apply HTE where eligible
- Restructure to avoid Subpart F if avoidable
- Get Indian audited financials showing income categories
- Coordinate with Form 5471 Schedules
Explore our complete US Tax Return Guide to understand refunds, filing rules, and IRS procedures for NRIs.