What is a section 962 election in simple terms?

It is an annual election that lets an individual US shareholder of a foreign company, such as a UK limited company, be taxed on the company's undistributed profits as if a US corporation held the shares: a 21 percent rate, a percentage deduction against the inclusion, and a credit for the UK corporation tax the company paid. The rules are in Internal Revenue Code section 962 and Treasury Regulations section 1.962-2.

Who can make a 962 election?

Any individual US shareholder of a controlled foreign corporation, meaning a US citizen or resident who owns at least 10 percent of the vote or value of the company directly, indirectly or constructively. The election is personal: each shareholder decides for themselves, and it covers all CFCs that shareholder owns for the year, not just one.

Does the UK corporation tax my company pays reduce my US bill under the election?

Yes. The election unlocks the deemed-paid foreign tax credit under section 960, so the corporation tax your UK company paid becomes creditable on your return subject to a statutory haircut: 90 percent counts for tax years beginning after 2025, 80 percent for earlier years. For a company paying the 25 percent UK main rate, the credit usually eliminates the residual US tax on retained profits entirely.

Are distributions taxed twice after a 962 election?

A second US layer applies, by design. Under section 962(d), earnings previously taxed under the election are taxed again when actually distributed, except to the extent of the US tax you actually paid in the election year. Dividends from a UK company are generally qualified dividends because the UK is a US treaty country, and the foreign tax credit for UK dividend tax you pay as a UK resident typically absorbs most or all of the residual US charge.

Can I revoke a section 962 election?

Not freely. The election is annual, so you can simply decline to make it next year, but revoking an election already made for a year requires the IRS Commissioner's consent, which the regulations grant only where a material and substantial change in circumstances occurs that could not have been anticipated when the election was made.

Can I make a 962 election for past years I never filed correctly?

Often, yes. Owners who never filed Form 5471 or Form 8992 can amend open years or, if eligible and non-willful, use the Streamlined Foreign Offshore Procedures described at IRS.gov, filing three years of amended returns and six years of FBARs with a non-willfulness certification. Section 962 elections are commonly included in those catch-up filings so the lookback-year inclusions get corporate-rate treatment and deemed-paid credits, though late elections need careful preparation because the regulations contemplate the statement being filed with the year's return.

Section 962 Election for UK Company Owners: How It Works

The section 962 election lets a US citizen or green card holder who owns a UK limited company pay US tax on the company's undistributed profits at the 21 percent corporate rate rather than at individual rates of up to 37 percent, and, just as importantly, claim a deemed-paid credit for the UK corporation tax the company has already paid. For most profitable UK companies paying corporation tax at the 25 percent main rate, that combination reduces the residual US charge on retained profits to zero or close to it. The trade-off is a second layer of US tax when the company eventually distributes those profits, which is why the election is a genuine decision each year rather than an automatic box to tick.

If you are a US investment banker, investor or founder in London who owns 10 percent or more of a UK limited company, the US treats that company as a controlled foreign corporation, or CFC, and can tax you personally, every year, on profits you never received. The 962 election is one of the principal tools for managing that exposure. Our site's companion piece covers the GILTI shareholder rules more broadly; this article is the decision-and-mechanics guide for company owners specifically: what the election is, exactly how it changes the computation, how UK corporation tax interacts with it, what happens when the company actually pays you, when the election helps and when it hurts, how it is made on the return each year, and how past years can be repaired.

What Is a Section 962 Election?

A section 962 election is an annual election under Internal Revenue Code section 962 that allows an individual US shareholder of a controlled foreign corporation to be taxed on the CFC income attributed to them under section 951(a), including subpart F income and the income picked up through the global intangible low-taxed income regime, as if a US corporation stood between them and the foreign company. Congress designed it to put individuals who own foreign companies directly on a comparable footing with individuals who hold the same companies through a US corporate structure. The operative rules sit in Treasury Regulations sections 1.962-1 and 1.962-2, and the reporting runs through Form 5471 and Form 8992, whose current instructions are published at IRS.gov.

Eligibility is straightforward. You must be an individual who is a US shareholder of the CFC, meaning you own, directly, indirectly or constructively, at least 10 percent of the vote or value of the foreign company. A typical London example is a US banker or portfolio manager who has set up a personal UK limited company to hold investments or consulting income, or a founder holding a significant stake in a UK trading company. The election is made person by person: each US shareholder decides independently, and one shareholder's election does not bind the others.

