A US citizen owning a UK limited company can elect under section 962 to be taxed on the CFC inclusion at corporate rates and credit UK corporation tax. When that helps, and when it costs you.
If you are a US citizen or green card holder who owns a UK limited company, US law can tax you personally on the company's profits before a penny reaches your bank account. A section 962 election lets you be taxed on that inclusion as though you were a US corporation — at the 21% corporate rate, with the section 250 deduction and a credit for the UK corporation tax the company itself paid. It is often the difference between a punitive US charge and no current US charge at all, but it buys deferral rather than exemption, and it has to be modelled year by year.
A UK company owned by US shareholders is usually a controlled foreign corporation, which pulls its profits into your personal return through the subpart F rules and the section 951A tested-income rules — commonly known as GILTI, and referred to in the IRS's 2026 draft forms as net CFC tested income. Which rules bite, and in what order, is covered in subpart F vs GILTI for small foreign company owners; this article assumes you already have an inclusion.
The structural problem is simple. A US corporation owning your UK company would get the section 250 deduction and a deemed-paid credit for the UK corporation tax under section 960. You, as an individual, get neither by default — so profit already taxed at 25% in the UK can attract a further charge of up to 37% in the US, because the company paid the UK tax and an individual shareholder has no claim to it.
Section 962 closes that gap by letting an individual step into the corporate shoes for this one purpose.
IRS Publication 514 puts it plainly:
> "If you are a shareholder of a CFC and elect under section 962 to be taxed at corporate rates on your section 951(a) amount ... and your global intangible low-taxed income (GILTI) inclusion for the tax year, you may be able to claim a credit for certain foreign taxes paid or accrued by the CFC, but only against your separately computed U.S. tax liability with respect to your section 951(a) amount and GILTI inclusion."
Three things follow from that sentence, and all three matter.
The inclusion is taxed under the regime in sections 11 and 55 rather than at your marginal individual rate. Publication 542 confirms the corporate figure: "Corporations ... figure their tax by multiplying taxable income by 21% (0.21)." For 2026 the top individual rate is 37%, reached at $640,600 for a single filer and $768,700 for a married couple filing jointly, per the IRS inflation adjustments for tax year 2026.
The Form 8993 instructions state the deduction is "allowed only to domestic corporations (not including real estate investment trusts (REITs), regulated investment companies (RICs), and S corporations) and section 962 electing individuals", and that electing individuals use Form 8993 to compute it.
The percentage is changing. The IRS states that for tax years beginning on or after 1 January 2018 and before 1 January 2026, section 250 allows a deduction of 37.5% of FDII plus 50% of GILTI, and that "thereafter, these deductions are reduced to 33.34% and 40%, respectively" — a change made by Public Law 119-21. Practically: 21% on the remaining 50% gave 10.5% through 2025; 21% on the remaining 60% gives 12.6% from 2026. Still far below 37%.
This is usually the decisive element. The election lets you claim a credit under section 960 for the UK corporation tax your company paid, but ring-fenced: it may only be used against the separately computed US tax on the inclusion, not against the tax on your salary, dividends or rental income.
The credit is claimed on Form 1118, not Form 1116. The Instructions for Form 1116 are explicit: "If you make this election, you must claim the credit by filing Form 1118." The Instructions for Form 1118 add the trap: the ordinary carryback and carryforward provisions "do not apply to foreign income taxes assigned to section 951A category income". Credits you cannot use in that basket this year are simply gone.
Two details matter. The deemed-paid amount is deliberately less than 100% of the foreign tax, and the statutory percentage was amended by Public Law 119-21 — confirm the figure for your tax year rather than reusing last year's. And new section 960(d)(4) disallows a section 901 credit for 10% of foreign income taxes on section 959(a) distributions of previously taxed earnings attributable to section 951A inclusions, for taxes paid or accrued after 28 June 2025.
This is the part that gets missed, and it is why the election is not a free win.
Section 962(d) provides that when the earnings are actually distributed to you, they are included in your gross income to the extent they exceed the US income tax you paid under the election. The regulations split the pot into "excludable section 962 earnings and profits" — an amount equal to the US tax you actually paid on the inclusion — and "taxable section 962 earnings and profits", which is everything else.
In plain terms: if the election worked well and the UK credit soaked up the US tax, almost nothing is excludable later. The distribution is taxable when it happens.
That is not a flaw; it is the design. The election converts an immediate charge at ordinary rates into a deferred charge at dividend rates, payable when you choose to take the money. Whether the later distribution reaches the lower qualified-dividend rates turns on the tests in Publication 550: the payer must be a qualified foreign corporation — which includes one eligible for the benefits of a comprehensive income tax treaty with the United States that includes an exchange of information programme and that the Treasury determines is satisfactory — and you must satisfy the holding period. The UK side is a separate exercise; see how the US-UK treaty prevents double taxation.
These figures show the mechanics; the outcome changes with the facts.
A US citizen resident in London owns 100% of a UK trading company with taxable profit of £400,000 — above the £250,000 upper limit, so the main rate applies without marginal relief. The UK corporation tax rates are 25% main rate and 19% where profits are £50,000 or less, with marginal relief in between.
