If you’re an American who owns a controlling interest in a Japanese company — typically a Kabushiki Kaisha (KK) or a Godo Kaisha (GK) classified as a corporation for US tax purposes — you likely have a Controlled Foreign Corporation (CFC). This means certain income of the company may be taxed on your US return even if you never take a distribution.
For tax years beginning after December 31, 2025, the rules formerly known as GILTI (Global Intangible Low-Taxed Income) have been renamed Net CFC Tested Income (NCTI) with significant structural changes under the One Big Beautiful Bill Act (OBBBA, Public Law 119-21). This article covers the current rules as they apply to Americans with Japanese companies.
As of June 22, 2026, the IRS’s 2026 Form 8992, Form 8993, and Schedule I-1 (Form 5471) are drafts and must not be filed or relied on as final instructions. Confirm the final forms and instructions before filing.
This article is general information and is not tax, legal, or accounting advice. CFC rules are among the most complex in the US tax code. Consult a qualified tax professional for your situation.
What Is a CFC?
A Controlled Foreign Corporation is a foreign corporation in which US shareholders own, directly, indirectly, or constructively, more than 50% of the total voting power or total value of the stock on any day during the corporation’s tax year. A US shareholder for this purpose is generally a US person who owns 10% or more of the voting power or value.
For Americans in Japan, the most common CFC scenario is:
- A US citizen who owns 100% of a Japanese KK — this is a CFC because you are a US shareholder owning more than 50%
- A US citizen who owns 100% of a GK classified as a corporation for US tax purposes — same analysis
A US person who owns or controls a CFC may have to file Form 5471 depending on the applicable filer category and exceptions (see our Form 5471 article). A 100% US owner will generally have a filing requirement. Beyond filing, you may owe US tax on certain types of the CFC’s income — even without any distribution.
Source: IRS — Instructions for Form 5471
Two Major Current-Inclusion Regimes for CFC Shareholders
US shareholders of CFCs may be required to include two major categories of income on their US returns. In addition, Section 956 (investment in US property) may apply in certain fact patterns but is not covered in detail here.
1. Subpart F Income
Subpart F income includes certain categories of passive or mobile income that the CFC earns. The rules are designed to prevent US shareholders from deferring US tax by parking income in a foreign corporation.
Categories that may produce Subpart F income include:
- Foreign personal holding company income (FPHCI) — dividends, interest, rents, royalties, certain gains, and similar passive items
- Foreign base company sales income — income from certain related-party purchase/sale transactions meeting specific criteria regarding the transaction parties, manufacturing location, and destination
- Foreign base company services income — income from services performed for or on behalf of a related person under specific conditions, including where the services are performed outside the CFC’s country of organization
- Insurance income and certain other categories
Each category has detailed definitions, exceptions (including active-business, same-country, and high-tax exceptions under Section 954(b)(4)), and de minimis rules. A US shareholder’s Subpart F inclusion is generally limited to the shareholder’s pro-rata share of the CFC’s current-year earnings and profits.
2. NCTI (Net CFC Tested Income) — Formerly GILTI
For tax years beginning after December 31, 2025, the former GILTI regime has been restructured and renamed NCTI under the OBBBA. NCTI is designed to subject CFC income that is not otherwise Subpart F income or certain other excluded income to current US taxation.
Key changes from the former GILTI regime:
- QBAI elimination — the Qualified Business Asset Investment deduction, which previously provided a deemed 10% return on tangible assets, has been eliminated. Under NCTI, there is no such exclusion
- Section 250 deduction reduced — for corporate US shareholders (and Section 962-electing individuals for the NCTI portion), the deduction against NCTI has decreased from 50% to 40%, resulting in a higher effective US tax rate (approximately 12.6% at the 21% corporate rate)
- Foreign tax credit haircut reduced — the deemed-paid FTC disallowance for NCTI-related foreign taxes under Section 960(d) has been reduced from 20% to 10%, meaning 90% (up from 80%) of deemed-paid foreign taxes are creditable
What Is “Tested Income”?
A CFC’s tested income is generally its gross tested income minus deductions properly allocable to that income. Gross tested income excludes:
- Income effectively connected with a US trade or business under Section 952(b)
- Gross income taken into account in determining Subpart F income
- Income excluded under the NCTI high-tax election
- Related-person dividends
- Foreign oil and gas extraction income
NCTI is the excess of the US shareholder’s aggregate pro-rata share of tested income over tested loss from all CFCs.
