Does a UK limited company that only sells to UK customers have foreign base company sales income?

No. Property sold for use, consumption or disposition in the United Kingdom falls outside the definition for a UK-organised company, even where the goods were made abroad and bought from a related person. The company should keep delivery records supporting UK destination, and the Form 5471 instructions ask for the exclusion to be disclosed on Schedule G, line 14 using the code SCSU with an attached statement.

Is UK Corporation Tax high enough for the subpart F high-tax exception?

It depends on the effective rate measured under US rules. The exception requires an effective foreign tax rate above 90 percent of the 21 percent US corporate rate, which is 18.9 percent. The UK main rate is 25 percent and the small profits rate is 19 percent. The exception is elective, and the effective rate is computed on income determined under US principles, so the UK headline rate alone is not conclusive.

What are the de minimis and full-inclusion thresholds for foreign base company income?

Under section 954(b)(3), if gross foreign base company income plus gross insurance income is less than the lesser of 5 percent of gross income or 1,000,000 US dollars, none of the company's income is treated as foreign base company income. If that sum exceeds 70 percent of gross income, the entire gross income is treated as foreign base company income, subject to the high-tax exception and deductions.

Does relabelling or repackaging in the UK count as manufacturing?

No. Treasury Regulation 1.954-3(a)(4) states that packaging, repackaging, labelling and minor assembly operations never constitute manufacturing. To rely on the manufacturing exception, the UK company must substantially transform the property, carry out assembly that is substantial in nature, or make a substantial contribution to manufacturing through its own employees, for example through oversight of production, quality control and product design.

Where are purchases from my US company reported on Form 5471?

Related-party trading flows are reported on Schedule M (Form 5471), which Category 4 filers must complete. Sales of stock in trade by the foreign corporation appear on line 1 and purchases of stock in trade on line 16, in the column that matches the related party. Amounts are stated in US dollars, translated at the average exchange rate for the foreign corporation's tax year.

Form 5471: Foreign Base Company Sales Income (UK Ltd)

Q: What is foreign base company sales income on Form 5471?

Foreign base company sales income is subpart F income defined in section 954(d). It arises when a controlled foreign corporation buys personal property from, or sells it to or on behalf of, a related person, and the property is both manufactured outside the corporation's country of organisation and sold for use outside that country. The shareholder's share is computed on Worksheet A and reported on Form 5471, Schedule I, line 1f.

Form 5471 is where a US owner of a UK limited company reports foreign base company sales income, the category of subpart F income that catches a trading company buying from or selling to a related party when the goods are both made outside the UK and sold for use outside the UK. Where every one of those conditions is met, the profit on those sales is worked through Worksheet A in the Form 5471 instructions, lands on Schedule I, line 1f, and is included in the US shareholder's income for the year under section 951(a), whether or not the company pays a dividend. Where any one condition is missing, the income is not foreign base company sales income at all.

In the returns we prepare for US owners of UK trading companies, this is the subpart F category that is most often overlooked, because the company looks like an ordinary active business. It has staff, a warehouse, customers and a UK Corporation Tax bill. None of that decides the question. The test is mechanical: who the company bought from or sold to, where the goods were made, and where they ended up. This guide walks through each element, the exceptions and thresholds, and the exact places the numbers appear on Form 5471, using the IRS instructions revised December 2025 at https://www.irs.gov/instructions/i5471 and the statute at https://www.law.cornell.edu/uscode/text/26/954.

What is foreign base company sales income on Form 5471?

Foreign base company sales income is income of a controlled foreign corporation, whether in the form of profits, commissions, fees or otherwise, derived from buying or selling personal property in a transaction involving a related person, where the property is manufactured, produced, grown or extracted outside the corporation's country of organisation and is sold for use, consumption or disposition outside that country. That is the definition in section 954(d)(1) of the Internal Revenue Code. It is one of the three components of foreign base company income listed in section 954(a), alongside foreign personal holding company income and foreign base company services income.

The statute describes four transaction patterns. Any one of them is enough to bring the income within the definition, provided the two location conditions are also met:

The company purchases personal property from a related person and sells it to any person.
The company sells personal property to any person on behalf of a related person, for example as a commission agent.
The company purchases personal property from any person and sells it to a related person.
The company purchases personal property from any person on behalf of a related person, for example as a buying agent.

