Knowledge Center Tax Advice for Specific Needs

What Is a Section 962 Election and Should I Make One?

A Section 962 election allows individual U.S. shareholders of controlled foreign corporations (CFCs) to be taxed at the 21% corporate rate rather than at individual rates up to 37% on certain foreign corporation income. According to the IRS, this election also unlocks the Section 250 deduction and indirect foreign tax credits, which can reduce the effective U.S. tax rate on GILTI income to as low as 10.5% for the 2025 tax year.

The election is most valuable when you:

Own 10%+ of a foreign corporation in a low-tax country (below 13% corporate rate)
Face GILTI or Subpart F income taxed at individual rates without the election
Earn above the FEIE limit ($130,000 for the 2025 tax year), where simpler strategies fall short

Would a Section 962 Election Lower Your GILTI Tax?

We’ll model your income under both scenarios and show you whether making the election reduces your U.S. tax bill.

Here’s what the election does, who it benefits most, and why it requires careful analysis before you commit.

How Does the Section 962 Election Change My Tax Picture?

Without a Section 962 election, your share of a CFC’s GILTI or Subpart F income is taxed at your ordinary individual rate. You get no Section 250 deduction and no indirect foreign tax credits against that income. For an expat in the 32% or 37% bracket, this can mean a massive tax bill on income you may not have even received as cash.

With the election, the IRS treats you as though you hold your CFC shares through a fictional U.S. corporation. This changes three things at once:

Your tax rate drops: GILTI is taxed at the 21% corporate rate instead of your individual rate. With the 50% Section 250 deduction (for the 2025 tax year), the effective rate falls to 10.5%.
You gain access to indirect foreign tax credits: You can claim credits for up to 80% of the foreign corporate taxes your CFC already paid. If your foreign corporation pays at least 13.125% in local taxes, these credits, combined with the Section 250 deduction, often eliminate your U.S. GILTI liability entirely.
Future distributions become taxable: This is the most important trade-off. Earnings that benefited from the Section 962 election are not treated as previously taxed income (PTI). When your CFC later distributes those profits to you, you will owe U.S. tax on the distribution, either at ordinary income rates or at qualified dividend rates if a tax treaty applies.

Who Qualifies for the Section 962 Election?

The election is available to any U.S. individual (citizen, green card holder, or resident alien) who is a U.S. shareholder of a CFC. You are a U.S. shareholder if you own at least 10% of the CFC’s voting power or value, either directly or through constructive ownership rules.

The election applies to both GILTI inclusions (reported on Form 8992) and Subpart F income inclusions. It must be made annually and applies to all of your CFCs for that tax year. You cannot cherry-pick which corporations the election covers.

Important

The election must be made by the due date of your tax return, including extensions. For Americans living abroad, this means June 15 (automatic extension) or October 15 if you file for an additional extension. Late elections are extremely difficult to obtain and may require a private letter ruling from the IRS.

When Does Section 962 Make the Most Sense?

The election delivers the greatest benefit when the gap between your individual tax rate and the 10.5% effective corporate rate is large, and when you plan to reinvest profits rather than take distributions.

Your Situation	Section 962 Recommended?	Why
Low-tax country (UAE, Singapore, Hong Kong), income above $130K	Yes	Large rate savings; FTC alone won’t help
High-tax country (UK, Germany, France), foreign rate above 18.9%	Consider the GILTI high-tax exception first	May exclude income from GILTI entirely, which is simpler
Income under $130K, eligible entity	Consider check-the-box + FEIE	Avoids GILTI/CFC rules entirely; much simpler
Plans to take regular distributions	Analyze carefully	Distribution tax may offset current-year savings
Reinvesting profits long-term	Strong candidate	Defers the distribution tax; maximizes current savings

What Is the Distribution Trade-Off?

This is the single most important factor in deciding whether to make the election. Here is a simplified illustration:

Year 1 (election year): Your CFC earns $200,000. With Section 962, you pay approximately $21,000 (10.5% effective rate). Without it, you might pay $48,000 at a 24% individual rate. Current-year savings: $27,000.

Year 3 (distribution year): Your CFC distributes those earnings. Because you made the election, this distribution is taxable. With a tax treaty providing qualified dividend treatment, you might owe ~$30,000 (15% rate). Without a treaty, you could owe up to $74,000 at ordinary rates.

The total tax across both events depends on your rate, treaty availability, and timing. In many cases, the election still saves money, particularly when distributions are deferred or treaty rates apply. But the analysis must use actual numbers for your situation.

How Are OBBBA Changes Affecting Section 962?

The One Big Beautiful Bill Act (signed July 4, 2025) changes the math for tax years beginning after December 31, 2025. The Section 250 GILTI deduction drops from 50% to 40%, raising the effective rate from 10.5% to 12.6%. The foreign tax credit increases from 80% to 90%, and the QBAI exclusion is eliminated, meaning more income is subject to NCTI (the successor to GILTI).

The 2025 tax year is the last year at the 10.5% rate, making it a critical planning window.

Let Greenback Analyze Whether Section 962 Is Right for You

The Section 962 election can save thousands of dollars annually, but the distribution trade-off, treaty coordination, and interaction with the Section 250 deduction, GILTI high-tax exception, and entity classification require careful multi-year modeling. Our CPAs run the numbers across multiple strategies, including check-the-box elections and Foreign Tax Credits, to recommend the approach that saves you the most over time.

If you own a foreign business, we handle Form 8992, Form 8993, Form 5471, and the Section 962 election statement as part of our small business tax preparation services.

You’ll have peace of mind, knowing that your taxes were done right. Have questions? Contact us, and one of our Customer Champions will be happy to help. If you’re ready to be matched with a Greenback accountant, click the get started button below.

Make the Section 962 Election Only If It Works for You

We’ll run the numbers, evaluate foreign tax credits, and help you decide whether the election improves your overall tax outcome.

This article is for informational purposes only and does not constitute legal or tax advice. Section 962 elections involve complex interactions with GILTI, Subpart F, foreign tax credits, and distribution taxation. For guidance on your specific situation, contact Greenback to speak with an expat tax specialist.

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