What counts as foreign personal holding company income in a UK limited company?

Under section 954(c) it is the company's passive income: dividends, interest, rents, royalties and annuities, income equivalent to interest, net gains on shares, bonds and other investment property, net foreign currency and commodity gains, notional principal contract income, payments in lieu of dividends and certain personal service contract receipts. It is tested item by item, so a UK trading company with a deposit account or portfolio has some even though its main business is active.

Is bank interest on a trading company's surplus cash subpart F income?

It is foreign personal holding company income, because section 954(c) has no general working capital exception for interest. Whether it becomes a subpart F inclusion depends mainly on the de minimis rule. If the company's gross foreign base company income is less than the lesser of 5% of its gross income or $1,000,000, none of its income is treated as foreign base company income for that year.

Does the 25% UK corporation tax rate mean the high-tax exception always applies?

No. The exception requires an effective foreign tax rate above 18.9%, which is 90% of the 21% US corporate rate, tested item by item on the US measure of net income. UK-taxed interest at the 25% main rate will normally pass. Dividends exempt from UK corporation tax bear no tax and fail. Companies at the 19% small profits rate have almost no margin. The exception must also be elected.

Is the section 954(c)(6) look-through rule still in force?

Yes. Section 70351 of Public Law 119-21, enacted on 4 July 2025, removed the expiry date from section 954(c)(6), effective for tax years of foreign corporations beginning after 31 December 2025. The rule previously covered tax years beginning before 1 January 2026, so coverage is continuous. The December 2025 Form 5471 instructions still describe the earlier extension in the note to Worksheet A line 1a.

Where does the income go on Form 5471 and Form 1040?

Gross FPHCI is listed by category on Worksheet A lines 1a to 1i in the Form 5471 instructions, reduced on line 13 for expenses, the earnings and profits limitation and the high-tax exception, then the shareholder's pro rata share is translated to dollars and entered on Schedule I, line 1e. A noncorporate shareholder reports the Schedule I amount on Schedule 1 (Form 1040), line 8n.

How does HMRC tax a UK company that mainly holds investments?

It pays corporation tax on interest, rents and chargeable gains, while most dividends it receives are exempt under Part 9A of the Corporation Tax Act 2009. If it is a close company that does not exist wholly or mainly to trade or to let land commercially to unconnected persons, it is a close investment-holding company under section 18N of the Corporation Tax Act 2010 and is charged at the 25% main rate whatever its profits.

Form 5471: FPHCI in a UK Limited Company Explained

Form 5471 is where a US owner of a UK limited company reports the company's foreign personal holding company income, the passive income that section 954(c) of the Internal Revenue Code treats as subpart F income and taxes to the shareholder in the year the company earns it, whether or not a penny is distributed. For a UK company that means interest on surplus cash, dividends and gains from an investment portfolio, rents and royalties. The figure is built up on Worksheet A in the Form 5471 instructions, carried to Schedule I, and then included in income on the shareholder's Form 1040.

In the returns we prepare for US citizens and green card holders who own UK companies, this is the category of subpart F income that turns up most often and is noticed least. A trading company has a few good years, the cash moves into a notice account and a managed portfolio, and the company now has passive income that the US rules examine line by line.

What is foreign personal holding company income on Form 5471?

Foreign personal holding company income, usually shortened to FPHCI, is the passive-income category of foreign base company income defined in section 954(c). Foreign base company income is in turn one of the components of subpart F income under section 952. When a controlled foreign corporation (CFC) has subpart F income, each US shareholder includes a pro rata share in gross income under section 951(a). A UK limited company is a CFC when US shareholders, meaning US persons who each own 10% or more by vote or value, together own more than 50%.

Section 954(c)(1) lists the categories. Worksheet A in the current instructions at https://www.irs.gov/instructions/i5471 (revised December 2025) follows the same list:

Dividends, interest, royalties, rents and annuities, after removing the amounts covered by the exceptions in section 954(c)(2), (3) and (6).
Income equivalent to interest, which the instructions say includes commitment fees or similar amounts for loans actually made.
Net income from notional principal contracts, such as interest rate swaps, other than a contract entered into to hedge inventory.
The excess of foreign currency gains over foreign currency losses from section 988 transactions, with an exception for transactions directly related to the business needs of the CFC.
The excess of gains over losses from commodity transactions.
The excess of gains over losses from the sale or exchange of property that produces the income in the first category, such as shares and bonds, and of property that does not produce any income.
Payments in lieu of dividends under securities lending arrangements.
Certain amounts received under personal service contracts where someone other than the company can designate the individual who performs the services, or the individual is named in the contract, and that individual owns 25% or more of the company by value.

