A Controlled Foreign Corporation (CFC) is a foreign corporation where more than 50% of voting power or value is owned by U.S. shareholders. In the F&I world, CFCs are one structure used for offshore dealer reinsurance programs.
Some dealer reinsurance programs are structured through offshore entities, typically domiciled in jurisdictions with favorable insurance regulatory environments. When a U.S. dealer owns or controls more than 50% of one of these foreign entities, it is classified as a Controlled Foreign Corporation under the Internal Revenue Code. The CFC structure has historically been one of the most common approaches to dealer reinsurance.
In a CFC-based reinsurance arrangement, the F&I product premiums flow through an insurance administrator to the offshore entity owned by the dealer. The CFC captures underwriting profit — the difference between premiums received and claims paid — and holds those funds in reserve. Over time, this reserve grows, creating an asset that the dealer can eventually access according to the terms of the arrangement and applicable regulations.
It is important to note that CFC structures carry specific tax reporting obligations and legal requirements. U.S. shareholders of CFCs must comply with IRS reporting rules, and the tax treatment of income earned through a CFC differs from domestic structures like a DOWC. Because of this complexity, dealers considering a CFC-based reinsurance program should always work with qualified tax and legal professionals who understand both the F&I industry and international tax law.
We help independent dealers evaluate CFC, DOWC, and retro options to find the right fit.