The rule that taxes your company's profit before you take it

It is the profit inside a controlled foreign corporation that American law taxes to its US shareholders each year, whether or not the company pays it out. The statute requires each US shareholder to include the amount in gross income for the year.

Until 2026 the same concept went by a different name. The mechanics looked similar. The arithmetic did not.

The company itself is not the taxpayer here. You are.

Two amendments landed together, both applying to tax years beginning after 31 December 2025. First, the statute dropped the old label, global intangible low-taxed income, and adopted net CFC tested income. Second, it struck out the subsection that gave a deemed return on tangible assets.

Alongside those, the same act cut the matching deduction from 50% to 40% and made it permanent.

The renaming is cosmetic. The repeal of the tangible-asset offset is not, and neither is the smaller deduction.

It applies to any US shareholder of a controlled foreign corporation, and the statute says so in exactly those words. Nothing in it limits the rule to large groups or to corporate shareholders. One American owning one British company sits squarely inside it.

That is the single most common misunderstanding we see. Congress had multinationals in mind. The words it chose catch everyone.

So the question is never whether you are big enough. It is whether Americans control the company.

Control means US shareholders together holding more than half the company, by vote or by value. A US shareholder is anyone holding at least a tenth. One American who owns the whole thing clearly qualifies. So does an even split with a Briton, where the American holds the casting vote.

Attribution rules widen this further than people expect.

Shares held by a spouse, a parent or a related company can count as yours. So a company you own a third of on paper may still be controlled once the family is added up.

Once control exists, the reporting duty and the inclusion arrive together. That is why Form 5471 and this calculation turn up in the same conversation.

Before the repeal, a company could shelter a deemed return on its qualified tangible property. Only the excess fell into the charge. Asset-heavy businesses benefited; businesses whose value sat in people and contracts did not.

That is the quiet good news for most readers here. A consultancy with three laptops and a desk held almost no qualifying assets. Its offset was already close to nothing.

In our practice the repeal has changed the numbers for manufacturers and property-holding companies far more than for service businesses.

Start from the company's tested income under American rules, not British ones. Then add it up across every controlled company you own. The calculation runs on Form 8992, which draws its figures from the schedules of the information return.

That means American earnings and profits, not the statutory accounts your British accountant filed.

Currency translation sits underneath all of it, so pick a consistent method and document it.

The statute gives it in the case of a domestic corporation, and that phrase does the work. An individual who includes net CFC tested income on a personal return gets no deduction at all under the ordinary route, and pays at ordinary rates on the full amount.

A corporate shareholder claims it on Form 8993.

So two shareholders with identical companies can face very different bills, purely because of what holds the shares.

An individual elects to pay corporate rates on these inclusions, as though a domestic corporation had received them. The statute also treats the amounts as a corporation's for foreign tax credit purposes. That is usually the real prize.

British corporation tax already paid by the company can then relieve the American charge.

Without it, an individual shareholder generally cannot reach those underlying taxes at all.

Not automatically, because it moves the tax rather than removing it. The election lowers the charge now. Money you later draw out still faces tax when it arrives, beyond what the election already collected.

That suits a company retaining profit to reinvest. It suits a company that distributes everything far less well.

It also needs making on time, with the supporting statement the regulations require.

Often it helps a great deal, and sometimes it does almost nothing. Britain charges a small profits rate on lower profits and a main rate above an upper limit, with marginal relief between. The GOV.UK guidance on Corporation Tax rates sets out the thresholds.

A company paying the main rate has usually paid enough to shelter the inclusion once credits are available.

A company on the small profits rate may not have, which is where the smaller American deduction begins to show.

American rules do not treat a private British limited company as a corporation automatically. Its owner can elect to have it disregarded instead. Do that and no controlled foreign corporation exists. No inclusion follows, because the company has stopped existing for American tax.

Profits land on your own return as they arise, with British tax available as a credit.

The cost is deferral, and the election is difficult to reverse within five years.

It changes the calculation, though rarely the direction. Salary reduces company profit, so it shrinks what this rule reaches. Dividends leave that profit intact, so the mix matters more once the rule bites anyway.

British employer costs pull the other way.

Neither answer is universal, which is why we model both rather than applying a rule of thumb.

Employer National Insurance, pension contributions and the corporation tax deduction for salary all pull in different directions. Run the numbers on your own figures rather than borrowing a colleague's answer.

It sits awkwardly, because the inclusion is not earned income. The foreign earned income exclusion never touches it. So someone excluding a whole salary still carries this amount in full.

Credits, not exclusions, are the tool here.

Our clients often find it odd that a relief covering their whole salary does nothing for the company's retained profit.

Then the control test may fail, and the whole chapter can fall away. Where US shareholders together hold no more than half the company by vote and by value, no controlled foreign corporation exists and no annual inclusion follows.

Real joint ventures do sometimes land there. A genuine fifty-fifty split with a British partner, on equal terms, may sit outside the rule.

Do not engineer it casually, though. Attribution rules and voting arrangements decide this, and HMRC and the IRS both look at substance.

The order matters here, because each decision narrows the next. Work through it before the year end rather than after it.

Keep the statutory accounts, the corporation tax computation and the exchange rates you used, year by year. Add a note of the shareholding on the first and last day of each period.

Those three items drive almost every figure in the calculation. Without them, each year starts from scratch.

Keep the election paperwork with them. It decides the treatment of everything else in the file.

Consider an American in Bristol whose consultancy retains £40,000 after paying her a modest salary. She has no material tangible assets, so the repealed offset would have sheltered almost nothing for her anyway.

Her company pays British corporation tax on that profit. Without an election she includes the tested income at ordinary American rates with no deduction and no access to the company's British tax.

With the election, corporate rates apply and the British tax becomes available. This example is illustrative rather than advice, and her full picture would decide it.

First, assuming the rule is for multinationals. The statute names any US shareholder of a controlled foreign corporation.

Second, expecting the earned income exclusion to cover retained profit. It covers wages, and this is not wages.

Third, leaving the corporate-rate election to the person preparing the return in April. It needs deciding while the year is still open.

Fourth, reading a pre-2026 article and applying its arithmetic. The offset it describes no longer exists.

Fifth, forgetting the British year end. A company with a March year end reports a period that no American form was designed around, and the mismatch has to be handled rather than ignored.

We model the inclusion both ways before the year closes, so the election is a decision rather than a discovery. That work sits alongside the rest of your US federal return.

Where structure is still open, we look at it first. Our note on setting up a British company covers that ground, and one business, two sets of accounts covers the unincorporated alternative.

This article is general information, not personal tax advice. Talk to us about your own company.