How Does the Section 962 Election Change the Tax Computation?

Without the election, your share of the company's tested income lands on your Form 1040 at ordinary individual rates, currently up to 37 percent, with no credit for the corporation tax your UK company paid on those same profits, because personal foreign tax credits generally only cover taxes you paid yourself. The election rewires three parts of that computation at once:

Corporate rate. The inclusion is taxed at the 21 percent US corporate rate instead of your marginal individual rate, and this corporate-rate tax is computed separately from the rest of your return.
The section 250-style deduction. A US corporation with a GILTI inclusion deducts a percentage of it before applying the 21 percent rate, and the 962 election extends that deduction to you. The deduction was 50 percent of the inclusion for tax years beginning before 2026, giving a pre-credit effective rate of 10.5 percent, and is 40 percent for tax years beginning after December 31, 2025, giving a pre-credit rate of 12.6 percent.
The deemed-paid foreign tax credit. Under section 960, the UK corporation tax your company paid on the included profits becomes creditable on your return as though you had paid it, subject to a statutory haircut: 80 percent of the foreign tax was creditable for tax years beginning before 2026, and 90 percent is creditable for tax years beginning after 2025. The creditable tax is also added back to the income base under the section 78 gross-up before the deduction and rate are applied.

Put together, the arithmetic is powerful for UK owners. Ninety percent of a 25 percent UK corporation tax charge is 22.5 percent of the profit, comfortably above the 12.6 percent pre-credit US rate, which is why a mainstream UK trading or investment company paying the main rate typically generates no residual US tax at all on retained profits in an election year. The credit cannot exceed the US tax on the inclusion, so the excess is simply unused rather than refunded.

What Changed in 2025, and What Is Net CFC Tested Income?

US legislation enacted in July 2025 reshaped this regime for tax years beginning after December 31, 2025. The GILTI label was retired and the inclusion is now called net CFC tested income, or NCTI. The deduction percentage fell from 50 to 40 percent, lifting the pre-credit elective rate from 10.5 to 12.6 percent. The foreign tax credit haircut narrowed from 20 percent to 10 percent, so 90 percent of the attributable UK tax now counts. And the deduction for a deemed return on tangible assets, the QBAI exclusion, was repealed, which modestly enlarges the income base for companies with significant fixed assets. For a calendar-year individual, these rules first bite on the 2026 return prepared in 2027, while 2025 returns still apply the old percentages. Because the IRS is revising forms and instructions to reflect the new law, the current-year figures should always be confirmed against the Form 8992 and Form 8993 instructions at IRS.gov before a return is filed.

The net effect for UK company owners is close to a wash. The pre-credit rate rose, but the larger credit for UK corporation tax rises with it, and for companies paying UK tax at 19 percent or more the deemed-paid credit still generally covers the whole US charge before limitation effects. The owners most affected are those whose companies have driven their effective UK rate well below the headline rates through reliefs, losses or capital allowances.

How Does UK Corporation Tax Paid by the Ltd Interact With the Election?

UK companies currently pay corporation tax at a 25 percent main rate, a 19 percent small profits rate for modest profit levels, and a tapered rate between the two under marginal relief. The election converts this company-level tax from a dead cost, from the US perspective, into a usable credit. That is the heart of the decision for UK owners, and the rate geometry matters. At the 25 percent main rate, the creditable 90 percent equals 22.5 percent of profits against a 12.6 percent pre-credit US charge, leaving ample headroom. Even at the 19 percent small profits rate, the creditable slice is 17.1 percent, still above the pre-credit rate, so residual US tax is usually nil in both cases, although expense allocation and foreign tax credit limitation rules can leave a sliver of US tax in some fact patterns.

