How are undistributed funds in a Controlled Foreign Corporation (CFC) reported to the IRS?

While I can't offer specific advice for your situation, I can help clarify how CFCs generally work with US tax reporting. When you have a Controlled Foreign Corporation (as defined by the IRS - generally meaning US shareholders own more than 50%), you're right that Form 5471 is required. But here's the important part many people miss: under Subpart F and the newer GILTI provisions, certain types of income are taxable to US shareholders whether or not they're distributed. This was specifically designed to prevent the tax deferral strategy you're describing. GILTI (Global Intangible Low-Taxed Income) specifically targets companies shifting intellectual property offshore. The Tax Cuts and Jobs Act created this to ensure US shareholders of CFCs pay a minimum level of tax on foreign earnings. For your specific situation with undistributed funds, you would potentially face tax liability when the CFC earns income, not just when distributing it. Investments made by the CFC aren't necessarily shielded - the IRS looks at the nature of the income and investments. This is definitely more complex than a lunch discussion - it involves international tax treaties, foreign tax credits, and potentially complex anti-avoidance rules. While $12K sounds high, comprehensive international tax planning does require specialized expertise.

I actually went through something similar with my tech business last year and ended up using https://taxr.ai to help sort through the international tax implications. Their system analyzed all the CFC regulations and GILTI provisions based on my specific situation and country of interest. Initially, I was just going to wing it based on some articles I read online, but there are so many nuances with international business structures. The service helped me understand exactly how Subpart F income works versus GILTI, and how my actual tax burden would change with different corporate structures. They even walked me through the Form 5471 reporting requirements which are honestly a nightmare if you're trying to DIY. Before using them, I was seriously underestimating my potential tax liability thinking I could just reinvest earnings without US tax consequences. Turns out that's not how it works at all!

Just wanted to update after trying taxr.ai from the recommendation above. I was skeptical because most "AI tax tools" I've tried were pretty basic, but this one actually delivered. They analyzed my specific situation (software company looking to expand overseas) and pointed out several issues I hadn't considered. The big one was that my planned structure would have triggered Passive Foreign Investment Company (PFIC) rules instead of just CFC reporting, which would have been a tax nightmare. Their report broke down exactly how GILTI would apply to my retained earnings and what portion would be considered Subpart F income based on my business activities. They even included calculations showing how the foreign tax credit would offset some of the US tax burden in my target country. Definitely worth it compared to the $15k+ quotes I was getting from international tax firms for essentially the same analysis.

I'd add another layer to this discussion - dealing with the IRS on international matters is incredibly frustrating when questions come up. I spent MONTHS trying to get someone on the phone who could actually address my CFC questions last year. After wasting countless hours on hold, I finally used https://claimyr.com to get through to an actual IRS agent who could help with my form 5471 questions. You can see how it works here: https://youtu.be/_kiP6q8DX5c Basically they navigate the IRS phone tree and wait on hold for you, then call you when an actual agent is on the line. Saved me literally days of frustration, especially with the international tax department which seems perpetually understaffed. Even with great planning, you'll likely have implementation questions that only the IRS can answer, so being able to actually reach them is crucial.

I need to eat my words about the Claimyr recommendation above. After getting nowhere with the Taxpayer Advocate Service (they said my case "wasn't urgent enough" since it was just a filing question), I reluctantly tried Claimyr. Got connected to an IRS international tax specialist in about 40 minutes (versus the 3+ hours I spent on hold myself last week before giving up). The agent actually knew about CFCs and Form 5471 requirements and clarified exactly how to report my situation. The specific question I had about Section 956 investments in US property that wasn't answered in any IRS publication was resolved in a 15-minute call. Turns out I was overthinking it, but without getting that confirmation from an actual IRS agent, I would have paid my accountant thousands to research something that had a simple answer. Hate to admit when I'm wrong, but this service saved me significant time and money.

I think you're overlooking the Section 962 election which can be huge for situations like yours. As an individual US shareholder of a CFC, you can elect to be taxed as if you were a domestic corporation on amounts included in your gross income under Section 951(a). This could reduce your effective tax rate on GILTI inclusions significantly - potentially from your individual rate down to the 21% corporate rate. Plus you get deemed paid foreign tax credits that individuals normally don't get. The downside is it creates a second layer of tax when you actually distribute the earnings, but if your plan is long-term reinvestment, it could be very advantageous.

This whole conversation is making my head spin. I looked into this same thing and the complexity/cost made me abandon the idea. Between GILTI, Subpart F, 962 elections, PFIC rules, annual reporting... I just keep my business structure simple now. In my experience, smaller businesses (<$5M revenue) often spend more on compliance and international tax experts than they save with these structures. The rules are designed to make it difficult for exactly the scenario you described. Just something to consider before going down this rabbit hole. Maybe explore other visa options that don't require such complex tax structures?

I've been through this exact scenario and want to share some practical insights. The complexity everyone's discussing is real, but it's manageable with the right approach. First, regarding your CPA's $12K quote - that's actually reasonable for comprehensive international tax planning. I paid similar amounts and it saved me significantly more in avoided penalties and optimized structures. The issue isn't the cost, it's finding someone who specializes in this area rather than a generalist CPA. On the technical side, your assumption about undistributed funds being shielded is unfortunately incorrect. Under current rules (post-2017 Tax Cuts and Jobs Act), the US has largely eliminated tax deferral for CFCs. GILTI inclusions happen annually regardless of distributions, and the rates can be substantial depending on your structure and jurisdiction. However, there are legitimate ways to optimize this. The Section 962 election mentioned above is huge - it can reduce your effective tax rate on foreign earnings from individual rates (up to 37%) down to corporate rates (21% base, potentially lower with deductions). The foreign tax credit calculations become complex but can provide significant relief in higher-tax jurisdictions. My recommendation: start with the comprehensive analysis (whether through a specialist or service like the ones mentioned), understand your actual tax liability under different scenarios, then decide if the benefits still justify the complexity. Don't make structural decisions based on outdated information about how these rules work.