Being taxed as a company you do not own

It is a yearly choice by a US individual to have certain foreign company income taxed at corporate rates rather than personal ones. The statute swaps the normal rate rules for the corporate rate and treats the person as a corporation for credit purposes.

The authority sits in the regulations under section 962 and in the Code provision above them. Both halves matter, because the rate change alone would rarely repay the paperwork.

A US corporation that owns a foreign subsidiary gets credit for the foreign tax the subsidiary paid. That is the indirect credit, and it stops one profit meeting tax twice in two countries.

An individual gets no such thing. She reports her share of the company's profit, at her own marginal rate, with no credit for the corporation tax the company handed to HMRC.

The result stings in a high-tax country. A British company already pays corporation tax at a serious rate on its profits, and the American owner then pays again on the same money.

So the default position punishes the very arrangement most people in this position actually have. A single-owner trading company in London is the common case, not an exotic one.

Three things move at once. The rate becomes the corporate rate, the indirect credit opens up, and the deduction that belongs to corporations becomes available on the relevant inclusion.

Each one carries value on its own. Together they can reduce the US charge on a profitable British company to nothing in a given year.

The arithmetic runs in a fixed order. Take the inclusion, add the gross-up for foreign tax, subtract the deduction, apply the corporate rate, then set the credit against whatever remains.

Notice that the credit pulls hardest here. In a country taxing company profits at a serious rate, it usually does the work on its own.

Two figures changed for tax years starting after 2025. The deduction on net CFC tested income dropped to 40%, and the share of underlying foreign tax that feeds the credit rose to 90%.

Those two moved in opposite directions, so the net effect depends on the company. A business paying tax at a healthy rate abroad gains more from the credit change than it loses from the smaller deduction.

We covered the wider shift in our note on net CFC tested income, which explains what replaced the older rules. The section 962 election sits on top of that regime rather than beside it.

So run the figures on current law rather than on a memory of the old ones. The percentages people still quote from a few years ago no longer apply.

Take a London company owned entirely by an American living in the UK. It earns a profit, pays British corporation tax on it, and keeps the rest to fund next year's hiring.

Without the election, the owner reports her inclusion at personal rates and claims nothing for the British tax. The US bill lands on money she has not seen and cannot easily extract.

With the election, the deduction reduces the inclusion, the corporate rate applies to what survives, and credit for most of the British tax then offsets the result. In our practice the answer is frequently a US charge of zero for that year.

Keep the working papers either way. Those figures feed a later calculation, and reconstructing them two years on is miserable work.

No, and this is the part people miss when the first year looks so good. A section 962 election buys a better rate on the inclusion, not permanent relief on the underlying profit, and the balance falls due when cash finally leaves the company.

The statute brings distributions of earnings covered by an election back into income, despite the rule that normally keeps previously taxed earnings out. Only part of the payment escapes.

The part that escapes equals the US tax the owner actually paid under the election. Everything above that figure meets tax on the way out, in her hands, at the rates applying to her then.

So a zero bill in year one leaves almost the whole distribution taxable later. That is the trade, stated plainly.

Deferral carries real value. Paying later with money the business kept and used beats paying now with money borrowed to cover the bill.

The later charge may also land at a kinder rate. A distribution from a company resident in a treaty country can qualify for the rate applying to qualified dividends, which sits well below the ordinary one.

That treatment turns on facts about the company and the holding period. Check it rather than assume it.

So the honest framing is a deferral with a possible rate improvement attached. Both parts deserve testing against the owner's own circumstances.

Income covered by the election sits in its own walled-off pool for limitation purposes. The regulation treats those amounts separately, and tax on everything else follows its own calculation.

Credits arising inside that pool stay inside it. They cannot reach salary, rental income or anything else on the same return.

Unused amounts can move between years under the ordinary carryover rules, but only into years where an election also applies. A year without one is a dead end for them.