Two features of the list catch UK owners out. First, the test is applied to each item of income, not to the character of the company. A company can be an unambiguous trading business and still have FPHCI. Second, gains count as well as income. Selling portfolio shares at a profit produces FPHCI even though no dividend or interest was received.

Why does interest on surplus cash in a trading company count?

This is the question we are asked most often, and the answer is that section 954(c) has no general exception for interest earned on working capital. The statute carves out interest earned in the active conduct of a banking or financing business under section 954(h), export financing interest, and interest from certain related companies. A consultancy or manufacturer that leaves retained profits in a deposit account, a money market fund or gilts fits none of those. The interest is FPHCI from the first pound.

A sterling-functional company that holds part of its reserves in US dollars or euros has a further item to test: any net exchange gain on those balances falls under the foreign currency category unless it is directly related to the business needs of the company.

For a trading company the practical question is therefore whether a statutory rule prevents the FPHCI from becoming a subpart F inclusion. In most owner-managed UK companies that rule is the de minimis test.

Which exceptions to FPHCI matter for a UK company?

Three exceptions in section 954(c) are relevant to the UK companies we see.

Active rents and royalties. Under section 954(c)(2)(A), FPHCI does not include rents and royalties derived in the active conduct of a trade or business and received from a person other than a related person. The regulations look for real activity by the company's own officers and employees, so a company that lets a single commercial unit through a managing agent should not assume it qualifies.
The same-country exception. Under section 954(c)(3), dividends and interest received from a related corporation are excluded where the payer is organised in the same country as the CFC and has a substantial part of its assets used in a trade or business in that country. Rents and royalties from a related corporation are excluded where the property is used in the CFC's own country. It is switched off to the extent the interest, rent or royalty reduces the payer's own subpart F income.
The look-through rule. Under section 954(c)(6), dividends, interest, rents and royalties received from a related CFC are not FPHCI to the extent they are attributable to income of the payer that is neither subpart F income nor income effectively connected with a US trade or business. It does not matter where the payer is organised, so it can cover a UK parent receiving a dividend from a trading subsidiary in another country.

The status of the look-through rule needs care because it has changed recently. It was a temporary provision, most recently extended to tax years of foreign corporations beginning before 1 January 2026. Section 70351 of Public Law 119-21, enacted on 4 July 2025, struck that end date from section 954(c)(6)(C), and the amendment applies to tax years of foreign corporations beginning after 31 December 2025. The text is at https://www.govinfo.gov/content/pkg/PLAW-119publ21/html/PLAW-119publ21.htm. The rule is therefore permanent and there is no gap in coverage. The note to Worksheet A line 1a in the December 2025 instructions still describes the earlier extension, as do some online copies of the statute.

None of these helps with income from unrelated parties: bank interest, coupons, dividends from listed shares and portfolio gains. For that income the answer lies in section 954(b).

How do the de minimis rule and the full-inclusion rule work?

Section 954(b)(3) contains two bright-line tests that are applied to the company as a whole before any deductions.

The de minimis rule in section 954(b)(3)(A) says that if the sum of the company's gross foreign base company income and gross insurance income for the year is less than the lesser of 5% of gross income or $1,000,000, then no part of the company's gross income for the year is treated as foreign base company income or insurance income. Three points matter in practice:

It is a gross test. Investment management fees, interest paid and overheads are ignored on both sides of the comparison.
It counts all foreign base company income together. Foreign base company sales or services income is added to FPHCI before the comparison.
The denominator is gross income as computed for US income tax purposes, not turnover in the UK accounts. For a company selling goods, gross income is broadly sales less cost of goods sold, which makes the 5% limit tighter than owners expect.

The full-inclusion rule in section 954(b)(3)(B) is the mirror image. If gross foreign base company income and gross insurance income exceed 70% of gross income, the entire gross income of the company for the year is treated as foreign base company income or insurance income, subject to the adjustments that follow on the worksheet. That is the normal position for a UK company whose only activity is holding a portfolio.

Between 5% and 70%, the FPHCI is foreign base company income and the trading income is not. The regulations also aggregate the income of related CFCs where income has been spread between companies to stay under the de minimis limit, so splitting the cash between two sister companies is not a solution.

Does UK corporation tax satisfy the high-tax exception?

Section 954(b)(4) excludes an item of income from foreign base company income if the taxpayer establishes that the item was subject to an effective rate of foreign income tax greater than 90% of the maximum US corporate rate in section 11. That rate is 21%, so the threshold is 21% x 90% = 18.9%.

