A Section 962 election lets an individual US shareholder of a controlled foreign corporation be taxed on their CFC inclusions at the 21% corporate rate instead of individual rates of up to 37%, and — crucially — claim indirect foreign tax credits for the corporation's own foreign tax. For tax years beginning after 31 December 2025, the calculation behind that election changed materially. OBBBA renamed GILTI to NCTI (Net CFC Tested Income), cut the §250 deduction from 50% to 40%, eliminated the QBAI-based deemed tangible income return, and raised the indirect credit cap from 80% to 90%. For an American running a UK limited company paying 19–25% Corporation Tax, §962 remains powerful — but the break-even foreign tax rate has moved, and so has the answer for asset-heavy companies.
What actually changed for tax years beginning after 31 December 2025
If you have been running the same spreadsheet since 2018, retire it. Four changes landed together, and they pull in different directions, which is exactly why the net effect is not obvious without doing the arithmetic on your own numbers.
The first change is cosmetic but pervasive: GILTI is now NCTI — Net CFC Tested Income. Every reference in your adviser's notes, your software's field labels and eventually the form instructions will migrate to the new name. The underlying architecture is unchanged: you still identify your CFCs, compute tested income at the corporate level, aggregate it, and take an inclusion into your personal US gross income whether or not a penny leaves the company's bank account.
The other three changes are substantive.
- **The §250 deduction fell from 50% to 40% for NCTI** (and from 37.5% to 33.34% for FDII), for tax years beginning after 31 December 2025.
- **The Net Deemed Tangible Income Return (DTIR) was eliminated.** The old 10%-of-QBAI carve-out that let asset-heavy CFCs shelter part of their tested income is gone from 2026.
- **The indirect foreign tax credit cap under §960(d)(1) rose from 80% to 90%** for corporations and for individuals making a §962 election, for tax years beginning after 31 December 2025.
- **The resulting effective corporate-level rate on NCTI is approximately 12.6%** — the 21% corporate rate applied to the 60% of the inclusion that survives the §250 deduction.
Why the §962 election exists at all
The anti-deferral regime was built with multinational groups in mind. Congress assumed the US shareholder of a foreign subsidiary would itself be a US corporation — so it gave that corporate shareholder two reliefs: a partial deduction against the inclusion, and a credit for the foreign taxes the subsidiary had already paid on the same profits.
Individuals got neither. An American who owns a UK Ltd personally takes the full inclusion into ordinary income at rates up to 37%, with no §250 deduction and, without an election, no credit at all for the UK Corporation Tax the company paid. The same profit is taxed twice, in full, in two countries. That is not a loophole being closed; it is a drafting consequence of a corporate-shaped regime applied to individuals.
Section 962 is the pressure valve. Make the election and, for the purpose of that year's CFC inclusions only, you are treated as if you were a domestic corporation: 21% rate, access to the §250 deduction, and access to the deemed-paid credit under §960. It does not convert you into a company for any other purpose, and it does not affect your salary, your rental income, or your UK dividends. It is narrow, annual, and easy to get wrong. If you are not yet clear on which of your entities is even a CFC, start with our guide to Form 5471 for UK-based Americans before you think about elections.
The old maths versus the new maths, side by side
Under the pre-2026 regime, the headline effective rate on a GILTI inclusion for a §962 electing individual was roughly 10.5% — 21% applied to half the inclusion after a 50% §250 deduction. Because only 80% of the underlying foreign tax could be credited, the arithmetic produced the famous 13.125% break-even: a CFC paying foreign tax at 13.125% or more generally wiped out the US residual tax entirely.
From 2026 the equivalent figures shift. The §250 deduction of 40% leaves 60% of the inclusion exposed, so 21% × 60% gives an effective rate of approximately 12.6%. The credit cap improves to 90%. Divide the effective rate by the credit haircut and you get the new break-even: 12.6% ÷ 0.9 = 14%.
