Section 962 Election for U.S. Shareholders of Controlled Foreign Corporations After the One Big Beautiful Bill Act (OBBBA)

For U.S. individual shareholders of Controlled Foreign Corporations (CFCs), the Section 962 election has long served as a strategic international tax planning tool. However, the landscape for this election has shifted significantly following the enactment of the One Big Beautiful Bill Act (OBBBA), which overhauled key global tax provisions for tax years beginning after December 31, 2025. Among the most notable changes, the tax base formerly known as GILTI is now referred to as Net CFC Tested Income (NCTI), with corresponding adjustments to deductions and foreign tax credit (FTC) rules.

This article examines how the Section 962 election operates in the post-OBBBA environment, outlines its revised advantages and disadvantages, and highlights critical considerations for U.S. shareholders contemplating this annual tax election.

Advantages of the Section 962 Election

1. Access to the 21% Corporate Tax Rate

By making a Section 962 election, U.S. individual shareholders can elect to be taxed as if they were U.S. corporations on their CFC inclusion items. This means CFC income can be subject to the corporate tax rate of 21%, rather than potentially much higher individual rates. This pivotal benefit remains available under the post-OBBBA regime.

2. Section 250 Deduction for NCTI (Formerly GILTI)

OBBBA makes the Section 250 deduction for NCTI a permanent fixture at 40% for U.S. corporations, resulting in an effective tax rate of approximately 12.6% (assuming no foreign taxes). This deduction applies to CFC tested income included under Section 951A (now NCTI) and is available to shareholders making a Section 962 election. It is important to note, however, that the Section 250 deduction does not apply to Subpart F income.

3. Deemed-Paid Foreign Tax Credits on Individual Returns

Section 962 allows shareholders to claim deemed-paid foreign tax credits (under Section 960) on their individual tax returns for foreign taxes paid by their CFCs. OBBBA further enhances the utility of these credits by modifying how income and deductions are allocated for FTC limitation purposes, generally making it easier for taxpayers to utilize available credits.

Disadvantages and Key Considerations

1. Taxable Distributions and Previously Taxed Income Pools

Shareholders making a Section 962 election must track a separate Section 962 Previously Taxed Income (PTI) pool-representing amounts previously taxed due to CFC inclusions. Any CFC distributions that exceed the Section 962 PTI are treated as taxable dividends. While foreign taxes attributable to these distributions can offset dividend income via FTCs, this treatment differs from standard individual shareholder rules under Section 959(a)(1), where certain distributions of previously taxed income can be received tax-free. Although OBBBA does not alter the basic dividend treatment under Section 962, it does affect how foreign taxes and inclusion amounts are determined.

2. Net Investment Income Tax (NIIT) Implications

Despite the corporate tax treatment applied to inclusion items under Section 962, the Net Investment Income Tax (NIIT) of 3.8% may still apply to dividend income received by individuals, including CFC distributions exceeding PTI. Effective tax planning must therefore account for both income tax and NIIT exposure.

3. Annual Election Requirement

The Section 962 election is made on an annual basis via the shareholder’s tax return for the relevant year. It cannot be carried forward or automatically applied to subsequent years, necessitating annual evaluation and diligent recordkeeping.

4. Section 250 Limitation for Subpart F Income

The Section 250 deduction remains unavailable for Subpart F income. As a result, Subpart F inclusions are taxed at the full 21% corporate rate before considering foreign tax credits.

Foreign Tax Credit (FTC) Limitations After OBBBA

OBBBA revises the mechanics of FTCs in several important ways:

• Deemed-Paid FTC Percentage Increased: The deemed-paid foreign tax credit percentage is generally increased to 90% of eligible foreign taxes for NCTI, up from the prior 80% for GILTI. This change enhances the benefit of foreign tax credits for taxpayers.
• Narrowed Deduction Allocation: Only specific deductions such as the Section 250 deduction and directly allocable expenses may be allocated to NCTI for FTC limitation purposes. This may increase the amount of foreign-source income that is eligible for credit, potentially expanding the FTC limitation.
• Section 904 Limitation Remains: FTCs cannot exceed the U.S. tax attributable to foreign-source income. Generally, unused foreign taxes cannot be carried back or forward by individuals outside Section 962.

Dividend Inclusion Rules in the Post-OBBBA Regime

Section 962 continues to impose specific rules regarding dividend treatment:

• Section 78 Gross-Up: Shareholders must include a Section 78 gross-up in their income for foreign taxes deemed paid by the CFC.
• Section 962 Supersedes Certain Section 959(a)(1) Rules: While Section 959(a)(1) may permit some tax-free distributions representing PTI, Section 962 establishes a distinct PTI pool for 962 inclusions. Distributions exceeding this pool are taxable. These rules remain in effect under OBBBA and require careful tracking.

Following the enactment of the One Big Beautiful Bill Act, the Section 962 election continues to offer U.S. shareholders a means to reduce their tax liability on CFC income through corporate-style tax treatment. Key benefits include access to the 21% corporate rate, the Section 250 deduction for NCTI, and more generous deemed-paid FTC rules.

Nonetheless, critical elements such as inclusion calculations, FTC mechanics, and dividend taxation have all been updated under the new law. Each year, shareholders should undertake comprehensive analysis—ideally supported by quantitative modeling to determine whether a Section 962 election will deliver a net tax benefit based on the CFC’s income profile and the shareholder’s broader tax position.