The election also has a rival worth naming: the high-tax exclusion, which removes tested income from the US inclusion entirely where the company's effective foreign rate exceeds 18.9 percent, being 90 percent of the 21 percent corporate rate. A UK company squarely paying the 25 percent main rate will often qualify, and where it does the exclusion can be the simpler route because excluded income never enters the US computation and carries no second-layer consequence under section 962(d). The trap is the 19 percent small profits rate, which sits only fractionally above the 18.9 percent line: the effective rate as computed under the US rules reflects US-defined income and timing, not the UK statutory rate, and it can fall below the threshold even when the headline rate clears it. Owners in that band frequently find the 962 election the more dependable tool, and the two elections can be evaluated side by side every year, since both are annual choices.

What Happens When Your UK Company Actually Pays You a Dividend?

Here is the catch that defines the election. Normally, profits you have already been taxed on as a CFC inclusion become previously taxed earnings and profits, or PTEP, and come out later free of further US tax under section 959. Section 962(d) overrides that: earnings that were taxed under a 962 election are taxed again when actually distributed, except to the extent of the US tax you actually paid under the election. If your deemed-paid credits reduced the election-year US tax to zero, which is the usual UK outcome, then effectively the entire later distribution is taxable again as a dividend. This is deliberate. The election gives you the same deal a US corporation's shareholder gets: a low corporate-level charge now, and a shareholder-level charge when cash comes out.

The second layer is usually softer than it sounds for a London-based owner. Because the UK is a US treaty country, dividends from a UK company are generally qualified dividends, taxed at capital gains rates of up to 20 percent plus the 3.8 percent net investment income tax, rather than at ordinary rates. And because the UK taxes the same dividend in your hands as a UK resident, currently at up to 39.35 percent for additional-rate taxpayers, the foreign tax credit for that UK dividend tax typically absorbs most or all of the residual US charge. In practice, the election converts an immediate dry US tax at up to 37 percent on money you never received into a deferred charge that arrives only when you take the cash, and that is then largely covered by UK credits. What it does not do is make the second layer disappear, which is why distribution plans belong in the annual modelling.

A Worked Scenario: A US Investment Banker in London

Consider a managing director at a London bank, a US citizen, who owns 100 percent of a UK limited company holding her investment and advisory activity. In a tax year beginning in 2026, the company earns a profit of 500,000 dollars before tax and pays UK corporation tax at 25 percent, or 125,000 dollars, leaving 375,000 dollars of after-tax profit that is retained in the company. All figures are simplified illustrations that ignore exchange rates, expense allocation and limitation details, but the mechanics follow the current rules as reflected in IRS.gov form instructions.

Without a section 962 election, her inclusion of roughly 375,000 dollars is taxed at her 37 percent marginal rate, about 138,750 dollars, with no credit for the company's 125,000 dollars of UK tax. Combined with the corporation tax already paid, more than half the profit is gone, and she has not received a penny. With the election, the computation changes entirely: the 375,000 dollar inclusion is grossed up by the 125,000 dollars of creditable UK tax to a 500,000 dollar base, the 40 percent deduction brings it to 300,000 dollars, the 21 percent corporate rate produces a pre-credit tax of 63,000 dollars, and the deemed-paid credit of up to 112,500 dollars, being 90 percent of the UK tax, extinguishes it. Residual US tax in the election year: zero. Years later, when the company distributes the 375,000 dollars, the full amount is taxable under section 962(d) because no US tax was actually paid under the election, but it arrives as a qualified dividend with credit available for the UK dividend tax she pays as a UK resident. The election has turned an immediate six-figure US bill into a deferred, largely credited one.

When Does the Election Help, and When Does It Hurt?

The election tends to help when the following are true:

Your UK company pays corporation tax at or near the 25 percent main rate, so the deemed-paid credit covers the entire pre-credit US charge.
Profits are being retained and reinvested in the company rather than fully distributed each year, so the second layer is deferred, possibly for many years.
Your income already sits in the top US brackets, making the spread between 37 percent and the elective rate as wide as possible.
The high-tax exclusion is unavailable or unreliable for you, for example because the company pays the 19 percent small profits rate that hovers just above the 18.9 percent threshold.

It tends to hurt, or at least deserves harder scrutiny, in these situations:

The company distributes substantially all of its profits every year, so the second layer lands immediately and the election mainly adds complexity.
Reliefs, losses or R&D claims have pushed the company's effective UK rate well below the headline rates, thinning the deemed-paid credit that makes the election work.
You own several CFCs, because the election applies to all of your CFCs for the year, not just the one you had in mind.
You are unwilling to maintain the multi-year records the election demands, since poor tracking can convert the planned second layer into accidental double taxation.