So the threshold foreign tax rate you need in order to fully shelter an NCTI inclusion has risen from about 13.125% to about 14%. For a UK company that is still comfortable headroom — the UK Corporation Tax rates on GOV.UK run from a 19% small profits rate up to a 25% main rate — but the cushion has thinned, and it thins further for anyone with meaningful non-taxable income in the company, disallowed expenses, or expense apportionment against the NCTI basket.
Worked example: a UK Ltd with £400,000 of profit
Take Rachel, a US citizen resident in London and the sole shareholder and director of a UK trading company. For the year ended 31 December 2026 the company makes £400,000 of taxable profit. She has no associated companies, so the full main rate applies above £250,000.
**Step one — the UK side.** UK Corporation Tax for FY2026 is 19% on profits up to £50,000, 25% above £250,000, with Marginal Relief in between at a fraction of 3/200. At £400,000 the company is above the upper limit, so the main rate applies to the whole amount: £400,000 × 25% = £100,000 of Corporation Tax, leaving £300,000 post-tax. You can sanity-check profits that fall inside the Marginal Relief band with our UK Corporation Tax calculator or the guidance on Marginal Relief at GOV.UK.
**Step two — translate to US dollars.** The US computation is done in the CFC's functional currency and translated. For illustration only, assume an average rate of $1.30 to £1 — your actual figures will use the rates that apply to your accounting period, and the answer is sensitive to them. On that assumption, pre-tax tested income is $520,000 and UK tax paid is $130,000.
**Step three — tested income and the NCTI inclusion.** Tested income after the UK tax charge is $520,000 − $130,000 = $390,000. In 2025 Rachel could have reduced this by the deemed tangible income return of 10% of QBAI. From 2026 that offset no longer exists, so the full $390,000 is her NCTI inclusion.
**Step four — the §78 gross-up.** A §962 electing shareholder is treated as receiving a deemed dividend equal to the creditable foreign taxes. At the new 90% cap that is 90% × $130,000 = $117,000. Her gross income for the §962 computation is $390,000 + $117,000 = $507,000.
**Step five — the §250 deduction and the tax.** The 40% deduction is 40% × $507,000 = $202,800, leaving taxable income of $304,200. At the 21% corporate rate, the tax is $63,882.
**Step six — the credit.** Rachel has $117,000 of deemed-paid credits, but the credit in the NCTI basket is limited to the US tax on that basket's income — $63,882. The credit therefore reduces her §962 tax to nil, and $53,118 of credits is simply lost. Credits in this basket cannot be carried back or carried forward.
**Step seven — the counterfactual.** Without the election, that $390,000 inclusion lands on her Form 1040 as ordinary income with no §250 deduction and no indirect credit. At a 37% marginal rate that is $144,300 of US tax on profits she has not received, on top of the £100,000 already paid to HMRC. The election is the difference between $144,300 and nil in the current year.
Where the loss of the QBAI offset actually bites
Rachel's company is a services business with almost no depreciable tangible assets, so losing the DTIR costs her nothing. The picture is very different for a US-owned UK company holding significant plant, machinery, fit-out or production equipment.
Suppose the same $390,000 of tested income sat in a company with $1,000,000 of qualified business asset investment. Under the pre-2026 rules the deemed tangible income return would have carved roughly $100,000 out of the base, reducing the inclusion to around $290,000 before the deduction and credit steps. From 2026 the entire $390,000 is in the base. The QBAI concept has not been narrowed — it has been removed.
This is precisely the population for whom §962 has become more attractive rather than less. A capital-intensive CFC that used to shelter a large slice of its tested income without any election now faces a materially larger inclusion, and needs the 21% rate plus indirect credits to keep the US bill at nil. Studios, production companies, manufacturers, laboratories and property-adjacent trading companies should all re-run this.
- Asset-heavy CFCs lose the most from the DTIR repeal and gain the most from making the election.
- Asset-light service CFCs see the smallest change, because they had little QBAI to begin with.
- Companies paying an effective foreign rate below 14% now face residual US tax where 13.125% previously sufficed.
- Anyone who declined the election in earlier years on marginal numbers should model 2026 from scratch.
