My U.S. company formed a wholly owned Hong Kong subsidiary. What do we file?

The subsidiary is a CFC, so the U.S. company files Form 5471 with its Form 1120 every year, usually as a Category 4 and 5 filer. Subpart F income and net CFC tested income (NCTI) are computed on Form 8992 and related forms and may be taxed currently in the U.S.

What changed for GILTI in 2026?

The 2025 law renamed GILTI as net CFC tested income (NCTI) and, for foreign corporation years beginning after December 31, 2025, removed the QBAI exclusion. The section 250 deduction for C corporations fell from 50% to 40% (about 12.6% effective), and the deemed-paid foreign tax credit rose from 80% to 90%.

Do I owe U.S. tax if my foreign subsidiary pays no dividend?

Possibly. Subpart F income, such as passive income and certain related-party sales income, and NCTI are included by U.S. shareholders each year whether or not distributed. Later distributions of those amounts are generally not taxed again.

What happens if I didn't file Form 5471?

The penalty is $10,000 per foreign corporation per year, plus $10,000 for each 30 days the failure continues more than 90 days after IRS notice, up to $50,000 more, and creditable foreign taxes can be reduced. The assessment period for the related tax also stays open until the information is filed.

I'm a green card holder and own shares of a Chinese company directly. Do I file Form 5471?

If you own 10% or more and U.S. shareholders together own more than 50%, the company is a CFC and you file Form 5471; officers, directors and people crossing the 10% threshold can have filing duties even without CFC status. An individual's NCTI is taxed at individual rates without credit for corporate foreign tax unless a section 962 election is made.

Foreign Subsidiary CFC Rules, Form 5471 and 2026 NCTI

The short answer

When a U.S. company or U.S. individual sets up a subsidiary in China, Hong Kong or Singapore, and U.S. shareholders that each own at least 10% together own more than 50%, the subsidiary is a controlled foreign corporation (CFC). Form 5471 is filed with the U.S. return every year, with penalties starting at $10,000 per company per year, and some of the subsidiary's profit is taxed in the U.S. currently even if never distributed: Subpart F income and "net CFC tested income" (NCTI), the new name for GILTI. Under the 2025 law (P.L. 119-21), for foreign corporation years beginning after December 31, 2025, the QBAI exclusion is gone, the section 250 deduction for C corporations drops from 50% to 40% (about a 12.6% effective rate), and the deemed-paid foreign tax credit rises from 80% to 90%. The computation is on Form 8992.

Who this applies to

Founders with a U.S. C corporation or LLC who open a subsidiary, office or trading company in China, Hong Kong or Singapore; RTP tech founders with an R&D center back home; e-commerce sellers and importers using a Hong Kong buying company that orders from Chinese factories and sells to the U.S. company.

It also applies to U.S. citizens and green card holders who own a foreign company directly. Even without a U.S. company in between, you may be a U.S. shareholder of a CFC and must file Form 5471.

What a CFC is, and the Form 5471 categories

The question is whether U.S. shareholders together control more than 50%; how you own or control determines your filing category.

U.S. shareholder: under section 951(b), a U.S. person (company, individual or partnership) that owns, directly, indirectly or constructively, 10% or more of the vote or value of a foreign corporation.

CFC: a foreign corporation more than 50% owned by U.S. shareholders, by vote or value. A wholly owned Chinese or Hong Kong subsidiary of a U.S. company is a CFC.

Form 5471 categories (instructions revised December 2025): Category 1 relates to section 965 specified foreign corporations; Category 2 covers U.S. officers or directors of a foreign corporation in which a U.S. person acquired 10%; Category 3 covers crossing the 10% threshold on acquisition or disposition, among others; Category 4 is a U.S. person with control (more than 50%); Category 5 is a U.S. shareholder of a CFC. A U.S. parent owning 100% is usually Categories 4 and 5 and completes the balance sheet, income statement, earnings and profits and related-party transaction (Schedule M) schedules.

When: attach it to the owner's income tax return and file by that return's due date, including extensions.

Ownership rules changed: the 2025 law restored section 958(b)(4) for foreign corporation years beginning after December 31, 2025, so a U.S. person is no longer treated as owning stock held by a foreign person. Structures where a Chinese parent owns both a U.S. company and other foreign companies should be re-tested.

Which profits are taxed in the U.S. right away

Even with no dividend, part of a CFC's profit can be taxed currently, as Subpart F income or NCTI.

Subpart F income

Mainly passive income (interest, dividends, royalties, rents) and foreign base company income. A typical case: a Hong Kong subsidiary buys from unrelated Chinese factories and sells to its U.S. parent, with goods made and used outside Hong Kong; that related-party sales income may be foreign base company sales income. If the income bears an effective foreign tax above 90% of the 21% U.S. corporate rate (18.9%), the high-tax exception may be elected.

