Does a US shareholder of a cash-rich UK company have to file Form 5471 or Form 8621?

It depends on percentage and control. If you own 10% or more of the vote or value and US shareholders together own more than 50%, the company is a CFC and the overlap rule in section 1297(d) means you generally report on Form 5471, not as a PFIC holder. If you own under 10%, or the company is not a CFC, PFIC rules apply and Form 8621 is usually required.

Can a UK trading company really be a PFIC?

Yes. A foreign corporation is a PFIC if 75% or more of its gross income is passive or at least 50% of its assets, on average, produce passive income. A UK trading company holding large cash reserves can fail the asset test, particularly if it is a CFC, because CFCs measure assets by adjusted basis and self-generated goodwill usually has little or no basis.

Does UK corporation tax let a CFC use the high-tax exception?

Often for interest, rarely for dividends. The election under section 954(b)(4) needs an effective foreign rate above 90% of the 21% US rate, which is 18.9%. HMRC charges close investment-holding companies at the 25% main rate, so interest usually clears the bar. UK companies are generally exempt on dividends received, so portfolio dividends carry no UK tax and remain subpart F income.

What changes for a US owner holding exactly 10% rather than 9%?

The section 951(b) test is 10% or more of vote or value, so an owner at exactly 10% is a US shareholder and can rely on the overlap rule if the company is a CFC. At 9% the owner is outside it unless family attribution adds shares. The 9% owner then holds PFIC stock, files Form 8621 and faces the excess distribution regime by default.

How does HMRC treat a UK company that sells its trade and keeps the cash?

A close company that no longer trades and holds investments is typically a close investment-holding company. HMRC's manual at CTM03951 confirms these companies pay corporation tax at the main rate, currently 25%, with no small profits rate or marginal relief. The UK treatment does not change US status, so the US owners must separately test CFC and PFIC status.

What happens to previously taxed income when the UK company pays a dividend?

For a 10% owner of a CFC, subpart F income already taxed is tracked as PTEP on Form 5471 Schedule P, and an actual distribution comes first out of PTEP, so that portion is not taxed again in the US. The UK taxes the full dividend when paid, so the timing of foreign tax credits needs care. Minority PFIC holders instead apply the excess distribution rules.

Form 5471 and PFIC Overlap for Cash-Rich UK Companies

If you are a US citizen owning 10% or more of a UK company that US shareholders control, you report that company on Form 5471 under the controlled foreign corporation (CFC) rules, even if its cash pile has turned it into a passive foreign investment company (PFIC). The CFC/PFIC overlap rule in section 1297(d) switches off PFIC treatment for you during that period. A US owner below 10%, or any US owner of a UK company that is not a CFC, gets no such relief and faces the PFIC regime and Form 8621.

This matters most after a liquidity event. A founder sells the trade of a UK company for cash, or a family keeps profits in a holding company and invests them in deposits and listed shares. For UK purposes nothing unusual has happened. For US purposes the company may now be a PFIC, a source of subpart F income, or both, and the right answer depends on percentages that are easy to get wrong. In the returns we prepare for US citizens in the UK, the cash-box company is one of the most frequent reasons a single entity triggers two different information returns for two different family members.

What makes a cash-rich UK company a PFIC?

A PFIC is any foreign corporation that meets either of two tests in section 1297(a) of the Internal Revenue Code for a tax year. The statute is published at https://www.law.cornell.edu/uscode/text/26/1297 and the IRS summarises it in the Form 8621 instructions at https://www.irs.gov/instructions/i8621.

Income test: 75% or more of the corporation's gross income for the year is passive income.
Asset test: the average percentage of its assets that produce passive income, or are held to produce it, is at least 50%.
Passive income means income of a kind that would be foreign personal holding company income under section 954(c): broadly dividends, interest, royalties, rents, annuities and gains on property that produces that kind of income.
Cash and deposits generate interest, so in practice they are treated as passive assets even when a company thinks of them as working capital.

The asset test is where cash-rich trading companies get caught. A UK company with a modest trade and a large deposit balance can fail the 50% asset test even while most of its income still comes from trading. There is a further twist for companies that are also CFCs. Section 1297(e) requires a non-publicly traded CFC to measure its assets by adjusted basis, as determined for earnings and profits, rather than market value. Self-generated goodwill and brand value usually carry little or no tax basis, so they barely register in the fraction, while every pound of cash counts in full. A business worth many times its cash balance on the open market can still look predominantly passive on an adjusted-basis measurement.