The policy behind the rule is simple to state. Congress did not want sales profit parked in a company that sits between a related supplier and the end market while adding little in the country where it is organised. A UK limited company that buys finished product from its owner's US business and ships it to customers in Germany or France fits that pattern precisely, even though nobody set it up with that purpose in mind.

What are the four elements a UK distributor has to test?

We test every revenue stream of a UK trading company against four elements. All four must be present for a given sale to produce foreign base company sales income; the absence of any one takes that sale out.

A purchase or sale of personal property. The rule covers goods, not services or land. The statute excludes agricultural commodities that are not grown in the United States in commercially marketable quantities.
A related person on one side of the transaction. The related person can be the supplier, the customer, or the principal on whose behalf the company acts.
Manufacture outside the UK. The property must be manufactured, produced, grown or extracted outside the country under whose laws the company is organised, which for a UK limited company means outside the United Kingdom.
Use outside the UK. The property must be sold for use, consumption or disposition outside the United Kingdom.

A UK company buying from unrelated suppliers and selling to unrelated customers has no foreign base company sales income however international its trade. The failure mode we see most often is the reverse assumption: the owner believes that because the UK company sells to genuine third-party customers the rule cannot apply. It can. A related-party purchase followed by an unrelated-party sale is the first pattern in the statute.

Who counts as a related person for a UK limited company?

A related person is defined in section 954(d)(3). A person is related to a controlled foreign corporation if it is an individual or entity that controls, or is controlled by, the corporation, or if it is an entity controlled by the same person or persons who control the corporation. Control of a corporation means owning, directly or indirectly, stock with more than 50 percent of the total voting power or more than 50 percent of the total value. For a partnership it means more than 50 percent by value of the beneficial interests. Ownership attribution rules similar to those in section 958 apply.

For an owner-managed group this is usually an easy element to satisfy. A US citizen who owns all of a UK limited company and all of a US LLC controls both. If the LLC is treated as a corporation or a partnership for US tax purposes, it is an entity controlled by the same person. If it is a single-member LLC disregarded for US tax purposes, the purchase is in substance from the individual owner, who is a related person because that individual controls the UK company. Either route leads to the same place, but the classification of the LLC does change which column of Schedule M the transactions are reported in, so we confirm it at the start.

When does the manufacturing exception take a UK company out?

Foreign base company sales income does not include income from the sale of property that the controlled foreign corporation itself manufactured, produced or constructed. The detail is in Treasury Regulation 1.954-3(a)(4), at https://www.law.cornell.edu/cfr/text/26/1.954-3. The regulation requires the company to meet one of three tests through the activities of its own employees, and it states that a company is not treated as a manufacturer merely because the property is sold in a different form from the form in which it was bought.

Substantial transformation. Purchased property is substantially transformed by the company before sale, so that what is sold is a different product from what was bought.
Component assembly that amounts to manufacturing. Purchased components are assembled or converted through activities that are substantial in nature and generally considered to be manufacturing. The regulation adds a safe harbour where conversion costs, meaning direct labour and factory burden, are 20 percent or more of the total cost of goods sold.
Substantial contribution. Where the physical work is done by someone else, such as a contract manufacturer, the company can still qualify if its own employees make a substantial contribution to the manufacturing. The regulation lists activities that are weighed, including oversight and direction of the process, material and vendor selection, management of manufacturing costs and capacities, control of manufacturing logistics, quality control, and developing or directing the product design.

Substantial contribution is a facts-and-circumstances test. The regulation says no single activity and no particular number of activities is determinative. One point is not negotiable: the regulation states that in no event will packaging, repackaging, labelling or minor assembly operations constitute manufacturing. A UK company that receives finished goods, applies UK or EU compliance labels, bundles them into retail packs and ships them has not manufactured anything for this purpose. Where a UK company does claim the exception, the Form 5471 instructions ask for it to be disclosed, which we come to below.

How do the same-country exceptions work for UK-made or UK-consumed goods?

The two location conditions in section 954(d)(1) each produce an exclusion. Under Regulation 1.954-3(a)(2), income from property manufactured, produced, constructed, grown or extracted in the United Kingdom is outside the rule for a UK company, even if the supplier is related and the customer is abroad. Under Regulation 1.954-3(a)(3), income from property sold for use, consumption or disposition in the United Kingdom is outside the rule, even if the goods were made abroad and bought from a related person.

