Beginning with tax years after December 31, 2025, changes to Sections 951A and 250 significantly alter the tax landscape for U.S. individuals considering a Section 962 election. The One Big Beautiful Bill Act, commonly referred to as the OBBBA or OB3, replaces the Global Intangible Low-Taxed Income (GILTI) regime with Net CFC Tested Income (NCTI) under Code Section 951A. While the name change is largely cosmetic, the calculation and tax implications have shifted significantly.
Key NCTI Changes Affecting Section 962 Election Analysis
The transition from GILTI to NCTI under Section 951A introduces several technical changes that directly influence the relative advantages of a Section 962 election for individual U.S. shareholders. These changes affect both the amount of income subject to U.S. tax and the availability of corporate-level benefits that are otherwise unavailable to individuals.
- QBAI Deduction Eliminated: The 10% deemed return on tangible assets (Qualified Business Asset Investment) is removed. This means all tested income of a CFC is now included, regardless of tangible asset investment.
- Section 250 Deduction Reduced: For NCTI, the deduction drops from 50% to 40%, increasing the effective U.S. tax rate on foreign earnings.
- Foreign Tax Credit (FTC) Increased: Deemed-paid FTC rises from 80% to 90%, partially offsetting the higher inclusion.
- Effective Rate: For corporate taxpayers, the effective U.S. tax rate on NCTI is approximately 14% under the assumption of sufficient foreign taxes. For individuals taxed at ordinary rates (up to 37%), the burden can be significantly higher.
These changes may affect how individual U.S. shareholders of controlled foreign corporations consider electing under Section 962 to be treated as a domestic corporation for purposes of income inclusions under Code section 951A. These considerations are also relevant to individual U.S. shareholders with Subpart F inclusions.
Why Section 962 Election May Be Preferable for U.S. Individual Shareholders with NCTI Inclusions
Baseline Tax Treatment Without a Section 962 Election
In evaluating whether to make a Section 962 election, it is important to understand the baseline tax treatment U.S. individuals face on NCTI inclusions in the absence of planning.
Without planning, U.S. individuals owning CFCs face:
- Full inclusion of NCTI at individual rates (up to 37%).
- No access to corporate-level benefits like FTC or Section 250 deduction.
- However, distributions from previously taxed earnings and profits (“PTEP”) may be tax-free.
Section 962 Election Benefits
A Section 962 election allows individual U.S. shareholders to access certain corporate-level tax benefits when NCTI and Subpart F income is included under Section 951A, potentially reducing the overall U.S. tax burden.
By making a Section 962 election, individuals can:
- Be taxed on NCTI (and Subpart F) inclusions at the corporate rate of 21%.
- Claim a Section 960(d) FTC for 90% of foreign taxes deemed paid, reducing U.S. liability.
- Apply the Section 250 deduction of 40% deduction on NCTI, lowering the effective rate.
Taken together, these benefits can materially reduce the effective U.S. tax rate on NCTI, with the ultimate outcome depending on the amount of foreign taxes paid.
Conclusion
Individual shareholders of CFCs should carefully consider whether making a 962 election will result in tax savings. The election applies annually but must be made with respect to all CFCs held by the U.S. shareholder. In addition, tax modeling and projections should be completed to forecast the ultimate tax rate on distributions from CFCs not organized in treaty jurisdictions, which may be taxed at up to 37%. Finally, shareholders should avail themselves of the high tax exclusion if applicable.
Author: Lisa Zhai | [email protected]
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