For a typical American-owned KK operating a business in Japan, much of the company’s active business income that is not Subpart F income will generally be tested income subject to NCTI. However, even “active” income (such as consulting or services) may be Subpart F income if it involves related persons and is performed outside the CFC’s country of organization — the determination depends on the transaction parties, service location, and related-person relationships.
Source: IRS — Instructions for Form 5471 | Public Law 119-21 (OBBBA) | 26 CFR §1.951A-2
How NCTI Affects Individual US Shareholders
The NCTI rules create a particular challenge for individual US shareholders (as opposed to corporate shareholders):
- Individuals are generally not eligible for the Section 250 deduction on their own — this deduction is available to domestic corporations (and Section 962-electing individuals for the NCTI portion)
- Without the deduction, the NCTI inclusion is taxed at ordinary individual rates, which can be significantly higher than the effective corporate rate
- Individuals do not automatically receive deemed-paid foreign tax credits for foreign taxes paid by the CFC
Section 962 Election
An individual US shareholder may make a Section 962 election to be taxed on CFC inclusions (both Subpart F and NCTI) as if they were a domestic corporation. The election is made for a taxable year by filing the required Section 962 election statement with the shareholder’s return for that year. Form 8993 and other forms or schedules may also be required to compute and report the consequences of the election.
This election can provide:
- Access to the Section 250 deduction (40% under the 2026 rules) — this deduction applies to the NCTI portion, not to a Subpart F inclusion
- Access to deemed-paid foreign tax credits under Section 960 for foreign taxes paid by the CFC
- Taxation at the 21% corporate rate on the inclusion amount
However, the Section 962 election has complexities:
- When the CFC later distributes earnings that were previously included under Section 962, the distribution is included in the individual’s gross income to the extent it exceeds the US tax previously paid on the Section 962 inclusion. Tracking PTEP layers and basis is essential
- For deemed-paid foreign tax credits under Section 960, a Section 962-electing individual generally files Form 1118 (not Form 1116, which is for taxes paid or accrued directly by the individual)
- The interaction between Section 962, foreign tax credits, PTEP, and actual distributions requires careful modeling across multiple years
The High-Tax Exclusion and Exception
Two separate high-tax provisions may apply to CFC income. They are distinct elections with different rules:
NCTI High-Tax Exclusion
Under Treas. Reg. §1.951A-2(c)(7), a CFC’s controlling domestic shareholders may elect to exclude qualifying high-taxed income from NCTI tested income if the effective foreign tax rate on that income exceeds 90% of the US corporate rate (i.e., 90% × 21% = 18.9%). This exclusion is applied separately by tested unit (not QBU) — tested units can include the CFC itself, certain pass-through entities, and branches. A Japanese company’s headline or overall effective tax rate does not by itself establish eligibility; the calculation requires US tax-law definitions of income and foreign-tax allocation at the tested-unit level.
If the NCTI high-tax exclusion applies, the excluded income is removed from tested income, and the corresponding foreign taxes generally do not generate Section 960 deemed-paid credits or NCTI-basket credits for that excluded income.
Subpart F High-Tax Exception
Separately, Section 954(b)(4) and Treas. Reg. §1.954-1(d) provide a high-tax exception for Subpart F income, elected by the CFC’s controlling US shareholders. This is a distinct election with its own grouping and calculation rules. Like the NCTI exclusion, electing this exception means the related foreign taxes generally do not generate deemed-paid credits for that excepted income.
Source: 26 CFR §1.951A-2 — Tested Income and High-Tax Exclusion | 26 CFR §1.954-1 — Subpart F High-Tax Exception
Practical Impact for Americans with Japanese Companies
Japanese Corporate Tax and Foreign Tax Credits
Japan’s combined effective corporate tax rate varies by location, taxable income, and entity size, and varies materially. For corporate US shareholders or individuals making a Section 962 election, the deemed-paid FTC for Japanese corporate taxes may substantially reduce the US tax on NCTI — but this cannot be determined without completing the Section 904 limitation calculation, applying the income-category (basket) rules, and accounting for the 10% haircut on NCTI-category deemed-paid credits (90% creditable).
