A section 962 election lets an American who owns a UK company be taxed on its NCTI or Subpart F income as if they were a US corporation: at the 21% corporate rate, with the section 250 deduction and credit for the UK corporation tax the company paid. For a UK Ltd paying 25%, it often cuts US tax to nil. US owners of UK companies should model it yearly.
Without the election, an individual shareholder pays tax on the inclusion at ordinary rates of up to 37%, gets no section 250 deduction and cannot credit the company's UK tax. The difference on a profitable company is large.
What the section 962 election changes
| No election | Section 962 election | |
|---|---|---|
| Rate on the inclusion | Individual rates, up to 37% | Corporate rate, 21% |
| Section 250 deduction on NCTI | Not available | 40% for tax years beginning after 2025 (50% on GILTI before) |
| Credit for UK corporation tax | Not available | Deemed-paid credit, 90% of the tax attributable to NCTI from 2026 (80% before) |
| Later dividend from the company | Largely tax-free as previously taxed income | Taxed to the extent it exceeds the US tax already paid |
| Form for the deduction | — | Form 8993 |
The Instructions for Form 8993 confirm that US individual shareholders of controlled foreign corporations making a section 962 election use Form 8993 to claim the section 250 deduction, and that the deduction for GILTI of 50% falls to 40% thereafter. From 2026 the regime is called net CFC tested income, and Public Law 119-21 raised the deemed-paid percentage in section 960(d) from 80% to 90%.
A worked example
Take a UK Ltd, wholly owned by an American in London, paying corporation tax at the 25% main rate that GOV.UK sets for profits over £250,000. On $100 of tested income it pays $25 of UK tax, leaving $75 of net tested income.
- With the election: the inclusion is grossed up for the deemed-paid tax, the 40% deduction is applied, and the 21% corporate rate is charged — then 90% of the $25 UK tax is credited against it. The US tax on the inclusion is typically eliminated.
- Without the election: the $75 inclusion is taxed at the shareholder's ordinary rate with no deduction and no credit for the UK corporation tax, so a 35% bracket produces more than $26 of US tax on money the shareholder has not received.
The figures are illustrative; real calculations depend on the company's tested income, qualified business asset investment and expenses allocated against the inclusion.
The catch: distributions later
The election is not free. Under section 962(d), when the company later pays out the earnings that were included, the distribution is taxable to the extent it exceeds the US tax paid under the election. Without the election, those previously taxed earnings would come out largely tax-free.
For a UK company this is often manageable. Dividends from a UK company generally count as qualified dividends under the US–UK treaty, taxed at the preferential rates, and UK income tax on the dividend is creditable in the passive category — see Form 1116 explained. The net result is usually far better than paying ordinary rates on the inclusion up front.
Check the high-tax exclusion first. Where the company's effective UK rate on its tested income exceeds 90% of the US corporate rate — 18.9% — an election can exclude that income from NCTI altogether, which can make a section 962 election unnecessary for a UK Ltd paying the 25% main rate.
Making the election
The election is made each year by attaching a statement to the timely filed return, including extensions, for the year it is to apply. It covers all the controlled foreign corporations you own for that year, so it cannot be cherry-picked company by company. Form 5471 is filed alongside regardless — see Form 5471 filing requirements.
Because it is annual, the decision can change as profits, rates and distribution plans change. It should be modelled with the high-tax exclusion and the expected dividend pattern side by side, rather than defaulted either way. A year of heavy reinvestment and a year of large dividends can point in opposite directions, and so can a change in the owner's personal bracket.
When it matters most
- A profitable UK Ltd paying the small profits rate of 19%, just above the 18.9% high-tax threshold or below it in some years.
- Owners in a high US bracket who plan to retain profits in the company for several years.
- Companies with significant untaxed or low-taxed income, where the high-tax exclusion does not apply.
- Americans with companies in low-tax jurisdictions, such as a UAE free zone company — covered in Form 5471 for a UAE free zone company.
Tranzesta runs the high-tax exclusion, the section 962 election and the distribution plan together each year, with the UK company accounts and the US return prepared from the same figures. Book a consultation if you own a UK company. The foreign tax credit side sits under the foreign tax credit and double taxation.
Frequently Asked Questions
What is a section 962 election?
It is an annual election under section 962 of the Internal Revenue Code that lets an individual US shareholder of a controlled foreign corporation be taxed on Subpart F and NCTI inclusions as if they were a domestic corporation — at the 21% corporate rate, with the section 250 deduction and a deemed-paid credit for the foreign corporation's taxes.
What is the section 250 deduction for NCTI from 2026?
For tax years beginning after 31 December 2025, the section 250 deduction for net CFC tested income is 40%, down from 50% for GILTI in earlier years, according to the Instructions for Form 8993. Individuals making a section 962 election claim it on Form 8993 attached to their return.
How much UK corporation tax can I credit under a section 962 election?
For NCTI inclusions in tax years beginning after 2025, 90% of the foreign income taxes attributable to the inclusion are deemed paid, after Public Law 119-21 raised the figure from 80%. Subpart F inclusions carry their own deemed-paid rules, and the credit remains subject to the usual foreign tax credit limitation.
Are dividends taxed again after a section 962 election?
Partly. When the company later distributes earnings that were included under the election, the distribution is taxable to the extent it exceeds the US tax already paid under section 962. Dividends from a UK company generally qualify for the preferential US rates under the treaty, and UK tax on them can be credited.
Do I need a section 962 election if my UK company pays 25% corporation tax?
Often not. Where the company's effective UK tax rate on its tested income exceeds 18.9%, which is 90% of the US corporate rate, the high-tax exclusion can remove that income from NCTI entirely. The two should be modelled together, because the answer can differ between companies and between years.
Is the section 962 election useful for a UAE company?
It can be, but the benefit is smaller. A UAE free zone company paying 0% qualifying income tax, or 9% on other profits, has little foreign tax to credit, so the election mainly swaps individual rates for the 21% corporate rate and the section 250 deduction rather than eliminating US tax on the inclusion.
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