Section 962 Election: Cut CFC Tax from 37% to 12.6%

This one catches people constantly. You are a US citizen or green card holder, you own a company abroad (Dubai, Singapore, Lisbon, São Paulo, take your pick), and you have just discovered that your foreign company's profits land on your US tax return whether or not a single dollar ever leaves the company bank account. The Section 962 election decides whether that phantom income gets taxed at your personal rate of up to 37% or at an effective 12.6%. It is the same company, the same profit, the same tax year. The only thing that changes is a statement you attach to your return.

For tax years beginning after 31 December 2025, the math behind that decision changed. Most of what you will find online about this election was written against the old rules, which makes it wrong on the rate, wrong on the carve-out, and wrong on the credit. Here is what actually applies now.

What Section 962 Does: Elect Corporate Rates as an Individual

Start with the problem. If you are a US shareholder of a controlled foreign corporation, certain categories of that company's income are taxed to you currently, under Subpart F and under the net CFC tested income rules. There is no waiting for a distribution. The income lands on your Form 1040 in the year the company earns it, and whether the cash is sitting in a Dubai bank account or in your own wallet makes no difference to the IRS.

The unfairness that Section 962 exists to fix becomes obvious once you line up the two owners side by side. A US corporation owning that same CFC would pay 21% on the inclusion, take a deduction against it, and claim a credit for the foreign taxes the CFC already paid. An individual owning the company directly gets none of that by default. You pay ordinary rates up to 37%, and you get no deemed-paid foreign tax credit at all, because Section 960 hands that credit to domestic corporations and to nobody else.

Section 962 lets you elect, as an individual, to be taxed on your CFC inclusions as though you were a domestic corporation. For that slice of income, and only that slice, you step into corporate shoes. You get the 21% rate instead of 37%, and you get the deemed-paid credit for the foreign taxes your CFC paid. Nothing else on your return changes.

One scope check before we go further. Section 958(b)(4) has been restored, which limits downward attribution and means far fewer foreign-owned structures get swept into accidental CFC status, with a new Section 951B handling foreign-controlled US shareholder situations separately. If you were caught by the post-2017 attribution mess, it is worth confirming whether you still are. Who counts as a US shareholder, and what triggers an inclusion, is covered in our guide to CFC rules.

GILTI Is Now NCTI: What OBBBA Changed for Tax Years Beginning After 31 December 2025

The One Big Beautiful Bill Act renamed global intangible low-taxed income. It is now net CFC tested income, or NCTI. If you learned this regime as GILTI, it is the same machinery under a new label, and the rename is the least important thing that happened to it.

Three substantive changes matter for anyone weighing a Section 962 election on a CFC:

• The Section 250 deduction dropped from 50% to 40%, which moves the headline effective corporate rate on NCTI from 10.5% to 12.6%.
• The QBAI carve-out was eliminated entirely. There is no longer any deemed return on tangible assets shielding income from the inclusion.
• The foreign tax credit haircut improved from 80% to 90%, so more of the foreign tax your CFC already paid is creditable under Section 960(d).

The 37% top individual rate was made permanent, which at least makes the comparison side of the equation stable. No more planning around whether the top bracket snaps back, because it does not.

Put those together and the conclusion runs opposite to what most commentary assumes. The rate went up slightly, true. But the base got wider and the credit got better, and for most people that means the gap between doing nothing and making the election is larger now, not smaller.

How the Math Works: 12.6% Versus 37% on CFC Inclusions

An example makes this concrete. Sarah is a US citizen living in Portugal. She owns 100% of a consulting company incorporated in the UAE, and in 2026 that company earns $500,000 of tested income and pays zero local corporate tax.

Without a Section 962 election, Sarah reports the full NCTI inclusion on her 1040 as ordinary income. She gets no Section 250 deduction and no deemed-paid credit. At the top rate, that is roughly $185,000 of US tax on money still sitting in a UAE bank account. (That ignores state tax and assumes she is at the top of the bracket, but it makes the point.)

With the election, Sarah is taxed as though she were a domestic corporation on that inclusion. Under the final Section 250 regulations, an individual who makes a Section 962 election can claim the Section 250 deduction against the inclusion, which is what makes the 12.6% effective rate achievable rather than theoretical. So the computation runs: $500,000 inclusion, less the 40% Section 250 deduction, leaves $300,000 taxable at 21%. That is $63,000.