NCTI-category excess credits generally do not carry back or forward under the current rules. This means that excess Japanese tax credits in the NCTI basket cannot offset US tax in other years or categories.
Ownership Timing Changes
Under OBBBA §70354, for foreign corporation tax years beginning after December 31, 2025, a US shareholder that owns CFC stock directly or indirectly under Section 958(a) on any day during the year determines its pro-rata share of Subpart F income and NCTI by reference to the periods during which it held that stock, was a US shareholder, and the foreign corporation was a CFC. This replaces the prior last-day-of-CFC-year rule for these inclusion items. Note that Section 956 (investment in US property) retains a separate timing rule. This change is relevant in years involving acquisition, disposition, or restructuring of CFC ownership.
Filing Requirements
Depending on the filer category, inclusion, elections, and credits claimed, the required forms may include:
- Form 5471 — Information Return of US Persons With Respect to Certain Foreign Corporations. A 100% US owner will generally have a filing requirement under Categories 4 and 5a
- Schedule I-1 (Form 5471) — NCTI calculations at the CFC level
- Form 8992 — Calculation of Net Controlled Foreign Corporation Tested Income (NCTI) at the shareholder level
- Form 8993 — Section 250 Deduction for FDDEI and NCTI (applicable to domestic corporations and Section 962-electing individuals for the NCTI portion)
- Form 1118 — generally required for a Section 962-electing individual claiming deemed-paid credits based on foreign taxes paid by a CFC
- Form 1116 — may apply separately to foreign income taxes paid or accrued directly by the individual
Verify that final 2026 forms and instructions have been released before filing.
Frequently Asked Questions
My KK is profitable but I don’t take distributions. Do I still owe US tax?
Potentially yes. If the KK is a CFC, you may owe US tax on your pro-rata share of Subpart F income and NCTI — regardless of whether the company distributes any money to you. This current-inclusion feature is fundamental to the CFC regime.
Japan’s corporate tax rate is higher than the US rate. Won’t the FTC eliminate my US tax?
For NCTI with a Section 962 election (or for corporate shareholders), the deemed-paid FTC for Japanese corporate taxes may substantially reduce the US tax on NCTI. However, the FTC is subject to Section 904 limitation calculations, the 10% haircut, income-category rules, and NCTI-category excess credits generally do not carry back or forward. Without a Section 962 election, individual shareholders do not receive deemed-paid FTCs and face ordinary individual rates on NCTI. The result depends on your complete tax picture.
What changed in 2026?
The OBBBA renamed GILTI to NCTI, eliminated the QBAI exclusion, reduced the Section 250 deduction from 50% to 40%, reduced the FTC haircut from 20% to 10%, and changed the ownership timing rule for Subpart F and NCTI inclusions (from last-CFC-day to a period-based approach for CFC tax years beginning after December 31, 2025). For individual shareholders, the elimination of QBAI means more CFC income is now subject to current US taxation.
Should I make a Section 962 election?
The Section 962 election can reduce your current-year tax on NCTI by providing access to the corporate rate, Section 250 deduction (for NCTI), and deemed-paid FTCs. However, future actual distributions from PTEP may be included in gross income to the extent they exceed the prior Section 962 tax. The decision depends on your income levels, Japanese tax paid, distribution plans, and overall tax situation. Model both scenarios across multiple years with a tax professional.
Does the high-tax exclusion help my Japanese KK?
Potentially. If the effective foreign tax rate on your KK’s tested-unit income exceeds 18.9% (90% of the 21% US corporate rate) under the US tax-law calculation, the income may be excludable from NCTI tested income. Japan’s corporate rates often exceed this threshold on a headline basis, but the tested-unit-level calculation and US-law income/tax allocation are required. Electing the exclusion means forgoing the related NCTI-basket FTC.
Next Steps
- US Tax Filing Obligations — The complete overview
- Form 5471 — Detailed guide on Form 5471 filing
- Foreign Tax Credit — Offset US tax with Japanese taxes paid
- Social Insurance and SE Tax — Totalization Agreement for self-employed
- Streamlined Filing — How to catch up if you haven’t been filing (coming soon)