How the Form 5471 CFC overlap rule works

The overlap rule is a priority rule. Section 1297(d) says that a corporation is not treated as a PFIC with respect to a shareholder during the qualified portion of that shareholder's holding period. The qualified portion is the part of the holding period after 31 December 1997 during which two things are both true: the shareholder is a United States shareholder as defined in section 951(b), and the corporation is a CFC. The Form 8621 instructions put it plainly: a US shareholder who includes subpart F income from a CFC that is also a PFIC is generally not subject to the PFIC provisions for the same stock during the qualified portion. The exception does not extend to option holders.

A United States shareholder is a US person who owns 10% or more of the total combined voting power or 10% or more of the total value of all classes of stock of a foreign corporation. A CFC is a foreign corporation in which such US shareholders together own more than 50% of the vote or value. Ownership counts direct, indirect and constructive holdings, so shares held by a spouse, children or parents can be attributed to you. Both definitions appear in the Form 5471 instructions at https://www.irs.gov/instructions/i5471. A point we still see mis-stated in older guides: the requirement that a corporation be a CFC for an uninterrupted 30 days before an inclusion arises was repealed by the 2017 Tax Cuts and Jobs Act, so a CFC for even part of a year can produce an inclusion.

The practical effect is that a qualifying 10% owner swaps one regime for another. Instead of the PFIC excess distribution rules and Form 8621, the owner is taxed currently on the company's subpart F income and on its tested income under section 951A, and reports everything on Form 5471. That is not automatically a better outcome. It is a different one, and for a company that has become a pure investment vehicle it can mean annual US tax on income the UK company has not distributed.

Exactly 10% versus 9%: why one percentage point changes the regime

The 951(b) test is 10% or more, so a shareholder holding exactly 10% of the vote or value is a US shareholder and can sit inside the overlap rule, provided the company is a CFC. A shareholder with 9.99% is not, unless attribution pushes them over. We regularly see founder families where one sibling holds 9% and another 11%, and the two receive completely different US treatment from the same company in the same year: the 11% holder files Form 5471 and reports subpart F income, while the 9% holder is a PFIC shareholder filing Form 8621.

Test both vote and value. A holder of non-voting growth shares worth 10% of the company's value is a US shareholder even with no votes.
Apply constructive ownership before concluding someone is below 10%. Shares held by close family members can be attributed.
Recheck every year. Share buybacks, new issues to employees and redemptions move percentages without anyone buying or selling.
Check CFC status separately. A 10% holder of a UK company that is only 40% owned by US shareholders is not protected, because the company is not a CFC.

Subpart F: the tax the overlap rule substitutes

For a 10% owner of a CFC, the cash box produces foreign personal holding company income, a category of subpart F income. Interest on deposits, dividends from a share portfolio and gains on investment assets are all included. Section 954(c)(1) lists dividends, interest, royalties, rents and annuities, and certain property gains. The US shareholder includes their pro rata share in gross income for the year, whether or not the company pays a dividend, and reports it on Form 5471 Schedule I.

Two statutory thresholds in section 954(b)(3) can change the result. If foreign base company income is less than the lesser of 5% of gross income or $1,000,000, none of it is treated as foreign base company income. If it exceeds 70% of gross income, the entire gross income of the CFC is treated as foreign base company income, subject to the high-tax exception and expense allocation. After a trade sale, the 70% rule is often in play within a year or two.

Does the high-tax exception help a UK company?

Sometimes, and it depends on what the cash is invested in. Section 954(b)(4) and Treasury Regulation 1.954-1(d), published at https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.954-1, allow an election to exclude an item of income from subpart F where it was subject to foreign income tax at an effective rate greater than 90% of the maximum rate in section 11. With the US corporate rate at 21%, that threshold is 18.9%. The election is made by the controlling US shareholders by statement with their returns, and on Form 5471 the excluded amount of foreign personal holding company income appears on Schedule I, Worksheet A, line 13i.

On the UK side, GOV.UK at https://www.gov.uk/corporation-tax-rates confirms a 25% main rate, a 19% small profits rate for profits of £50,000 or less, and marginal relief between £50,000 and £250,000. A company that has sold its trade and holds only investments is often a close investment-holding company, and HMRC's manual at https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm03951 confirms that such companies are charged at the main rate and cannot use the small profits rate or marginal relief. Interest taxed at 25% will usually clear 18.9%, although the effective rate is computed on the income as measured under US principles, so timing differences can pull it below the line.