In other words, 21% multiplied by 60% gives you 12.6%. Same income, roughly $122,000 less tax in year one.

There is a catch, and it arrives later, when the money comes out. We will get to it. Get the year-one arithmetic straight first, though, because for founders who are reinvesting rather than distributing, year one is the year that matters and the deferral is real money.

The QBAI Elimination: Why More of Your CFC Income Is Now Caught

This is the change almost nobody has updated their thinking for. Under the old GILTI rules, you subtracted a deemed 10% return on qualified business asset investment before computing the inclusion. If you owned a factory, equipment, real operating assets of any kind, a chunk of your CFC's profit simply fell outside the regime.

That shield is gone. There is no QBAI reduction any more, and the inclusion now captures tested income without any tangible-asset offset. It is worth pausing on that for a second, because the regime was sold to the public as a tax on mobile intangible profits, and the one feature that kept real factories out of it is the feature that got deleted.

Take Paul, who runs a manufacturing operation through a CFC in Mexico with $4 million of tangible assets on the books. Under the old rules, $400,000 of profit was carved out before the inclusion was even calculated. As of 2026, that $400,000 is inside the inclusion with everything else. His exposure went up without him changing a single thing about how he runs the business.

The practical effect is that far more shareholders now need to run the net CFC tested income numbers at the individual level. Asset-heavy CFCs that sat comfortably outside the regime are now inside it. And because the election is most valuable precisely when the inclusion is large, losing QBAI makes Section 962 more useful than it was, not less. The bigger the number flowing onto your 1040 at 37%, the more the 12.6% alternative is worth.

Foreign Tax Credits Under 962: The 90% Deemed-Paid Credit and the 14% Break-Even Rate

The second half of the election is the credit, and for people operating in real tax jurisdictions it is often worth more than the rate cut. Without the election you get nothing here, because Section 960 gives the deemed-paid credit only to domestic corporations. Make the election, you are treated as one, and the credit opens up.

The haircut used to be 20%, meaning only 80% of the CFC's foreign taxes counted. It is now 10%, so 90% of them are creditable. Run the break-even and you get a clean number: 12.6% divided by 0.9 gives you 14%. If your CFC sits in a jurisdiction where its effective tax rate is 14% or higher, the credit wipes out the residual US tax on the NCTI inclusion entirely.

That number is worth memorising, because it reclassifies a lot of jurisdictions. Ireland at 12.5% falls just short of it, an irritating near miss for a country that built a generation of structuring around that rate. Singapore at 17% clears it, and so do the UK, Spain, most of continental Europe and a good deal of Latin America.

One further change here deserves more attention than it gets. Expense allocation to the NCTI basket is now limited to directly allocable deductions. Under the old rules, your interest expense and your research and experimentation costs got apportioned into the basket, shrinking the foreign source income sitting in it and stranding credits you had legitimately earned. Highly leveraged shareholders lost real money that way. That apportionment is gone for the NCTI basket. Only directly allocable deductions reduce it now, which means the credits you compute are far more likely to be usable in practice.

Note that this deemed-paid credit under a 962 election is a different mechanism from the personal foreign tax credits you claim on foreign wages, and it interacts with the exclusion choices most expats face. If you are weighing those, our comparison of the foreign earned income exclusion and the foreign tax credit covers the individual-level side of that decision.

The NCTI High-Tax Exclusion and How It Interacts With a 962 Election

The Section 954(b)(4) high-tax exclusion survived OBBBA and still applies to tested income. If a CFC's tested income is taxed abroad above the statutory threshold, you can elect to exclude that income from tested income altogether, which means no NCTI inclusion from that CFC at all.

The two elections are not the same tool. The high-tax exclusion removes income from the regime, while Section 962 changes how the remaining income is taxed. If you exclude everything, there is nothing left for a 962 election to improve. The practical sequencing looks like this:

• High-tax CFCs: run the exclusion first. If the income comes out of tested income entirely, the 962 question may be moot for that entity.
• Low-tax or zero-tax CFCs: the exclusion is unavailable, so 962 is your only rate relief.
• Mixed groups: this is where it gets genuinely messy, because the exclusion is made consistently across commonly controlled CFCs and can strip out exactly the high-taxed income whose credits were sheltering your low-taxed income.

