GILTI and the Section 962 Election: How US Shareholders of Foreign Corporations Can Slash Their Tax Bill

Imagine your foreign company nets $300,000 in profit. You haven't taken a dime out of it. The cash is sitting in a corporate bank account in Singapore, Dubai, or Mexico City. And yet, by April 15, the IRS is expecting you to write a check at federal rates of up to 37% on income you never saw.

Welcome to GILTI — Global Intangible Low-Taxed Income — the most counterintuitive provision in the international tax code. If you're a US citizen, green card holder, or US resident who owns 10% or more of a foreign corporation, this regime touches you directly. And if you don't know about Section 962, you may be paying double or triple the tax you actually owe.

This guide explains how GILTI works in 2026 (now officially called NCTI), why the default treatment is so punishing for individual owners, and how a one-page election can drop your effective rate from 37% to roughly 12.6%.

What GILTI Actually Is

GILTI was introduced by the Tax Cuts and Jobs Act of 2017 to discourage US multinationals from parking intangible profits (think patents, software, brand value) in low-tax jurisdictions. The mechanism: each year, a US shareholder of a controlled foreign corporation (CFC) must include their share of the CFC's "tested income" on their personal US return — even if no money was distributed.

A CFC is any foreign corporation in which US shareholders (each owning 10% or more by vote or value) collectively own more than 50%. Most expat-owned consulting LLCs, family-owned international businesses, and individually held offshore holding companies fall squarely in this bucket.

In 2026, GILTI was rebranded Net CFC Tested Income (NCTI) under the One Big Beautiful Bill Act (OBBBA), with several mechanical changes that we'll cover below. But the core problem for individuals stayed the same: phantom income, taxed at the highest individual rate, with limited credits.

The Math of Default GILTI Treatment for Individuals

Here's why individual ownership of a CFC is brutal under default rules.

When a domestic C-corporation is the US shareholder of a CFC, it gets two big breaks:

1. A Section 250 deduction that reduces the GILTI inclusion by 40% in 2026 (down from 50% pre-2026).
2. An indirect foreign tax credit under Section 960 that lets the corporation credit 90% of foreign taxes paid by the CFC.

When an individual is the US shareholder of a CFC, default treatment gives them neither. The full inclusion lands on Form 1040, taxed at marginal rates up to 37%, with no Section 250 deduction and no indirect foreign tax credit. If the CFC paid foreign income tax, that tax effectively disappears from the US calculation.

A simple example. Suppose your Mexican S.A. de C.V. earns $300,000 of tested income. It paid $30,000 of Mexican corporate tax. As an individual at the 37% bracket:

• US tax on $300,000 GILTI inclusion: $111,000
• Indirect FTC for Mexican tax paid by the CFC: $0
• Net US tax: $111,000

Add the Mexican tax already paid, and you're at $141,000 of total tax on $300,000 of profit — an effective rate of 47%. And the cash never left the company.

Enter Section 962

Section 962 is a one-page election that flips the script. By attaching a statement to your Form 1040, you tell the IRS: for purposes of this GILTI inclusion, treat me as if I held my CFC through a fictional US C-corporation.

The election does three things at once:

1. The corporate rate applies. Your GILTI inclusion is taxed at 21% (the Section 11 corporate rate) instead of your marginal individual rate.
2. The Section 250 deduction unlocks. You get the 40% deduction (2026), reducing the taxable amount.
3. Indirect foreign tax credits become available. Foreign taxes paid by the CFC become creditable against your US tax — up to 90% under post-OBBBA rules.

Run those three changes through the math, and the effective US rate on GILTI for a Section 962 electing individual drops to about 12.6% in 2026 (it was 10.5% before the OBBBA tightening). That's the same effective rate a domestic C-corporation pays on GILTI.

A Side-by-Side: $300K of CFC Tested Income (2026)

Item	Default (no election)	Section 962 election
Tested income inclusion	$300,000	$300,000
Section 250 deduction (40%)	$0	$120,000
Taxable amount	$300,000	$180,000
Tax rate applied	up to 37%	21%
Pre-credit US tax	$111,000	$37,800
Indirect FTC for Mexican tax (90% of $30,000)	$0	$27,000
Net US tax	$111,000	$10,800
Effective US rate on tested income	37.0%	3.6%

The same fact pattern, reduced by more than $100,000 of US tax, simply by attaching a statement to the return.

For higher-tax jurisdictions, the FTC alone can wipe the US tax to zero, leaving only the foreign tax to deal with. For low-tax jurisdictions (Singapore, Hong Kong, Ireland, the UAE), the Section 962 election typically still lands somewhere between 9% and 13% effective US rate — far better than 37%.

The 2026 OBBBA Changes You Need to Know

The OBBBA, effective for tax years beginning after December 31, 2025, rewrote several pieces of the GILTI machinery. The most important changes for individuals making a Section 962 election:

• GILTI renamed to NCTI. Net CFC Tested Income is the new statutory term. Form 8992 will reflect the new naming over the 2026 filing season.
• Section 250 deduction reduced from 50% to 40%. Effective rate on tested income for corporate-rate taxpayers goes from 10.5% to roughly 12.6%.
• Indirect FTC haircut reduced from 20% to 10%. In other words, the deemed-paid credit on foreign taxes attributable to net CFC tested income increased from 80% to 90%. This partially offsets the higher rate.
• QBAI deduction eliminated. Pre-2026, individuals could subtract a 10% deemed return on qualified business asset investment (tangible property used in the CFC's trade or business) before computing GILTI. Starting 2026, NCTI is computed directly from tested income with no QBAI carve-out. Asset-heavy CFCs that previously avoided GILTI through QBAI lose that shelter.
• 18.9% high-tax threshold preserved. The corporate rate stayed at 21%, so the GILTI High-Tax Exception (HTE) still kicks in at foreign effective rates above 18.9% — more on that below.