This is the contrast that matters most in practice. A UK company that buys only UK-made goods, or that sells only to UK customers for UK use, has no foreign base company sales income, however closely related its supplier is. A UK company with a mixed book has to split its sales. The regulation supplies the presumptions used to do that. Property sold to an unrelated person is presumed to be for use in the country of destination. That presumption falls away if the company knew, or should have known from the circumstances, that the goods probably would not be used there, in which case the company must establish the country of ultimate use or the goods are presumed to be used outside its own country. Property sold to a related person is presumed to be for use outside the company's country unless the company establishes otherwise.

For a UK distributor the practical consequence is evidential. Delivery addresses, export documentation and customer contracts are what support the split between UK-destination sales and everything else. Sales to a UK wholesaler that the company knows is re-exporting to Ireland or the Netherlands do not sit safely in the UK column.

Does the branch rule matter for a UK trading company?

Briefly, it can. Section 954(d)(2) provides that where a controlled foreign corporation carries on activities through a branch or similar establishment outside its country of incorporation, and that has substantially the same effect as if the branch were a wholly owned subsidiary, the income attributable to the branch is treated as derived by a separate subsidiary and constitutes foreign base company sales income. The Form 5471 instructions make clear that a disregarded entity of the company counts as a branch or similar establishment. A UK company that has set up a sales office, a fulfilment entity or a manufacturing site in another country therefore needs the branch analysis run under Regulation 1.954-3(b) before anyone concludes that there is no related-party transaction. The mechanics involve a comparison of tax rates between locations and are beyond a short summary; the point for the owner is that an overseas branch does not remove the issue and may create it.

How do the de minimis and full-inclusion rules change the answer?

Section 954(b)(3) contains two thresholds that operate on the company as a whole. Under the de minimis rule, if the sum of foreign base company income, measured before deductions, and gross insurance income for the year is less than the lesser of 5 percent of gross income or 1,000,000 US dollars, no part of the company's gross income is treated as foreign base company income. Under the full-inclusion rule, if that same sum exceeds 70 percent of gross income, the entire gross income for the year is treated as foreign base company income, subject to the high-tax exception and to deductions.

Both tests are run on gross income, which for a company selling goods generally means sales less cost of goods sold rather than turnover. The Form 5471 instructions place the de minimis rule on line 10 of Worksheet A and the full-inclusion rule on line 11. A UK company with a small strand of related-party export sales alongside a large domestic business may fall under the de minimis rule and report nothing. A UK company whose trade is mostly EU resale of related-party product may tip over 70 percent, at which point its UK sales profit is swept in as well. That second outcome surprises owners more than any other part of the computation.

Does UK Corporation Tax satisfy the high-tax exception?

Section 954(b)(4) excludes from foreign base company income any item of income that the taxpayer establishes was subject to an effective rate of foreign income tax greater than 90 percent of the maximum rate specified in section 11. Section 11 sets the US corporate rate at 21 percent, as shown at https://www.law.cornell.edu/uscode/text/26/11, so the hurdle is an effective rate above 18.9 percent.

On the UK side, GOV.UK states at https://www.gov.uk/corporation-tax-rates that the main rate of Corporation Tax is 25 percent for companies with profits over 250,000 pounds and that the small profits rate is 19 percent for profits of 50,000 pounds or less, with Marginal Relief in between. The guidance at https://www.gov.uk/guidance/corporation-tax-marginal-relief confirms that both limits are proportionately reduced for short accounting periods and by the number of associated companies.

Those headline rates do not answer the US question on their own, for three reasons we explain to every owner. First, the exception is elective. Regulation 1.954-1(d), at https://www.law.cornell.edu/cfr/text/26/1.954-1, requires an election by the controlling US shareholders, made by a statement attached to the return, and the election binds all US shareholders of the company. Second, the effective rate is not the UK statutory rate. The regulation computes it as the US dollar amount of foreign income taxes on the net item of income, divided by that net item plus those taxes, with the income measured under US tax principles rather than UK ones. Differences between UK taxable profit and US-measured income can push the result above or below the UK rate actually charged. Third, a company at the 19 percent small profits rate has a margin of only a tenth of a percentage point over the 18.9 percent hurdle, so even a modest timing difference can fail the test, whereas a company paying at or near the 25 percent main rate has real headroom.

