When CFC and PFIC Rules Overlap
The CFC/PFIC overlap rule applies to a U.S. citizen's holding period, including when a foreign corporation is a CFC and the shareholder has current inclusions under Subpart F or GILTI. The rules also address ownership thresholds, control, domestic passthroughs and foreign-trust ownership.
References to GILTI on this page describe the framework before the changes that apply to taxable years beginning after 2025. For those years, section 951A is described as net CFC tested income (NCTI) and includes substantive changes. See GILTI and net CFC tested income.
When the overlap rule applies
A foreign corporation that meets the PFIC definition may be treated differently for a shareholder during a qualified portion of the shareholder's holding period if the corporation is also a CFC. The qualified portion generally covers the time when the corporation is a CFC and the shareholder owns at least 10% by vote or value, making that person a U.S. shareholder under section 951(b).[2]
During that qualified portion, the corporation is generally not treated as a PFIC with respect to that shareholder. The rule addresses overlap between PFIC treatment and current income inclusions under Subpart F. It is specific to the shareholder and the qualifying part of the holding period, not necessarily the entire time the shares are held.[2][5]
If the shareholder does not meet the U.S. shareholder threshold for a portion of the holding period, that time generally is outside the qualified portion. A proposed transition rule covers a period when a partner had current inclusions under Subpart F or GILTI through a U.S. partnership.[2][7]
Different ownership and control tests
CFC treatment involves both control by U.S. shareholders and a shareholder-level ownership threshold. A CFC is a foreign corporation in which U.S. shareholders own more than 50% of total voting power or stock value, directly, indirectly or under constructive ownership rules. A U.S. person generally qualifies as a U.S. shareholder at 10% or more of the total voting power or total value of stock.[6]
PFIC treatment uses different tests. The PFIC framework has no control requirement and no minimum stock ownership requirement. A foreign corporation is a PFIC if at least 75% of its gross income is passive, or if at least 50% of the average value of its gross assets is in assets that produce, or are held to produce, passive income.[2][6]
As a result, a U.S. person can have PFIC ownership without holding 10% or controlling the corporation. The overlap rule's qualified portion, however, depends on the shareholder meeting the U.S. shareholder threshold while the corporation is a CFC.[2][6]
Ownership through domestic passthroughs
The proposed regulations describe an aggregate approach under which the overlap rule is evaluated at the partner or shareholder level for ownership through a domestic partnership or S corporation. The proposed regulations generally apply to tax years beginning on or after publication of final regulations in the Federal Register. A domestic passthrough may still count as a U.S. shareholder when determining whether a foreign corporation is a CFC, while an individual's own status and inclusions are determined at the owner level.[2]
A U.S. owner with at least 10% direct or indirect ownership in a CFC/PFIC is treated as a U.S. shareholder partner. Under the aggregate approach, that person calculates any applicable Subpart F and GILTI inclusions, and the overlap rule may apply during the qualified portion.[2]
An owner below 10% is not a U.S. shareholder under section 951(b) for this purpose and is no longer subject to those inclusions through the passthrough under the aggregate approach. The overlap rule does not apply to that partner, so PFIC rules may apply to the indirectly held shares.[2]
Foreign-trust ownership context
A foreign trust can own shares of a corporation that may be a CFC or PFIC. U.S. beneficiaries may be subject to tax on income earned by certain corporations whose shares the trust owns.[1]
The general CFC and PFIC thresholds are distinct. CFC treatment turns on U.S. shareholder control of the foreign corporation and a qualifying shareholder's ownership; PFIC treatment has no corresponding control or minimum ownership threshold.[6]
Questions and answers
Does the overlap rule cover an entire period of share ownership?
Generally, it covers only the qualified portion, when the corporation is a CFC and the shareholder meets the U.S. shareholder threshold. A period when the shareholder does not meet that threshold is generally outside the qualified portion.[2]
What ownership percentage makes a U.S. person a U.S. shareholder?
Under section 951(b), a U.S. shareholder is a U.S. person who owns, directly, indirectly, or constructively, at least 10% of a foreign corporation's total voting power or total stock value.[2][6]
Does PFIC treatment require control of the foreign corporation?
No. PFIC rules do not have a control requirement or a minimum stock ownership requirement, while CFC rules involve control by U.S. shareholders and a 10% shareholder threshold.[6]
How can a U.S. partnership affect the overlap rule?
Under aggregate treatment, the rule applies at the partner level. An owner with at least 10% may have Subpart F or GILTI inclusions and may qualify for the overlap rule; an owner below 10% may remain subject to PFIC rules.[2]
How may foreign trusts affect U.S. beneficiaries?
U.S. beneficiaries of foreign trusts may be subject to tax on income earned by certain corporations whose shares the trust owns, including CFCs and PFICs.[1]
What is the transition rule for earlier Subpart F or GILTI inclusions?
A proposed transition rule covers the portion of a shareholder's holding period when the person had a current inclusion under Subpart F or GILTI from an interest held through a U.S. partnership. It applies to the described period, not automatically to all ownership time.[7]
Related pages
Sources and data notes
- sdtrustassociation.org, Carlyn S. McCaffrey, U.S. Situs Foreign Trust for Cross Border Families (South Dakota Trust Association, 2020). https://sdtrustassociation.org/wp-content/uploads/2020/09/McCaffrey-%E2%80%93-South-Dakota-Paper.pdf. Retrieved .
- thetaxadviser.com, The CFC/PFIC overlap rule after aggregate treatment. https://www.thetaxadviser.com/issues/2025/feb/the-cfc-pfic-overlap-rule-after-aggregate-treatment/. Retrieved .
- thetaxadviser.com, Cleansing the PFIC taint: Planning and pitfalls. https://www.thetaxadviser.com/issues/2017/jun/cleansing-pfic-taint-planning-pitfalls/. Retrieved .
- bdo.com, IRS and Treasury Issue Final CFC Regs, Proposed PFIC Regs Characterizing Domestic Partnerships as Aggregates for Some Purposes. https://www.bdo.com/insights/tax/irs-and-treasury-issue-final-cfc-regs-proposed-pfic-regs-characterizing-domestic-partnerships-as-ag. Retrieved .
- nysba.org, Report on the Proposed Regulations Regarding PFICs and CFCs Held by Partnerships and S Corporations (PDF). https://nysba.org/wp-content/uploads/2022/04/1462-Report-on-the-Proposed-Regulations-Regarding-PFICs-and-CFCs-held-by-Partnerships-and-S-Corporation1-Final-1.pdf. Retrieved .
- nycbar.org, New York City Bar Committee on Taxation of Business Entities, Report Offering Proposed Guidance Regarding the Passive Foreign Investment Company Rules (2009). https://www.nycbar.org/pdf/report/uploads/20071778-ReportRePassiveForeignInvestmentCompanyRules.pdf. Retrieved .
- rsmus.com, Proposed PFIC regulations revise reporting by US partnerships. https://rsmus.com/insights/tax-alerts/2022/proposed-pfic-regulations-revise-reporting-by-us-partnerships.html. Retrieved .
Dates in this block record when each source was read for this page.