The sting in the tail: what happens when the money comes out
Section 962 is a timing and rate election, not an exemption. Amounts included under the election become previously taxed earnings and profits, and when the company eventually distributes them, the PTEP is excluded from your income only to the extent of the US tax you actually paid under the election. Anything above that is taxed again as a dividend when distributed.
Look at what that means in Rachel's case. Her §962 tax after credits was nil. So when the company distributes those earnings, effectively the whole amount is taxable to her on distribution. She has not eliminated US tax on the profits — she has deferred it until she takes the cash out, and converted an immediate 37% hit into a later charge on distribution.
Whether that later charge falls at ordinary rates or the lower qualified dividend rates depends on the character of the distribution and the treaty position of the paying company's jurisdiction. This is genuinely contested territory and the answer has moved with case law and IRS guidance, so it should be confirmed for your specific facts rather than assumed. Our overview of the US-UK tax treaty sets out the framework, but the treatment of §962 PTEP distributions is a point to raise explicitly with your adviser before you declare a dividend.
When §962 is still the wrong answer
The election is not a default. There are common fact patterns where it costs more than it saves, and the 2026 changes have not rescued any of them.
The most frequent is the shareholder whose CFC pays little or no local tax. If your company sits in a low-tax or nil-tax jurisdiction, there are few or no indirect credits to claim, and the election simply converts a 37% charge into a 12.6% charge with a second charge waiting on distribution. That may still be better, but it is a much closer call and depends heavily on when you plan to extract the money.
The second is the shareholder with multiple CFCs pulling in different directions. The election is all-or-nothing for the year: make it and it applies to every CFC in which you are a US shareholder for that year. A profitable, high-taxed UK company and a loss-making or low-taxed company elsewhere cannot be treated differently.
The third is the shareholder who intends to distribute everything immediately anyway. If the cash is coming out in the same year, the second layer of tax arrives at once and the deferral benefit — which is much of the point — never materialises.
How the election is actually made
Mechanically, the election is a statement filed with your return for the year in question. There is no standalone form and no advance approval — but there is no informal version either, and a return filed without the statement does not contain the election.
Alongside the statement you will generally be filing the full CFC reporting package: Form 5471 for the corporation itself, Form 8992 to compute the tested income and inclusion, Form 8993 to claim the §250 deduction, and Form 1118 to claim the indirect foreign tax credits. The IRS instructions to Form 8993 confirm that individual shareholders making a §962 election use that form to determine the allowable §250 deduction, and that it must be attached to the return and filed by the due date including extensions. The instructions to Form 8992 set out the inclusion computation itself.
Two features catch people out. The election must be made annually — there is no rolling or evergreen version, and a year missed is a year at individual rates. And it must be made by the due date of the return including extensions, which means a late-filed return can forfeit it entirely.
- File a §962 election statement with the return for each year you want it to apply.
- The election covers every CFC in which you are a US shareholder for that year.
- Form 8992 computes the NCTI inclusion; Form 8993 claims the §250 deduction.
- Form 1118 claims the deemed-paid credits at the new 90% cap.
- Form 5471 reporting obligations continue regardless of whether you elect.
Deadlines: the American-abroad calendar for the 2026 return
Because the election must be in place by the return due date including extensions, the filing calendar is not administrative trivia — it is the deadline for the planning itself.
Americans living abroad get an automatic extension to 15 June, and can push the deadline to 15 October with a further extension request. That gives you a realistic window in which to finalise the UK company's statutory accounts, agree the Corporation Tax figure, translate everything, and only then decide whether the election helps.
The sequencing matters. You cannot sensibly decide on §962 before the UK Corporation Tax charge is settled, because the credit is the whole point. In practice, that means requesting the October extension by default in any year where a CFC is in the picture, rather than filing early and regretting it.
Section 962 against the alternatives
The election does not exist in isolation. It is one of several structural answers to the same problem, and the right one depends on how you extract money and where you expect to be living in five years.
**Salary extraction.** Paying yourself a larger UK salary reduces the company's taxable profit and therefore the tested income, at the cost of UK income tax and National Insurance and US treatment of the earnings. This is the point at which the exclusion-versus-credit decision becomes central, and our comparison of the foreign tax credit versus the FEIE is the right place to start that analysis.