Because the election is made year by year, none of this is a permanent commitment. A well-prepared return models three scenarios annually: no election, a 962 election, and the high-tax exclusion, and picks the best answer for that year's facts.

How Is the Election Made Each Year on the Return?

There is no standalone IRS form for the election itself. Under Treasury Regulations section 1.962-2, you make it by filing a statement with your Form 1040 for the year, and the regulation prescribes what the statement must contain: the name, address and taxable year of each CFC and of the entities in the ownership chain, the amounts included in gross income under section 951(a) shown corporation by corporation, your pro rata share of each company's earnings and profits and of the foreign taxes paid on them, and the distributions received from each company categorised by the year the earnings arose. Once made, the election is binding for that year and covers all of your CFCs. Revocation for a year already elected requires the IRS Commissioner's consent and is granted only where a material and substantial change in circumstances occurs that could not have been anticipated when the election was made.

Around the statement sits the supporting return package: Form 5471 for the company, including Schedule P for previously taxed earnings and profits, Form 8992 computing the tested income inclusion, Form 8993 for the deduction, and a corporate-style foreign tax credit computation supporting the deemed-paid credit. The 21 percent tax computed under the election is then carried onto the return with a section 962 notation rather than flowing through the ordinary rate schedule. The instructions for each of these forms at IRS.gov control the current mechanics, and they are being updated for the post-2025 rules, so the current-year versions should always be used.

What Records Keep the Second Layer From Becoming a Third?

The least discussed part of the election is the ledger it creates. Every election year generates its own pool of previously taxed earnings and profits, tracked year by year on Schedule P of Form 5471, together with a record of the US tax actually paid under that year's election, because the section 962(d) exclusion on later distributions is limited to exactly that amount of tax. A distribution a decade later must be traced to the pools it came from, converted at the right exchange rates with currency gain or loss recognised on the PTEP, and matched against the tax-paid record for the relevant year. Owners who let this ledger lapse, or who change preparers without handing over the history, routinely end up unable to demonstrate the character of a distribution, and amounts that should have been partly shielded are reported as fully taxable. For a company retaining profits over many years, maintaining the PTEP schedules is not an optional nicety; it is the mechanism that preserves the value of every election you have ever made.

Can You Fix Past Years With Amended Returns or Streamlined?

Many UK company owners discover the CFC rules years after incorporating, having never filed Form 5471 or Form 8992 at all. The penalties are not trivial: the Form 5471 instructions at IRS.gov set out penalties starting at 10,000 dollars per form, per year, for failures to file. Two repair routes matter. The first is amending: filing Form 1040-X for open years with the missing international forms and, where beneficial, a section 962 election statement attached. Because the regulation contemplates the statement being filed with the return for the year, elections made on amended returns need careful handling and positioning, and the supporting computations must be complete for each year touched. The second, and often better, route for those living in the UK is the Streamlined Foreign Offshore Procedures, described at IRS.gov, under which an eligible non-willful taxpayer files three years of amended or delinquent returns and six years of FBARs with a certification of non-willful conduct, generally with penalty relief. Section 962 elections are commonly built into streamlined submissions so that the lookback-year inclusions from a UK company arrive with corporate-rate treatment and deemed-paid credits rather than at full individual rates, which frequently reduces the tax cost of the catch-up dramatically.

How We Prepare Section 962 Filings for UK Company Owners

We are US-UK tax preparation and compliance specialists, and the 962 election is bread-and-butter work in our practice. Each year we model the three outcomes, no election, election, and high-tax exclusion, on your actual UK statutory accounts, prepare the Form 5471, 8992 and 8993 package with the election statement drafted to the regulation's requirements, build and maintain the PTEP and tax-paid schedules that protect future distributions, and coordinate the US filings with your UK self assessment so that credits land where they should on both sides. For owners with unfiled years, we prepare complete streamlined or amended-return packages with the election incorporated where the numbers support it. We do not tell you what your company should do commercially; we make sure that whatever it does is computed correctly, filed on time, and documented so that every pound of UK tax the company pays does the maximum possible work on your US return.