If you are an individual who directly owns a foreign company, the Section 962 election lets you pay tax on the company's US-taxed earnings at corporate rates instead of your personal rate. For 2026, that means access to the 12.6% NCTI effective rate and foreign tax credits, instead of up to 37% with no credits. The trade-off: later distributions can be taxed again.
Why individuals get the worst deal on CFC income
When a US person owns at least 10% of a controlled foreign corporation (a CFC), the US taxes its earnings every year, whether or not the company pays a dividend. That is true for Subpart F income and for NCTI (the 2026 replacement for GILTI). A corporation that owns the CFC gets the good math: a 21% rate, the Section 250 deduction, and foreign tax credits for taxes the CFC paid abroad.
An individual who owns the CFC directly gets none of that. The comparison looks like this:
| Corporation owning a CFC | Individual owning a CFC directly | |
|---|---|---|
| Tax rate on the inclusion | 21% | Up to 37% |
| Section 250 deduction | Yes (40% for NCTI in 2026) | No |
| Effective rate before credits | 12.6% | Up to 37% |
| Credit for foreign taxes the CFC paid | Yes, 90% deemed-paid | No |
| 3.8% net investment income tax | No | Possible |
So an individual can face a combined federal rate near 40% on the same earnings a corporation taxes at 12.6% before credits, and the individual gets no credit for the foreign tax the company already paid. That gap is what the Section 962 election exists to close. If you are still sorting out whether your company counts as a CFC, start with our controlled foreign corporation tax guide.
What the election actually does
Section 962 of the tax code lets an individual US shareholder elect to be taxed on CFC inclusions as if they were a domestic corporation. It covers both Subpart F inclusions and NCTI inclusions. With the election in place, three corporate benefits switch on: the 21% corporate rate replaces your personal rate, the Section 250 deduction becomes available, and you can claim the deemed-paid foreign tax credit for taxes the CFC paid.
In plain terms, the election lets you borrow the corporate tax math for one year at a time. You still file as an individual. You still own the company directly. But the CFC earnings picked up on your return are computed under corporate rules. The 3.8% net investment income tax also stays off this income, since it is taxed under the corporate framework.
The 2026 math, step by step
Take a simple example. You own 100% of a foreign services company. In 2026 it earns $100,000 and pays $15,000 of local corporate tax (a 15% foreign rate). Here is the difference the election makes:
| No election | With Section 962 election | |
|---|---|---|
| Amount included in US income | $100,000 | $100,000 |
| Section 250 deduction (40%) | $0 | $40,000 |
| Taxable amount | $100,000 | $60,000 |
| US tax before credits | $37,000 (at 37%) | $12,600 (at 21%) |
| Credit for foreign tax paid | $0 | $13,500 (90% of $15,000) |
| Net US tax on the inclusion | $37,000 | $0 |
Without the election, you owe $37,000 and get no credit for the $15,000 the company already paid abroad. With the election, the $13,500 credit wipes out the $12,600 of US tax, leaving zero due currently. That is a $37,000 swing on the same $100,000 of earnings.
Two notes on this example. First, it assumes a services company with no tangible-asset issues, so the NCTI base is the full $100,000. Second, the 40% deduction and 90% credit are the 2026 NCTI figures; older articles about this election still show the pre-2026 GILTI numbers (50% and 80%), which no longer apply (see our GILTI tax strategy guide for how the old regime worked).
The catch: distributions can be taxed again
Here is the trade-off, and it is a real one. Normally, earnings you already paid US tax on come out of a CFC tax-free. That rule does not fully apply after a Section 962 election. When the company later distributes those earnings to you, the distribution is taxed again as a dividend to the extent it exceeds the US tax you paid under the election.
Go back to the example. You paid $12,600 of US tax under the election. If the company later distributes the full $100,000 to you, the first $12,600 comes out free (it matches tax already paid), but the remaining $87,400 is taxed as a dividend. So the election shifts tax from today to the distribution date; it does not always eliminate it. The election is most powerful when you plan to leave earnings in the company for years, and weakest when a big distribution is coming soon. Our repatriation planning guide walks through the distribution side of this decision.