Route A — no election, tax year beginning in 2026. The £300,000 inclusion goes on Schedule 1 (Form 1040), which the Form 1040 instructions allocate to line 8n for a section 951(a) inclusion and line 8o for a section 951A(a) inclusion. There is no section 250 deduction and no deemed-paid credit. If the shareholder is already in the top bracket, the US charge is around £111,000, on top of the £100,000 of UK tax. Roughly half the profit has gone in tax, and not a penny has been distributed.
Route B — section 962 election. The inclusion is grossed up by the deemed-paid UK tax, reduced by the 40% section 250 deduction, and taxed at 21%. The pre-credit US tax cannot exceed 12.6% of the grossed-up inclusion — on the order of £45,000 to £50,000. The UK corporation tax available for credit is £100,000, a third of the inclusion. Even after the statutory reduction to the deemed-paid amount, the credit comfortably exceeds the pre-credit US tax, so the residual current US tax is nil. The unusable excess cannot be carried anywhere.
Route B, later. When the £300,000 is eventually distributed, very little is excludable — precisely because very little US tax was paid under the election. The distribution is taxed then, potentially at qualified-dividend rates, with UK tax and treaty relief also in play.
The honest summary: Route A costs about £111,000 now; Route B costs nothing now and defers the charge to a usually lower rate, at a time of your choosing.
| Scenario | Likely best route | Why |
| --- | --- | --- |
| Profits at the 25% UK main rate, retained in the company | Section 962 election, or high-tax exclusion | UK tax already exceeds the US corporate charge; either route removes the current US cost |
| Profits distributed in full each year anyway | Usually no election | The distribution is taxed regardless; the election adds forms and a permanent schedule for little benefit |
| Company on the 19% small profits rate | Model both properly | 19% sits only just above the high-tax threshold, so small computational differences change the answer |
| Shareholder in a low US bracket | Usually no election | A 21% corporate rate can be worse than the individual's own marginal rate |
| Single-member consultancy, no retained cash | Salary and dividends, or check-the-box | Removes the inclusion problem at source rather than managing it |
| Profits volatile, or a loss year | Decide annually | The election is a year-by-year choice, not a structure |
Section 954(b)(4) excludes income subject to foreign tax at a rate greater than 90% of the maximum rate specified in section 11 — 90% of 21% is 18.9%. The final regulations extending an elective high-tax exclusion to tested income were published as TD 9902 in Internal Revenue Bulletin 2020-33.
For a UK company paying the 25% main rate this is often the cleaner answer: the income drops out of tested income, with no section 962 statement, no Form 1118 and no 962 earnings and profits schedule to maintain for the life of the company. For a company on the 19% small profits rate, the margin above 18.9% is thin enough that timing differences between the UK and US measures of profit can tip it the wrong way.
A UK private limited company is not among the foreign entities that must be treated as corporations for US purposes, so it can generally elect on Form 8832 to be treated as a partnership or a disregarded entity. That removes the CFC inclusion machinery entirely: profits flow onto your return as they arise, and the UK corporation tax becomes, in US eyes, a tax you paid.
The UK does not follow the election. Companies House and HMRC still treat the company as a company, corporation tax is still due, and you carry a permanent mismatch between the two systems — not least on what happens when you take money out. There is also a restriction on changing classification again soon afterwards. A structural decision with a long tail, not a filing tweak.
For many owner-managed UK companies the simplest answer is to stop accumulating profits: salary and dividends are taxed once, on a timetable you control. The UK trade-offs are covered in paying yourself from a UK company as a US citizen.
1. Finish the CFC numbers first. You cannot model the election without the tested income and subpart F computation, so the Form 5471 work has to be done. See our Form 5471 guide for the category and schedule requirements.
2. Model both outcomes side by side, including the later distribution.
3. Compute the section 962 tax: the inclusion plus the section 78 gross-up, less the section 250 deduction computed on Form 8993, at 21%. Then compute the deemed-paid credit on Form 1118, separately for the section 951A category, noting any excess you will lose.
4. Attach the statement required by Regulations section 1.962-2. It must give the name, address and taxable year of each CFC and of every entity in the chain of ownership; the amounts included in your gross income under section 951(a), corporation by corporation; and distributions received from each CFC in the year, split between excludable section 962 earnings and profits, taxable section 962 earnings and profits, and other earnings and profits, showing the source by taxable year.
5. Report and carry through correctly: the inclusion on Schedule 1 line 8n or 8o, and the 962 tax computation through to Form 1040. Publication 514 directs an electing shareholder who has figured a credit to the Form 1040 instructions for line 16.
6. Open a permanent 962 earnings and profits schedule and maintain it every year. Without it you cannot prove what is excludable when the money comes out.
7. Re-decide next year. The election is made for the taxable year with which the statement is filed.
⚠ A section 962 election should never be a house rule. It can be excellent where UK corporation tax is high and profits are genuinely retained, and actively unhelpful where profits are paid out each year or the shareholder's own rates are low. It also creates a permanent record-keeping obligation that outlives the year in which it is made. Get the numbers first, then decide — and decide again next year.
The right answer for one owner is the wrong answer for another with a similar-looking company, because it turns on the UK rate actually paid, how much is retained, and when you intend to take the money out. If you are carrying a CFC inclusion and have never had the routes costed properly, that is the work worth doing. Our US-UK cross-border business tax service covers exactly this, and every position is reviewed and signed off by a licensed CPA or Enrolled Agent on the US side and an ACCA-qualified accountant on the UK side. If it would help to talk it through, you can book a consultation.
This article is general information, not advice.