A Controlled Foreign Corporation (CFC) is a foreign entity where US shareholders own more than 50% of the voting power or value. US shareholders of a CFC must include certain categories of passive income — called Subpart F income — in their US taxable income each year, even if no dividends are paid. This can create a US tax liability on income that the foreign subsidiary has not yet distributed, requiring founders to plan their corporate structure carefully.
When a US parent company or US shareholders own more than 50% of the voting power or value of a foreign corporation, that foreign corporation is classified as a controlled foreign corporation (CFC). US shareholders who own 10% or more of the CFC's voting power or value must include their pro rata share of the CFC's Subpart F income in their US taxable income currently, regardless of whether the income is distributed. Subpart F income includes passive income such as dividends, interest, rents, and royalties, as well as certain types of sales and services income involving related parties. In the typical Silicon Valley structure of a Delaware parent with a foreign subsidiary, the subsidiary is almost always a CFC. Gurpreet Bal advises that the Subpart F analysis is critical for any US company with foreign operations because current inclusion of Subpart F income can accelerate US tax liability on income that has not been repatriated.
Global Intangible Low-Taxed Income (GILTI) is a US tax regime that imposes a minimum tax on the earnings of US-owned foreign subsidiaries that exceed a 10% return on tangible assets. For tech companies with IP-heavy foreign subsidiaries that generate high returns on minimal tangible assets, GILTI can result in significant US tax liability on foreign earnings regardless of whether they are distributed. The effective GILTI rate depends on the foreign tax credit and how much of the income the foreign jurisdiction taxes.
The Tax Cuts and Jobs Act of 2017 introduced the GILTI regime, which requires US shareholders of CFCs to include in current income the CFC's earnings that exceed a deemed return on its tangible depreciable assets. GILTI is designed to impose a minimum tax on foreign earnings, particularly earnings from intangible assets such as intellectual property. For technology companies with foreign subsidiaries that hold significant IP or generate substantial income from intangible-intensive businesses, GILTI can result in significant current US tax liability. C corporation shareholders benefit from a 50% GILTI deduction (reduced to 37.5% after 2025) and foreign tax credits that can partially offset the inclusion, but individual shareholders of S corporations and partnerships do not receive the deduction. Gurpreet S. Bal advises companies structuring cross-border operations to model GILTI exposure and consider whether IP holding structures, cost-sharing arrangements, or entity classification elections can optimize the GILTI outcome.
A Passive Foreign Investment Company (PFIC) is a foreign corporation where 75% or more of gross income is passive, or 50% or more of assets produce passive income. US investors in a PFIC face punitive tax treatment on gains and distributions unless they make a qualifying election. Early-stage foreign startups with minimal active revenue are particularly vulnerable to PFIC classification, and the consequences can be severe for US founders and investors who hold stakes in foreign entities.
US investors in foreign companies must analyze whether the foreign company is a PFIC, which applies if 75% or more of the company's gross income is passive income or 50% or more of its assets produce or are held for the production of passive income. PFIC classification subjects US investors to punitive tax treatment on distributions and gains, including taxation at the highest ordinary income rates plus an interest charge for the deemed deferral benefit. Startup companies are frequently at risk of PFIC classification because they may have significant cash holdings from fundraising (passive assets) and limited operating revenue (passive income test). Gurpreet Bal advises US investors considering investments in foreign startups to evaluate PFIC status and, if applicable, consider making a Qualified Electing Fund (QEF) election or Mark-to-Market election to mitigate the adverse tax consequences.
Payments of dividends, interest, and royalties from a US company to a foreign recipient are subject to 30% US withholding tax, reduced by applicable tax treaties. In M&A transactions, the source and character of acquisition consideration — and whether treaty rates apply — significantly affects the after-tax economics for foreign sellers. Treaty benefits are only available if the recipient satisfies the treaty's limitation on benefits provisions, which are designed to prevent treaty shopping.
Cross-border payments including dividends, interest, royalties, and service fees are generally subject to US withholding tax at a statutory rate of 30%, which may be reduced under an applicable income tax treaty. India and the US have a tax treaty that reduces withholding rates on dividends to 15% or 25% depending on ownership levels, interest to 10% or 15%, and royalties to 10% or 15%. Treaty benefits require the recipient to be a qualified resident of the treaty country and to satisfy limitation on benefits provisions. Gurpreet S. Bal advises companies structuring intercompany payments between US and Indian entities to model the withholding tax cost, claim applicable treaty benefits, and consider the interaction between withholding taxes and the GILTI and Subpart F regimes in determining the overall effective tax rate on cross-border income.
Cross-border acquisitions can be structured to optimize tax efficiency through the use of treaty-favorable holding companies, step-up basis elections for acquired assets, and careful attention to the character of consideration paid. Buyers should analyze whether target entities have accumulated PFIC or CFC exposure that could create unexpected tax liabilities post-acquisition, and sellers should model the impact of withholding taxes on net proceeds before agreeing to deal terms.
US acquirers of foreign targets must evaluate whether to acquire the foreign entity's stock or assets, whether to make a check-the-box election to treat the foreign entity as a disregarded entity for US tax purposes, and how to structure the post-closing intercompany relationship to minimize the combined US and foreign tax burden. A Section 338(g) election may be available to treat a stock purchase as a deemed asset purchase for tax purposes, potentially stepping up the tax basis of the target's assets but triggering gain recognition. For acquisitions of Indian targets specifically, Gurpreet Bal advises analyzing the interaction between India's domestic tax rules on capital gains and transfer pricing and the US tax rules on CFC inclusions, GILTI, and foreign tax credits to optimize the cross-border tax structure.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on mergers and acquisitions, venture financings, IPOs, and cross-border transactions. He has advised on more than 50 M&A transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology. Prior to his career as a corporate lawyer and transaction advisor, he served with the U.S. Department of Justice and as an international and cross-border tax advisor at a Big 4 accounting firm.