The UK rates are published at https://www.gov.uk/corporation-tax-rates. From 1 April 2023 the main rate is 25% for companies with profits over £250,000, the small profits rate is 19% for companies with profits of £50,000 or less, and marginal relief applies in between. The limits are reduced for short accounting periods and associated companies. As a simple illustration, an item taxed at the 25% main rate is comfortably above 18.9%, and an item taxed at the 19% small profits rate is above it by one tenth of a percentage point.

That comparison of headline rates is where most commentary stops, and it is not the test. The exception is applied item by item, comparing the foreign tax attributable to the item with the net item computed under US tax principles. Three consequences follow for a UK company:

Dividends usually fail. Most dividends received by a UK company are exempt from corporation tax under Part 9A of the Corporation Tax Act 2009, provided the conditions are met. HMRC's outline of the small company conditions is at https://www.gov.uk/hmrc-internal-manuals/international-manual/intm652010. An exempt dividend bears no UK tax, so its effective rate is nil and the high-tax exception cannot apply to it.
Interest usually passes at the main rate and is marginal at the small profits rate. At 19%, any difference between the UK and US measure of the net item can tip the result below 18.9%.
Gains need a separate computation. The UK chargeable gain and the US gain on the same disposal can differ because of base cost, currency and timing, so the effective rate may be well above or below the UK headline rate.

The exception is elective. Under the regulations at section 1.954-1(d) the election is made by the controlling US shareholders and is evidenced by a statement with the return; it is not applied automatically because the UK rate happens to be high. On Worksheet A the excluded amount has its own line within the FPHCI computation.

Worked illustration: the de minimis test over two years

This is an illustration with assumed figures, not a client case. Assume an exchange rate of $1.30 to £1 throughout; a real return uses the rates required for that year. A US citizen resident in London owns 100% of a UK consultancy company. The company has no cost of goods sold, so its gross income for US purposes is its gross receipts.

Year one. The company earns consultancy fees of £1,900,000. It also has £42,000 of interest on deposits and gilts, £18,000 of dividends from a portfolio of listed shares, and £25,000 of net gains on portfolio disposals. Gross FPHCI is £42,000 + £18,000 + £25,000 = £85,000. Gross income is £1,900,000 + £85,000 = £1,985,000. Five per cent of gross income is £99,250. The $1,000,000 limit at the assumed rate is about £769,231. The lesser of the two is £99,250. Because £85,000 is less than £99,250, the de minimis rule applies and none of the company's income is foreign base company income for the year.

Year two. A major contract ends and fees fall to £1,200,000, while the investment income and gains are unchanged at £85,000. Gross income is £1,285,000 and 5% of that is £64,250. Now £85,000 exceeds £64,250, so the de minimis rule fails. It fails for the whole £85,000, not just the £20,750 excess. The 70% threshold would be £899,500, so the fee income stays outside subpart F.

Assume the company is taxed at the 25% main rate in year two, that its controlling shareholder makes the high-tax election, and that the US and UK computations of the interest and gains are the same. The interest and gains have borne UK tax at more than 18.9% and can be excluded. The £18,000 of dividends is exempt from UK corporation tax, so it cannot. Ignoring allocable expenses for simplicity, the shareholder's subpart F inclusion is £18,000, or $23,400 at the assumed rate, reported on Form 1040 even though the company paid no dividend to its owner. The investments did not change between the two years. The trading income did, which is why a company near the line should have the ratio projected before its year end.

Where is FPHCI reported on Form 5471?

The computation sits on Worksheet A in the instructions.

Lines 1a to 1i collect gross FPHCI by category, and line 2 totals them. These amounts are entered in the company's functional currency, which for most UK companies is sterling.
Lines 8 to 12 apply the two section 954(b)(3) tests: 5% of gross income on line 8, 70% on line 9, the de minimis result on line 10 and the full-inclusion result on line 11.
Line 13 converts gross FPHCI to adjusted net FPHCI. Expenses definitely related to the income, related person interest expense and other allocable expenses are deducted, then amounts excluded under the section 952(c) earnings and profits limitation, then amounts excluded under the high-tax exception.
Later lines compute the shareholder's pro rata share, translate the FPHCI portion into US dollars at the average exchange rate, and direct the result to Form 5471, Schedule I, line 1e.

Schedule I reports the shareholder's income from the corporation in US dollars. The instructions state that a separate Schedule I must be filed by or for each Category 4, 5a or 5b US shareholder. A sole owner of a UK company normally meets both the Category 4 and Category 5a definitions, and the instructions for item B say that such a filer checks only the Category 4 box.

Form 5471 is attached to the shareholder's income tax return and is due with it. The form overview is at https://www.irs.gov/forms-pubs/about-form-5471. The instructions state that a $10,000 penalty applies for each annual accounting period of each foreign corporation where the information required by section 6038(a) is not furnished on time, with further penalties if the failure continues after notice.