Dividends are the trap. A UK company generally pays no corporation tax on dividends it receives, because the distribution exemption in Part 9A of the Corporation Tax Act 2009 is designed to exempt the great majority of them, as HMRC explains at https://www.gov.uk/hmrc-internal-manuals/international-manual/intm651010. Dividend income from a UK company's equity portfolio therefore carries no UK tax, cannot meet the high-tax test, and flows through to a 10% US shareholder as subpart F income with no UK tax to credit against it.

The Form 5471 schedules a cash-box company brings into play

The Form 5471 instructions state that a filer described in Categories 4 and 5a completes all six pages of the form and the separate Schedules E, G-1, H, H-1, I-1, J, M, P, Q and R as applicable. One detail that is still mishandled in prior-year returns we review: if you satisfy the requirements of both Category 4 and Category 5a, the instructions say to check only the Category 4 box and leave 5a blank. Category 4 is control, meaning more than 50% of the vote or value. Category 5a is a US shareholder of a CFC who is not in 5b or 5c.

Schedule I: the shareholder's pro rata share of subpart F income, built up through Worksheet A, including the high-tax exception line.
Schedule Q: the CFC's income sorted into subpart F income groups, the tested income group and the residual group, with expenses allocated.
Schedule I-1: section 951A information. For tax years beginning after 31 December 2025, the regime formerly called GILTI operates as net CFC tested income following Public Law 119-21.
Schedule H: current earnings and profits, which cap the subpart F inclusion.
Schedule J: accumulated earnings and profits, split between previously taxed amounts and untaxed section 959(c)(3) earnings.
Schedule P: previously taxed earnings and profits (PTEP) for each US shareholder.
Schedule R: distributions, which the instructions treat as coming first out of PTEP and then out of the section 959(c)(3) balance.
Schedule M: transactions between the CFC and its shareholders or related persons, including loans from the company to a shareholder.

The 2026 instructions also reflect the One Big Beautiful Bill Act changes to CFC tax years and a pro rata share transition rule, with guidance in Notice 2025-75. For CFC years beginning after 31 December 2025, the pro rata share rules were also amended so that inclusions follow ownership during the year rather than only ownership on the last day, and proposed regulations issued in 2026 flesh this out. If shares change hands in a cash-box company during 2026, we compute the inclusion under the amended rules rather than rolling forward last year's workpapers.

Selling the trade mid-year: the year the regimes collide

The year of an asset sale is the hardest year to classify, because the company is partly an operating business and partly a cash box. For PFIC purposes, the income test looks at the whole year's gross income and the asset test at average assets across the year, so a sale in June can leave the first year below both thresholds while the following year fails them comfortably.

Section 1298(b)(3) contains a change of business exception. A corporation is not a PFIC for a year if it was never a PFIC before, substantially all of its passive income for the year is attributable to proceeds from disposing of one or more active trades or businesses, and it is not a PFIC in either of the following two years. The last condition is the one a cash box cannot meet. The exception suits a company that sells one business and reinvests in another. It does not help a company that sells its trade and keeps the proceeds in deposits and funds.

For a 10% owner of a CFC, the sale gain itself needs asset-by-asset analysis. Property gains are foreign personal holding company income only where the property gives rise to passive income or produces no income, so gains on assets used in the active trade generally fall outside that category and are instead considered under the tested income rules. Once the trade has gone, subsequent interest and dividends are squarely subpart F income.

Worked scenario: one company, two US owners, two different returns

Illustration only, with invented figures. Harbour Ltd is a UK company with a calendar accounting year. Sarah, a US citizen resident in London, owns 60%. Her UK business partner, who is not a US person, owns 31%. James, Sarah's cousin and also a US citizen, owns 9%, and no attribution applies between them. In June 2026 Harbour sells its trade and places the proceeds of £6,000,000 in money-market deposits and a portfolio of listed UK shares. In the second half of the year it earns £150,000 of interest and £60,000 of dividends. We assume an exchange rate of $1.30 to £1 purely for this illustration.