So treat the elected income as a separate return running alongside the real one. That mental model gets the ordering right.

A US shareholder who is an individual, which covers someone holding through a domestic partnership or an S corporation rather than directly. Trusts and estates qualify as well, so the choice is not limited to people holding shares in their own names.

The shareholder must count as a US shareholder of the foreign company under the ordinary ownership tests. That generally means ten per cent or more, measured by vote or by value.

Ownership through layers counts, which catches structures people built for commercial reasons years earlier. Somebody has to map the chain before preparing the election.

So settle the ownership position before anything else. The election achieves nothing for a person who falls outside the definition.

By attaching a statement to the return for the year it covers. No separate form exists and nobody approves it in advance, which makes the election easier to make than to unmake.

The statement carries real detail. The election regulation asks for each foreign company, the inclusion for each, the shareholder's share of earnings with the foreign taxes on them, and distributions received during the year by source.

The ownership chain goes in too, covering every entity standing between the individual and the foreign company. Names, addresses and tax years run throughout.

So prepare the statement alongside the computation rather than after it. The information it wants is the information the calculation already used.

Not easily. Revoking an election already made needs the consent of the Commissioner, and the standard is a material and substantial change in circumstances that nobody could have anticipated when the election went in.

That bar sits high, and a change of heart or a better calculation will not clear it. Writing to ask is a formal process, not a correction.

The annual nature of the choice is the real flexibility. Each year stands alone, so a bad fit this year simply means skipping next year.

So the question to settle is whether this particular year suits a section 962 election. Nobody is signing up for a decade.

A distribution that counts as an exchange of stock sits outside these rules. The distribution regulation leaves liquidation proceeds to the ordinary corporate provisions instead.

That changes the character of what the owner receives. Gain on a liquidation is capital gain, measured against basis, rather than a distribution of earnings.

The elected earnings do not simply vanish from that calculation. They affect basis and the resulting gain, which is where the arithmetic turns fiddly.

So involve somebody before a sale rather than after it. Exit planning is where earlier elections either pay off or bite.

The section 962 election replaces nothing. The owner still files the information return for the foreign company, still computes the inclusion, and still reports the figures the ordinary way.

Our note on Form 5471 covers the reporting side, and avoiding double taxation covers the relief that runs alongside it. The deduction itself runs through Form 8993.

Classification matters too, because a company that elected disregarded treatment produces no inclusion to speak of. The analysis in entity classification comes first in that case.

So fit the election into the filing set rather than treating it as a standalone move. It changes the tax, not the paperwork.

The first is treating a zero bill as the end of the story. The distribution charge sits there, unrecorded, waiting for the year the owner finally takes a dividend.

The second is making a section 962 election without tracking the amounts afterward. The excludable figure equals the tax paid, and nobody can rebuild that years later from a filed return alone.

The third is electing in a year where it achieves nothing. A company paying little foreign tax generates little credit, and the deduction alone rarely justifies the complexity.

A fourth is forgetting that the pool stands apart. Credits trapped inside it cannot rescue a return that falls short elsewhere.

Often yes, because the saving scales with the foreign tax rather than with the size of the business. A modest British company paying ordinary corporation tax generates credit in proportion to what it paid.

The cost is preparation time, and that cost stays roughly fixed. A very small inclusion may not clear it.

There is also the record-keeping burden, which runs for as long as the company holds the earnings. Somebody has to maintain that schedule year after year.

So weigh the yearly saving against both costs together. The second one is the one people forget to price.

We model the year both ways, then model the eventual distribution both ways. Four numbers, not two, because the comparison means little without the exit.

Then we look at when the owner realistically needs the cash. Somebody planning to extract profits next year sits in a very different position from somebody reinvesting for a decade.

Our US federal returns work covers the computation, the statement and the schedule that follows it. Where the position is unclear, talk to us before the return goes out.

So the answer turns on the person and the year. No general rule here is worth repeating.