When the Tax Cuts and Jobs Act introduced the global intangible low-taxed income (GILTI) regime in 2017, it created a structural imbalance that continues to affect international business owners: U.S. corporations that own controlled foreign corporations (CFCs) pay an effective GILTI rate of approximately 10.5% (after the Section 250 deduction and foreign tax credits), while individual U.S. shareholders of the same CFCs pay their full marginal ordinary income rate — up to 37% — with no deduction and no indirect foreign tax credit. The difference is not incidental; it is a built-in disparity that systematically disadvantages individuals who own foreign businesses directly rather than through a domestic corporate layer.

Section 962 of the Internal Revenue Code offers a partial remedy. By electing to be taxed as if they were a domestic corporation, individual CFC shareholders can access the Section 250 deduction and the Section 960 indirect foreign tax credit on their GILTI inclusion — substantially reducing the effective rate. The election has real limits and a hidden second-level cost that must be modeled carefully, but for many individual shareholders with large GILTI inclusions, it is the most important planning tool available on an annual basis.

The Problem: Individuals Pay More GILTI Tax Than Corporations

Global intangible low-taxed income (GILTI) is the mechanism by which U.S. shareholders of controlled foreign corporations are taxed annually on their share of the CFC's excess returns — roughly, the income earned above a 10% return on tangible assets. GILTI is included in the U.S. shareholder's gross income whether or not the CFC distributes it.

For U.S. corporations, GILTI is partially mitigated by two provisions: the Section 250 deduction (which allows corporations to deduct 50% of their GILTI inclusion, reducing the effective rate to 10.5%) and the ability to claim indirect foreign tax credits under Section 960 for taxes paid by the CFC. These two provisions significantly reduce a domestic corporation's effective GILTI rate.

Individual U.S. shareholders have access to neither of these benefits under the default rules. An individual who directly owns a CFC (rather than through a domestic corporation) includes 100% of the GILTI in gross income, taxed at ordinary income rates (up to 37%), with no Section 250 deduction and no indirect foreign tax credit. The result is a materially higher effective rate on GILTI for individuals than for C corporations — a disparity that can significantly affect the economics of owning a profitable foreign business directly rather than through a U.S. holding company.

What the Section 962 Election Does

Section 962 allows an individual U.S. shareholder of a CFC to elect to be taxed on the CFC's Subpart F income (including GILTI) as if the individual were a domestic corporation. The election is made on the individual's annual income tax return and applies to all CFCs in which the individual has a GILTI inclusion for that year.

The practical effect of the 962 election is threefold. First, the GILTI inclusion is taxed at the 21% corporate rate rather than the individual's marginal rate of up to 37%. Second, the Section 250 deduction becomes available, reducing the GILTI inclusion by 50% and producing an effective rate of 10.5% on net GILTI. Third, indirect foreign tax credits under Section 960 are available for taxes paid by the CFC on the GILTI income, subject to the 80% limitation on foreign tax credits in the GILTI basket that applies to corporations. The election is made annually — the taxpayer can elect 962 for some years and not others — and it applies to all CFCs, not just selected ones.

The Second-Level Tax — The Hidden Cost

The Section 962 election is not a free lunch. Because the individual is treated as a domestic corporation for purposes of computing the GILTI inclusion, any subsequent actual distribution from the CFC is subject to a "second-level tax" — a deemed dividend that is taxed to the individual without the benefit of the 962 election.

The mechanics: when the CFC actually distributes earnings that were previously taxed under the 962 election, the individual recognizes income to the extent the distribution exceeds the previously taxed earnings and profits (PTEP). PTEP represents the amount already included in income under GILTI; distributions out of PTEP are generally not subject to additional U.S. tax. But distributions in excess of PTEP — from earnings not previously included — are ordinary income to the individual, at individual rates.

The second-level tax means that the 962 election defers but does not eliminate the tax cost on CFC earnings for individual shareholders. Its primary benefit is rate reduction on the GILTI inclusion itself, plus access to foreign tax credits that can offset that cost. Whether the election is net beneficial depends on the CFC's foreign tax rate, the magnitude of the GILTI inclusion, and the anticipated timing of actual distributions.

When the Section 962 Election Makes Sense — and When It Doesn't

The 962 election is most beneficial when: (a) the individual's marginal rate significantly exceeds 21%; (b) the CFC has substantial GILTI (excess income above the 10% qualified business asset investment floor) that would otherwise be taxed at full ordinary income rates; (c) the CFC pays significant foreign taxes that can be used as credits to reduce the effective GILTI rate; and (d) the shareholder does not anticipate large actual distributions in the near term, which would trigger the second-level tax.

The election is less beneficial — or counterproductive — when the CFC qualifies for the GILTI high-tax exclusion (GILTI HTE), in which case the GILTI inclusion may be fully excluded if the CFC's effective foreign tax rate exceeds 18.9% for a given year; when the CFC makes large current distributions, because the second-level tax at individual rates may offset the rate benefit on the inclusion; or when the individual's income is below the 21% corporate rate, which is unlikely for CFC shareholders but possible in loss years.

The interaction with the GILTI high-tax exclusion deserves specific attention. Under the GILTI HTE regulations, income subject to foreign tax above an effective rate of 18.9% can be excluded from GILTI entirely. For individuals with CFCs in high-tax jurisdictions — many Latin American countries have corporate tax rates well above this threshold — the HTE may be more valuable than the 962 election: the income is excluded entirely rather than included at a reduced rate. The choice between HTE and 962 requires a year-by-year analysis of the CFC's effective foreign tax rate on each category of income.

State Tax Complications

Most states do not conform to the federal Section 962 election. California, New York, and other high-tax states that impose income tax on GILTI inclusions may not allow the 50% Section 250 deduction or the corporate rate benefit at the state level — even if the individual has made a valid federal 962 election. The result is that an individual may pay 10.5% at the federal level on GILTI (after 962 and the Section 250 deduction) while paying 13.3% California income tax on the full GILTI inclusion without any Section 250 benefit.

This state conformity gap significantly affects the effective rate calculation for high-tax-state residents. A California resident with a large GILTI inclusion needs to model both the federal and California tax cost of the 962 election, and compare it to the alternative of owning the CFC through a domestic holding company — which may provide more uniform benefits at both the federal and state level. The state tax analysis is not a secondary consideration; for residents of high-tax states, it can determine whether the 962 election is worthwhile at all.

Filing Requirements and Mechanics

The 962 election is made on the individual's Form 1040, through a statement attached to the return. There is no separate IRS form for the election. The taxpayer must attach a statement identifying the CFCs subject to the election, the GILTI inclusions from each, the applicable Section 250 deduction, and the foreign tax credits claimed under Section 960.

The election must be made on a timely filed return (including extensions). A retroactive 962 election for prior years is generally not permitted — the election is available only for the current tax year. Practitioners advising clients with large GILTI inclusions should address the 962 election before the tax return is filed, not as an afterthought after the return deadline has passed.

The IRS has issued limited guidance on 962 interactions with other provisions — including the GILTI HTE, the Subpart F rules, and PTEP tracking across multiple years. The regulations continue to develop, and the interaction between the 962 election and the PTEP rules is an area where the law remains unsettled. Taxpayers with complex CFC structures, multiple CFCs in different jurisdictions, or significant distributions anticipated in coming years should work with counsel who tracks the current regulatory landscape and can model the election's impact across both the federal and state level.