**Check-the-box.** Electing to treat the UK Ltd as a disregarded entity or partnership for US purposes removes the CFC problem entirely by removing the corporation from the US picture. It also removes deferral, complicates the UK position, and is very difficult to unwind cleanly. It is a genuine option, not a default.
**A US entity in the structure.** Some owners look at inserting or using a US company. The trade-offs there are covered in our piece on S corporations for US owners abroad, including why an S corporation is often the wrong vehicle once a foreign subsidiary is involved.
The honest summary is that §962 is the least invasive of these. It changes nothing about your structure, your UK filings, or your company law position. It is a line on a US return that can be turned on and off year by year — which is exactly why it deserves a fresh decision every year rather than a standing instruction.
Interaction with UK Corporation Tax planning
There is a counter-intuitive consequence of the 14% break-even. Anything that reduces the UK Corporation Tax your company pays also reduces the indirect credits available to shelter your NCTI inclusion. UK relief that looks like a straightforward win at company level can partly leak back into a US charge.
The clearest case is a company sitting in the Marginal Relief band. Profits between £50,000 and £250,000 attract an effective rate somewhere between 19% and 25% under the 3/200 fraction, and profits at the bottom of the range attract the 19% small profits rate. That is still above the 14% break-even, so the shelter generally holds — but the margin is much narrower than the headline 25% suggests, and it can be eroded by expense apportionment against the NCTI basket.
The practical instruction is not to stop claiming UK reliefs. It is to stop modelling the UK and US sides in separate spreadsheets. A relief that saves £8,000 of Corporation Tax and creates $6,000 of residual US tax has a very different value from the one your UK accountant quoted.
The state tax trap nobody mentions
Section 962 is a federal election. It has no automatic effect at state level, and many states do not recognise it, do not allow the §250 deduction, and do not allow foreign tax credits at all.
If you have retained a state filing obligation — because you never formally severed residency, still hold a driver's licence and voter registration there, or maintain property and other ties — you can find yourself with a nil federal charge and a real state charge on the same inclusion. The states that most commonly cause this are the ones with aggressive domicile-based residency tests.
Anyone moving from the US to the UK with a company in the picture should treat state residency severance as part of the same project as the federal analysis, not as a tidy-up exercise for later.
Common mistakes we see on §962 elections
Most of the problems we are asked to fix are procedural rather than analytical. The maths was right; the filing was not.
- **Making it once and assuming it persists.** The election is annual. Two clean years followed by a year where nobody filed the statement produces a full individual-rate inclusion in that third year.
- **Filing late.** Missing the return deadline including extensions can cost the election for that year, even where the numbers plainly supported it.
- **Forgetting the §78 gross-up.** Omitting the deemed dividend understates gross income and produces a credit computation that does not reconcile.
- **Applying it selectively across CFCs.** It applies to every CFC in which you are a US shareholder for the year — there is no picking and choosing.
- **Ignoring the distribution layer.** Electing, then distributing everything the following year without modelling the second charge, undoes much of the benefit.
- **Reusing a 2025 model in 2026.** A 50% deduction, an 80% credit cap and a QBAI offset are all now wrong. Rebuild it.
- **Assuming credits carry forward.** Excess credits in this basket are lost, not banked — which is why over-crediting is not a cushion.
What to do before your 2026 year-end
The changes take effect for tax years beginning after 31 December 2025, which for most UK companies with a December year-end means the year currently in progress. There is still time to act on it.
Start by confirming CFC status and your exact ownership percentage, including any attribution from family members that pushes you over the threshold. Then get a reliable projection of the company's tested income and UK Corporation Tax charge for the year, because the whole decision turns on the relationship between them. Model the election both ways, including the distribution layer, and then decide how much you actually intend to extract and when.
Finally, request the October extension as a matter of routine. The single most common reason a good §962 position is lost is not a bad analysis — it is a return filed in April before the UK numbers were ready.
If you own a UK limited company as a US person and you have not revisited this since the rules changed, the 2026 return is the wrong place to discover the answer moved.