Harbour is a CFC because Sarah alone, a US shareholder, holds more than 50%. Sarah meets Category 4 and Category 5a, so she checks only Category 4 and completes the full Form 5471. Her pro rata share of the dividend income is £36,000, about $46,800 at the assumed rate, and it is subpart F income: UK corporation tax on it is nil, so the high-tax exception is unavailable. Her 60% share of the interest, £90,000, can be excluded if the interest was taxed in the UK at an effective rate above 18.9% and the high-tax election is made. Income excluded under that election is also kept out of tested income. Because of the overlap rule, Sarah is generally not subject to the PFIC provisions, or a Form 8621, for Harbour during these years.

James is in a different position. At 9% he is not a US shareholder, so the overlap rule is unavailable to him even though Harbour is a CFC. If Harbour is a PFIC for 2026 or 2027, and on these facts it will be by 2027 at the latest, James holds PFIC stock. He files Form 8621 when required under section 1298(f). By default, distributions above 125% of the average of the prior three years, and any gain on sale, are excess distributions spread across his holding period and taxed at the highest rate for each prior year with an interest charge. Mark-to-market is unavailable because Harbour's shares are not marketable stock. A qualified electing fund (QEF) election is possible only if Harbour provides a PFIC Annual Information Statement, which is realistic here because Sarah needs the same numbers for her Form 5471.

What happens when the overlap ends or begins?

The overlap is not permanent. If Sarah later sells down so that US shareholders own 50% or less, Harbour stops being a CFC and her qualified portion ends. Under section 1297(d)(3), her holding period for PFIC purposes is then treated as starting the day after the qualified portion ended, so future excess distributions are spread only over the post-CFC period. That fresh start is lost if the shares were PFIC stock in her hands before the qualified portion began and no section 1298(b)(1) election was made.

The reverse journey is where the taint bites. Section 1298(b)(1) is the once-a-PFIC-always-a-PFIC rule. If James increases his holding to 10% while Harbour is a PFIC and a CFC, his earlier years as a PFIC shareholder leave the shares tainted. The Form 8621 instructions describe two purging elections for this case: Election F, a deemed sale of the stock at fair market value with the gain taxed as an excess distribution, and Election G, a deemed dividend of the shareholder's share of post-1986 earnings and profits, also taxed as an excess distribution. Both involve paying the PFIC charge once to clean the shares going forward, and the choice depends on whether the gain or the accumulated earnings is smaller.

When the cash is finally distributed: PTEP and the UK dividend

Eventually the company pays out its cash, by dividend or in a liquidation. For Sarah, amounts already taxed as subpart F income sit in PTEP on Schedule P, and an actual distribution comes first out of PTEP. That portion is not taxed again in the US, although foreign currency gain or loss can arise because the pound will have moved since the inclusion year. The UK, however, taxes the whole dividend at UK dividend rates in the year it is paid. The US inclusion came earlier and the UK tax comes later, so the foreign tax credit timing needs planning to avoid stranded UK tax. On a sale or liquidation, section 1248 can recharacterise part of a 10% owner's gain as a dividend to the extent of untaxed earnings.

For James, the same dividend is an excess distribution if it exceeds the 125% threshold, which a one-off cash return almost always will. The UK dividend tax is still creditable in principle, but the US calculation runs on the section 1291 regime rather than ordinary dividend rules.

Late Form 5471 or Form 8621 filings

Missed filings are common after a trade sale, because the UK accountants handle the sale and nobody revisits US status. The Form 5471 penalty is $10,000 per form per year, with an additional $10,000 for each 30-day period that the failure continues more than 90 days after IRS notice, up to $50,000 of additional penalty, as stated in the instructions and on https://www.irs.gov/forms-pubs/about-form-5471. Where income tax returns were filed but the information returns were not, the IRS Delinquent International Information Return Submission Procedures remain available at https://www.irs.gov/individuals/international-taxpayers/delinquent-international-information-return-submission-procedures, with penalties possible and a reasonable cause statement attached. Where unreported subpart F income or PFIC income means the returns themselves were wrong, the Streamlined Filing Compliance Procedures at https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures are usually the better route for non-wilful filers resident abroad.

Our practical sequence for a cash-rich UK company is the same every time: map every US owner's vote and value percentage including attribution, decide CFC status, run both PFIC tests on the right measurement basis for each year, then assign each owner to Form 5471, Form 8621 or both. Getting that map right first prevents most of the expensive corrections we see later.