Section 962 Election
An election that lets an individual US shareholder of a CFC be taxed on Subpart F income and GILTI/NCTI at corporate rates, unlocking the deemed-paid foreign tax credit and Section 250 deduction.
Detailed Explanation
A Section 962 election allows an individual (or a trust or estate) who is a US shareholder of a controlled foreign corporation to be taxed on Subpart F income and GILTI/NCTI inclusions as if they were a domestic C corporation for that income. Without the election, an individual pays at ordinary rates up to 37% with no credit for the corporate-level foreign taxes the CFC paid, which is usually the worst outcome. With the election, the 21% corporate rate applies, the individual can claim the Section 960 deemed-paid foreign tax credit (90% of foreign taxes for tax years beginning after 2025), and for GILTI/NCTI the 40% Section 250 deduction brings the effective pre-credit rate to roughly 12.6%. The trade-off is that the previously taxed income, when later distributed, is taxed again as a dividend to the extent it exceeds the US tax actually paid under the election. For CFCs operating in countries with a reasonable corporate tax rate, the election often eliminates most or all current US tax; the analysis should be re-run every year because foreign rates and earnings change.
Key Points
- Available to individual US shareholders of a CFC for Subpart F and GILTI/NCTI inclusions.
- Applies the 21% corporate rate instead of individual rates up to 37%.
- Unlocks the deemed-paid foreign tax credit (90% for 2026) and the 40% Section 250 deduction.
- Often drives current US tax toward zero for CFCs paying meaningful foreign tax.
- Previously taxed income is taxed again as a dividend on later distribution, above the US tax already paid.
- Made annually on a timely filed return for the inclusion year.
Practical Example
An individual owns a profitable operating CFC in Germany that pays a high local corporate tax. By making a Section 962 election, the owner is taxed on the NCTI inclusion at 21% with the 40% Section 250 deduction and a 90% credit for the German tax, often reducing the residual US tax to zero, versus a large ordinary-rate bill with no credit if no election were made.
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Learn about International TaxationRelated Terms
Controlled Foreign Corporation (CFC)
A foreign corporation more than 50% owned, by vote or value, by US shareholders who each own at least 10%, triggering current US tax on its Subpart F income and GILTI/NCTI.
GILTI (Global Intangible Low-Taxed Income)
A US tax on foreign income earned by Controlled Foreign Corporations in excess of a deemed routine return on tangible assets.
Subpart F Income
Certain types of foreign income earned by Controlled Foreign Corporations that are taxed currently to US shareholders, regardless of distribution.
Foreign Tax Credit (FTC)
A dollar-for-dollar credit on the US tax return for income taxes paid to a foreign country, designed to prevent double taxation.
Form 5471 (Information Return of US Persons With Respect to Certain Foreign Corporations)
An informational return required of US persons who own or control foreign corporations, with significant penalties for failure to file.
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