A gap in most published guides is what happens to the income after the election. The Schedule I-1 instructions direct that gross income excluded from foreign base company income by reason of the section 954(b)(4) high-tax exception is entered on line 2c of that schedule as an exclusion from tested income. In other words, sales income excluded under the subpart F high-tax exception does not simply drop into the section 951A computation instead.

Where does foreign base company sales income go on Form 5471?

The computation is done on Worksheet A, which sits in the Schedule I section of the Form 5471 instructions, and the result is carried to the form. These are the places a preparer touches, each of which we have checked against the December 2025 instructions and the current schedules:

Worksheet A, line 3: gross foreign base company sales income, determined after the application of section 952(b). Income removed by the same-country and manufacturing exceptions is left out of this line.
Worksheet A, lines 10 and 11: the de minimis rule and the full-inclusion rule.
Worksheet A, line 14: adjusted net foreign base company sales income. Line 14b takes the expenses allocated and apportioned under section 954(b)(5), line 14d the amount excluded under section 952(c), and line 14f the amount excluded under the high-tax exception, leaving line 14g.
Worksheet A, lines 54 to 57: the amount attributable to section 954(d) income is translated from functional currency to US dollars at the average exchange rate under section 989(b), and line 57 is carried to Schedule I, line 1f.
Schedule G, line 14: a Yes answer with a code and an attached statement where an exclusion has been relied on. The codes in the instructions include DM for de minimis, HT for high tax, SCM for same country manufacturing, SCSU for same country sales or use, PM for physical manufacturing, SC for substantial contribution and BR for branch.
Schedule M: sales of stock in trade on line 1 and purchases of stock in trade on line 16, split by column between the US person filing, entities that person controls and other related parties, translated at the average exchange rate.
Schedule J and Schedule P: the amount included by the shareholder becomes previously taxed earnings and profits, tracked at company level on Schedule J and in the shareholder's own accounts on Schedule P.
Schedule Q, line 1g: the single subpart F income group for all of the company's foreign base company sales income, with column (xiv) checked for any item to which the high-tax exception applies.

Three points about the interplay. Schedule M is the cross-check: if it shows purchases of inventory from the owner's US business and Worksheet A, line 3 is blank, the return should be able to explain why through a Schedule G, line 14 code. Schedule Q does not total items excluded under the high-tax exception within lines 1a to 1j; the instructions move them to the residual income group on line 4. And for a noncorporate shareholder, the instructions direct the Schedule I result to Schedule 1 (Form 1040), line 8n, described as a section 951(a) inclusion. The schedules themselves are available from https://www.irs.gov/Form5471.

Worked illustration: a UK Ltd buying from the owner's US LLC and selling into the EU

The following is an illustration only, with invented figures in sterling and no exchange rate assumed, because the thresholds applied here are ratios. A US citizen living in England owns 100 percent of a UK limited company and 100 percent of a US LLC. The LLC sells consumer products manufactured in the United States. The UK company buys finished stock from the LLC, holds it in a UK warehouse, relabels it and sells it to unrelated retailers. In the year, the UK company's gross income from sales is 600,000 pounds, of which 480,000 pounds arises on goods delivered to customers in Germany, France and the Netherlands and 120,000 pounds on goods delivered to UK customers.

Element by element: the goods are personal property; the supplier is a related person because the same individual controls both businesses; the goods are manufactured in the United States, so outside the UK; and the EU deliveries are for use outside the UK. Relabelling is not manufacturing. The 480,000 pounds is gross foreign base company sales income for Worksheet A, line 3. The 120,000 pounds on UK deliveries is excluded under the same-country use rule and disclosed on Schedule G, line 14 with code SCSU.

Now the thresholds. The 480,000 pounds is 80 percent of gross income. It is not below 5 percent, so the de minimis rule does not help. It exceeds 70 percent, so the full-inclusion rule applies and the whole 600,000 pounds of gross income is treated as foreign base company income, including the UK sales profit, before deductions and before the high-tax exception. Change the facts so that EU deliveries produce 150,000 pounds of the 600,000 pounds, or 25 percent, and only the EU slice is foreign base company sales income. Change them again so that EU deliveries produce 20,000 pounds, about 3.3 percent and far below the dollar ceiling, and the de minimis rule removes the category entirely for the year.