Net CFC tested income (NCTI, formerly GILTI)

Most operating profit that is not Subpart F becomes tested income. Under current section 951A, a U.S. shareholder includes its share of CFC tested income minus tested loss. From 2026:

QBAI removed: old GILTI exempted a 10% deemed return on the CFC's tangible assets (QBAI). That exclusion is deleted, so asset-heavy subsidiaries no longer get it.

Section 250 deduction cut to 40%: a U.S. C corporation deducts 40% (was 50%) of NCTI plus the section 78 gross-up, about a 12.6% effective rate at 21%.

Foreign tax credit raised to 90%: under section 960(d), a C corporation is deemed to pay 90% (was 80%) of the CFC's foreign income taxes on tested income. A new rule also disallows 10% of foreign taxes on later distributions of previously taxed NCTI.

Pro rata share by holding period: amended section 951(a)(2) allocates income to the period the U.S. shareholder actually held the stock, which matters for mid-year purchases and sales.

Individuals and LLC owners

The section 250 deduction and deemed-paid credit generally apply only to U.S. C corporations. If you own directly, or through a pass-through LLC or S corporation, NCTI is taxed at individual rates without credit for the CFC's foreign corporate tax. A section 962 election can apply corporate rates, but later distributions are taxed again, so it needs modeling.

Transfer pricing and penalties

Intercompany prices must be arm's length, and an unfiled 5471 is expensive.

Transfer pricing (section 482): service fees, purchases, royalties and interest between parent and subsidiary should match what unrelated parties would charge, with documentation; Schedule M lists them. China, Hong Kong and Singapore have their own rules, and both sides should agree.

Form 5471 penalties: per the instructions, $10,000 per foreign corporation per annual period for a late or incomplete form, plus $10,000 for each 30 days the failure continues more than 90 days after IRS notice, up to $50,000 more, and a possible reduction of creditable foreign taxes.

Open statute: under section 6501(c)(8), if a required 5471 is not filed, the assessment period for the related tax does not end until 3 years after the information is furnished.

Related forms: a foreign entity treated as disregarded is reported on Form 8858, and a U.S. company owning more than 50% of a subsidiary usually reports the subsidiary's foreign bank accounts on its FBAR.

A simple example

Simplified: ignores expense allocation, the section 904 limit, state tax and foreign withholding; numbers are assumed.

A U.S. C corporation owns 100% of a foreign subsidiary. In 2026 the subsidiary earns $1,000,000 before tax, pays $100,000 of local tax (an assumed 10% rate), and has $900,000 of tested income, no Subpart F income and no dividend.

NCTI of $900,000 plus the $100,000 section 78 gross-up is $1,000,000. Deduct 40% ($400,000), leaving $600,000; tax at 21% is $126,000; credit 90% x $100,000 = $90,000; U.S. tax is about $36,000.

Under the 2025 rules (50% deduction, 80% credit, ignoring QBAI): $500,000 taxable, $105,000 tax, $80,000 credit, about $25,000 of U.S. tax.

In this simplified math, U.S. tax approaches zero once the local effective rate reaches about 14%. If a U.S. individual owned the same subsidiary directly without a section 962 election, the $900,000 would be taxed at individual rates with no credit for the $100,000.

Common mistakes

"No dividend, nothing to report." Form 5471 is annual, and Subpart F and NCTI can be taxed currently.

"The subsidiary lost money, so no 5471." Filing depends on ownership and control, not profit; a tested loss can also offset other CFCs' tested income.

"An LLC owner is treated like a C corporation." The 40% deduction and 90% credit generally belong to C corporations; the choice of owner changes the U.S. tax.

Setting intercompany prices casually. Fees and transfer prices that are not arm's length can be adjusted in both countries.

"GILTI was repealed." It was renamed NCTI and recalculated; from 2026 many companies include more income.

What to do and when

Before forming the subsidiary: choose the owner (C corporation, LLC or individual) and entity type, model NCTI and local tax, and decide on any Form 8832 election.

In the year of formation: record the date and price of share acquisitions, check Category 2 and 3 filing duties, and put intercompany agreements and pricing support in place.

Each quarter: estimate Subpart F and NCTI in U.S. estimated tax payments.

April 15, 2027 (calendar-year C corporation; October 15 with extension): file Forms 5471, 8992 and 1118 with the 2026 Form 1120.

If earlier years were missed: review catch-up options with a CPA promptly; acting early keeps more options open.

How YCL can help

For U.S. companies and individual shareholders with subsidiaries in China, Hong Kong and Singapore, we determine CFC status, prepare Forms 5471, 8992, 1118 and 8858, compute Subpart F and NCTI, and help document intercompany pricing. See our U.S. company overseas subsidiary service.

For the full process, see our guide: Form 5471 for foreign companies.

YCL Accounting & Consulting is a multi-state CPA firm serving clients across the U.S. in English and Chinese, led by co-founder Gloria (Chenchen) Liu, CPA. You can start with a free 15-minute consultation.