That last point catches people. Excluding your high-tax CFC removes its income, but it also removes the foreign taxes that were feeding the credit pool. If those credits were covering the residual US tax on a zero-tax sister company, you may have made yourself worse off by claiming relief. Model both elections, separately and in combination, before you commit to either.

The Double-Tax Problem: PTI Distributions After a 962 Election

Here is the catch we promised. When you include CFC income currently, it becomes previously taxed income, and PTI normally comes out tax-free later. You paid once, you do not pay again.

Under a Section 962 election, that protection is only partial. The exclusion from gross income on a later distribution is limited to the amount of US tax you actually paid on the inclusion. Everything above that gets taxed a second time, as a dividend, at your individual rates.

Go back to Sarah. She included $500,000 and paid $63,000 of US tax under the election. Three years later she distributes the full $500,000 to herself. Only $63,000 comes out free. The remaining $437,000 is taxed again as a dividend.

Whether that second bite is tolerable or painful depends on one thing: whether the distribution qualifies for the 15% or 20% qualified dividend rate. Qualified treatment requires the CFC to be resident in a jurisdiction with a comprehensive US income tax treaty (or the shares to be traded on a US exchange). Sarah's UAE company does not qualify, so her second layer is ordinary income at up to 37%. A comparable company in the Netherlands or the UK would have produced qualified dividends instead.

That single fact should drive where you incorporate, and it should be doing that work long before anyone starts drafting an election statement.

When 962 Helps and When It Hurts (the Dividend Trap)

Pulling this together, Section 962 is a timing and rate instrument, not a permanent exemption, and it rewards a specific profile.

It helps when:

• Reinvestment over distribution: the longer the money stays in the CFC, the more the deferral compounds and the less the second layer matters in present value terms.
• Meaningful foreign tax: at or above a 14% effective rate, the deemed-paid credit eliminates residual US tax on the inclusion.
• A large inclusion: post-QBAI-elimination, this now describes far more asset-heavy businesses than it used to.
• A treaty jurisdiction: the eventual distribution gets qualified dividend treatment, which caps the second layer at 20%.

It hurts when you intend to pull the cash out promptly from a non-treaty jurisdiction. In that case you pay 12.6% now and up to 37% shortly after on nearly the whole amount, against a single 37% hit if you had done nothing at all. Paying twice to save nothing is the most common way this election goes wrong in practice.

One more scope point. If your foreign company is not a CFC, none of this applies and you are probably in PFIC territory instead, which is a different and generally worse regime. Confirm which rules you are in before modelling anything. Our cross-border structuring team runs this comparison as standard in any CFC review, because the answer frequently turns on facts (treaty status, distribution timing, leverage) that have nothing to do with the tax code itself.

Filing Mechanics: The Election Statement, Form 8993, and Why This Is a Year-by-Year Choice

The mechanics are unglamorous and the deadlines are unforgiving, so be precise here.

1. Attach an election statement to a timely filed return. It must state that you are electing under Section 962, identify each CFC, list the pro rata share of each inclusion, list the foreign taxes deemed paid, and show the computed tax. There is no standard form for this. You write it yourself.
2. File Form 5471 for each CFC. The election does not replace the information return. Miss it, and you are looking at a $10,000 penalty per form per year plus an open statute of limitations. The full reporting picture is in our Form 5471 guide.
3. File Form 8993 for the Section 250 deduction. This is the form that computes the 40% deduction, and it is the mechanical step that turns 21% into 12.6%. Skip it and you have elected corporate rates without the deduction that makes them worth having.
4. File Form 1118, not Form 1116, for the deemed-paid credit. You are being taxed as a corporation on this income, so you use the corporate credit form for it.
5. Report the tax on the correct line. The 962 tax is computed separately from your regular tax and added to it. It is not folded into your ordinary bracket calculation.

The election is made annually, so nothing locks you in. A strong income year with substantial foreign tax behind it is usually a year to elect; a loss year, or the year you finally take the cash out, usually is not. The flexibility cuts both ways, though, because it also means someone has to run the analysis every single year rather than setting it once and forgetting about it.

A final warning on timing. Section 962 is an election on a timely filed return, and the IRS has been notably unsympathetic to taxpayers seeking late relief for it. Discovering in 2029 that you should have elected for 2026 is not the kind of problem an amended return and a good explanation will fix. Run the numbers before the filing deadline, not after.