On the original facts the next question is the high-tax exception. If the company's taxable profits put it at or near the 25 percent main rate, the effective rate on the net sales income, measured under US principles, may well exceed 18.9 percent. If the test is met and the controlling shareholder makes the election, the amount is entered on line 14f of Worksheet A, Schedule I, line 1f is reduced accordingly, Schedule G, line 14 carries code HT, and Schedule Q, column (xiv) is checked. If the election is not made, or the US-measured effective rate falls short, the shareholder's pro rata share is included in income for the year. In both cases Schedule M shows the purchases from the US business on line 16.

How is the inclusion taxed, and what does a section 962 election do?

Under section 951(a), at https://www.law.cornell.edu/uscode/text/26/951, a US shareholder of a controlled foreign corporation includes in gross income a pro rata share of the corporation's subpart F income for the year. For an individual that amount is taxed as ordinary income without any distribution having been made. Worksheet A applies a current earnings and profits limitation on line 37 before the shareholder's share is determined.

Section 962 allows an individual US shareholder to elect to be taxed on section 951(a) amounts as if they had been received by a domestic corporation, which means tax computed under section 11 rather than at individual rates. The Form 5471 instructions note that a shareholder making the election is treated as a corporate shareholder for the purposes of deemed-paid foreign tax credits under section 960, which is why Schedule E and Schedule Q are completed carefully even for individuals. Section 962(d) contains a special rule for later actual distributions. Whether the election produces a better or worse overall result depends on the figures for the particular year and on later dividends, so in a preparation engagement we compute the return both ways and present the comparison.

What about foreign base company services income?

Foreign base company services income is the neighbouring category in section 954(e). It is income from technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial or like services that are performed for or on behalf of a related person and are performed outside the country in which the controlled foreign corporation is organised. A UK distributor that also charges its US affiliate for services its staff perform outside the UK needs that stream tested separately. It has its own line on Worksheet A, line 4 for the gross amount, and flows to Schedule I, line 1g. Services performed in the UK by the UK company fall outside the definition on the location condition alone.

Did the 2025 legislation change these rules?

The December 2025 Form 5471 instructions record changes made by Public Law 119-21 that affect the form, and none of them alters the section 954(d) definition described above. The instructions note that, for tax years of a specified foreign corporation beginning after November 30, 2025, the one-month deferral of the corporation's tax year is no longer permitted. They also describe a Pro Rata Share Transition Rule for certain dividends when applying section 951(a)(2)(B), refer filers to Notice 2025-75, and add related instructions to Worksheet A, line 46 and to Schedule G, line 14. Owners who bought or sold shares in the UK company during the year, or whose company paid dividends around the transition dates, should expect their preparer to ask about both. The definition of foreign base company sales income, the de minimis and full-inclusion thresholds, and the high-tax exception remain as stated in the current instructions.

What records should a UK distributor keep for the Form 5471 preparer?

Most of the work in this area is classification, and classification depends on records that the UK statutory accounts and Company Tax Return do not produce on their own. The items we ask for at the start of each year are:

A sales analysis by delivery country, reconciled to turnover in the accounts, with cost of goods sold matched to each group of sales.
A purchases analysis by supplier, identifying every supplier under common ownership and the US tax classification of each.
Country of manufacture for each product line, with supplier confirmation where the related supplier is itself a reseller.
A description of what the UK company's own employees do to the product or to the manufacturing process, if the manufacturing exception is to be considered.
The UK Corporation Tax computation and the tax actually charged for the period, including the number of associated companies used to set the rate limits.
Details of any overseas branch, warehouse entity or sales office, including how it is classified for US tax purposes.
Intercompany agreements and price lists, which also support the Schedule M figures.

With those in hand, the subpart F analysis for a UK trading company is usually a matter of careful arithmetic rather than judgment, and the Form 5471 that results tells a consistent story across Worksheet A, Schedule G, Schedule I, Schedule M and Schedule Q. Where the records are missing, the presumptions in the regulations tend to run against the company, particularly on destination of sales. Building the analysis into the year-end routine, alongside the UK accounts, is what keeps the US filing accurate and defensible.