How does the inclusion reach Form 1040?

Section 951(a) requires the US shareholder to include the pro rata share of subpart F income in gross income for the shareholder's tax year in which, or with which, the company's year ends. The Form 5471 instructions direct a noncorporate shareholder to enter the Schedule I amounts on Schedule 1 (Form 1040), line 8n, described as a section 951(a) inclusion. The amount is taxed as ordinary income.

Three mechanics follow from the inclusion:

Subpart F income for a year cannot exceed the company's current earnings and profits. If the limitation reduces the inclusion, the instructions explain that earnings in later years are recharacterised as subpart F income, so the limitation defers the amount and does not cancel it.
Amounts already included become previously taxed earnings and profits. They are tracked on Form 5471 so that a later dividend of the same profits is not taxed in full again.
An individual does not automatically receive a credit for UK corporation tax paid by the company. The instructions note that noncorporate shareholders may elect under section 962 to be taxed at corporate rates on section 951(a) amounts so as to claim a credit for certain foreign taxes of the CFC.

How does FPHCI interact with tested income?

A CFC's income is sorted into regimes that do not overlap. Under section 951A, tested income is computed without regard to gross income taken into account in determining the corporation's subpart F income, and without regard to income excluded from foreign base company income by the high-tax exception. Schedule I-1 of Form 5471 reports the company-level tested income figures that feed Form 8992, described at https://www.irs.gov/forms-pubs/about-form-8992. Public Law 119-21 renamed the shareholder-level amount from global intangible low-taxed income to net CFC tested income.

The practical consequence is one that surprises owners. When the de minimis rule applies, the interest, dividends and gains are not taken into account as subpart F income, so they do not drop out of the US picture. They fall into tested income together with the trading profit. In year one of the illustration, the £85,000 is part of tested income. Passing the de minimis test changes which regime applies to the passive income; it does not remove it from the US return.

Does the PFIC regime also apply to the same company?

A UK company with a large investment portfolio can meet the passive foreign investment company income or asset test at the same time as it is a CFC. Section 1297(d) deals with the overlap. The Form 8621 instructions at https://www.irs.gov/instructions/i8621 explain that a US shareholder, as defined in section 951(b), who includes its pro rata share of subpart F income for stock of a CFC that is also a PFIC is generally not subject to the PFIC provisions for that stock during the qualified portion of the holding period. The relief is limited to 10% US shareholders. A US family member holding 5% of the same company remains within the PFIC rules.

How is the same income taxed in the UK?

The UK company pays corporation tax on its total profits. Interest is brought in under the loan relationships rules, rents as profits of a property business, and gains on shares and bonds as chargeable gains. Most dividends are exempt under Part 9A of the Corporation Tax Act 2009; HMRC's background to the distribution exemption is at https://www.gov.uk/hmrc-internal-manuals/international-manual/intm651010.

One UK rule matters particularly for a company that is mainly an investment vehicle. A close company, broadly one under the control of a small number of shareholders, is a close investment-holding company unless throughout the accounting period it exists wholly or mainly for one of the purposes listed in section 18N of the Corporation Tax Act 2010. HMRC sets these out at https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm60710. They include carrying on a trade on a commercial basis and investing in land that is let commercially to unconnected persons. HMRC's introduction at https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm60705 confirms that such a company cannot claim the lower rate or marginal relief and is charged at the full rate whatever its profits.

The two systems pull in opposite directions. A trading company with surplus cash is not a close investment-holding company and may pay UK tax on its interest at 19%, with almost no margin over the 18.9% US threshold. A pure portfolio company pays 25% and clears the threshold on its taxed income, yet it is the company most likely to meet the full-inclusion rule and to hold UK-exempt dividends that cannot use the high-tax exception.

What should a US owner do each year?

The failure mode we see most often is a Form 5471 prepared from the statutory accounts alone, with investment income netted against bank charges and no Worksheet A in the file. The working papers we ask for are:

A schedule of every passive receipt for the company's year by type: interest, coupons, dividends, fund distributions, rents, royalties, realised gains and losses, and exchange differences.
Gross income computed under US principles, so the 5% and 70% tests can be run on the correct denominator.
The UK corporation tax computation, showing which items were taxed, at what rate, and which dividends were treated as exempt.
Details of any related-company payers, to support the same-country exception or the look-through rule.
The share register for the year, so that each owner's status as a 10% US shareholder and the pro rata shares are documented.

With those five items the Form 5471 can show whether the passive income was below the de minimis limit, excluded as high-taxed, covered by a related-party exception, or included on Schedule I and carried to Form 1040.