The fine print: annual, all-or-nothing, and on time
The election is made year by year. You attach a statement to your timely filed return, extensions included, and Treasury Regulation Section 1.962-2 spells out what the statement must contain. Three rules matter most.
First, it applies to all of your CFCs for that year. You cannot elect for one company and skip another. Second, you must make it each year you want it; there is no standing election that carries forward. Third, the deadline is strict. You cannot file an amended return later to add the election for a year you missed. If the return goes out without the statement, the election is lost for that year.
Because it is annual, you get to re-decide every year. A year with high foreign taxes and no planned distributions may favor the election; a year with a big dividend planned may not. That yearly choice is a feature, but it also means yearly modeling work.
When the election helps, and when it hurts
| Helps most when | Hurts or backfires when |
|---|---|
| The CFC pays meaningful foreign tax, so the 90% credit offsets the 21% rate | The CFC pays little or no foreign tax, so there is no credit to claim |
| You plan to leave earnings in the company for years | A large distribution is coming soon, triggering the second tax layer |
| The foreign rate is moderate (roughly 10% to 18%) | The foreign rate is already above about 18.9%, where the high-tax exclusion may remove the income from NCTI entirely |
| You own the CFC directly and want to keep it simple | You hold several CFCs with very different profiles, since the election is all-or-nothing |
The high-tax exclusion in the last row deserves a line of its own. If the CFC's effective foreign rate exceeds 90% of the US corporate rate (about 18.9%), a separate election can exclude that income from NCTI altogether. For companies in higher-tax countries, that exclusion often beats the Section 962 election, because there is no second tax layer later. The two elections solve different problems, so compare them side by side before choosing.
Election vs. a US holding company
The other common fix is to put a US corporation between you and the CFC. The US company gets the corporate NCTI math automatically every year, with no annual election and no all-or-nothing rule across entities. For owners with several foreign companies, that simplicity has real value.
But a holding company is not free. You pay to form and maintain it and file its returns, and the individual-level tax just moves to the day the holding company pays you a dividend. For a single CFC with steady earnings and no near-term distributions, the Section 962 election often delivers most of the benefit with none of the entity cost. For multiple CFCs or a future sale, the holding company usually wins. If a restructure is on the table, our cross-border tax structuring team models exactly these comparisons.
One administrative note either way: individual CFC owners generally must file Form 5471 each year to report the CFC, and the same ownership data feeds whichever path you choose.
Frequently asked questions
Who can make the Section 962 election?
An individual US shareholder of a CFC: generally a US person who owns at least 10% of the foreign corporation's vote or value, where US shareholders together own more than 50%. It is an individual-only election; corporations do not need it because they already get corporate treatment.
Does the election apply to both Subpart F and NCTI?
Yes. It covers inclusions under both Section 951(a) (Subpart F) and Section 951A (NCTI, the former GILTI). One election covers both types of income for that year.
What happens if I miss the deadline?
The election is lost for that tax year. It must be attached to a timely filed return, including extensions, and cannot be added on an amended return later. You can still make it for the following year.
Will the election reduce my tax if my CFC pays no foreign tax?
Probably not much. With no foreign tax, there is no deemed-paid credit to claim, so you pay the 21% corporate rate (12.6% effective on NCTI after the Section 250 deduction) now and still face the dividend tax when earnings are distributed. In that case, compare carefully against doing nothing or restructuring.
Is the election still worth it under the 2026 NCTI rules?
Often yes, and the 2026 changes arguably make it more valuable. The corporate benchmark is now a 12.6% effective rate with a 90% foreign tax credit, versus up to 37% with no credit for individuals. The wider the gap between your personal rate and the corporate math, the more the election saves, as long as no large distribution is imminent.
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