If your CFC operates in a country with a corporate tax rate above 18.9% (Germany, France, Australia, Japan, Mexico, much of Latin America), there's a separate election worth knowing about.

The GILTI High-Tax Exception: An Alternative to Section 962

The HTE lets you exclude a CFC's tested income from GILTI entirely if it was already taxed at 90% or more of the US corporate rate — that's 18.9% in 2026. The election is made at the CFC tested unit level on Form 8993.

When does HTE beat Section 962?

• Use HTE when your CFC operates in a high-tax country, especially if you don't expect to take distributions soon. Excluded income is simply not GILTI; you avoid the tracking complexity that Section 962 introduces (more on PTEP below).
• Use Section 962 when your CFC sits in a low or moderate-tax country, or when you want to claim the indirect FTC on foreign taxes paid.
• Mix and match is allowed. You can apply HTE to some tested units and Section 962 to others, though consistency rules at the CFC level constrain certain combinations.

A common pattern: a US founder with an Irish operating company (12.5% rate) and a German holding company (about 30% combined rate) elects HTE for the German entity and Section 962 for the Irish one. The German income drops out of GILTI entirely; the Irish income is taxed at the lower corporate-rate effective rate.

The Catch Nobody Tells You About: PTEP

The biggest pitfall of Section 962 is what happens when the CFC actually distributes earnings to you. Logically, you'd expect those distributions to be tax-free — you already paid US tax on the income.

Wrong. Section 962 splits the previously taxed earnings into two buckets:

• Excludable Section 962 E&P — equal to the amount of US tax actually paid under the election. When this portion is later distributed, it comes out tax-free. This makes intuitive sense: you paid US tax of $10,800 on the $300,000, so $10,800 of future distributions can come back to you tax-free.
• Taxable Section 962 E&P — the rest of the previously taxed amount. When this portion is distributed, it triggers a second layer of US tax at ordinary income rates — or qualified dividend rates (15% or 20%) if the CFC is in a tax treaty country.

In our $300,000 example, $289,200 of the original earnings becomes "taxable Section 962 E&P." If you take that as a distribution years later from a treaty-country CFC, you'll pay roughly 20% qualified dividend tax — about $57,840.

Total combined tax over time: $10,800 (initial Section 962 tax) + $57,840 (qualified dividend on later distribution) = $68,640. Still much better than the $111,000 default treatment, but the second layer surprises taxpayers who assumed they were done.

The lesson: Section 962 is most valuable when you expect to leave earnings inside the CFC for many years (so the time value of the deferred second-layer tax compounds in your favor), or when the CFC is in a treaty country where the distribution will get qualified dividend rates.

Other Drawbacks to Weigh Carefully

• State tax treatment varies. Most states don't recognize Section 962 elections. You may pay state tax on the full GILTI inclusion at individual rates even though the federal treatment is corporate. California, New Jersey, and a handful of others have particularly hostile rules.
• Foreign currency translation. If the CFC's functional currency isn't the US dollar, Section 986 translation rules add complexity and can produce unexpected gains and losses on distribution.
• Recordkeeping burden. You must track three categories of E&P (excludable Section 962, taxable Section 962, and other PTEP) for every year you've made the election, in every CFC. Errors here surface during audits or distributions.
• Annual election. Section 962 is made yearly, on a return-by-return basis. Switching strategies year-to-year is allowed but creates layered tracking obligations.
• Net Investment Income Tax (NIIT) interaction. GILTI inclusions taxed under Section 962 may still be subject to the 3.8% NIIT, depending on how the IRS interprets recent regulations. Add this to your effective rate calculation.

How to Actually Make the Election

There's no IRS form for the Section 962 election itself. You attach a statement to your timely filed (including extensions) Form 1040 that contains:

• A clear statement that you are electing under IRC Section 962 for the taxable year.
• The name, address, and tax year of each CFC for which the election applies.
• Your pro-rata share of the CFC's Section 951(a) inclusion (Subpart F income and GILTI/NCTI), CFC by CFC.
• Your pro-rata share of E&P and foreign taxes paid for each CFC.
• Any distributions received during the year, broken into excludable Section 962 E&P, taxable Section 962 E&P, and other E&P.

Alongside the statement, you'll need:

• Form 5471 for each CFC (the existing reporting requirement).
• Form 8992 to compute your GILTI/NCTI inclusion.
• Form 8993 if you're claiming the Section 250 deduction.
• Form 1118 to claim the indirect foreign tax credit (using the corporate FTC form, not Form 1116).
• The Section 962 tax itself is reported on Form 1040, Schedule 2, line 12.

This isn't a DIY return. Most preparers who don't routinely handle international owners will miss steps. Look for a CPA or enrolled agent with explicit Section 962 experience, or be ready to vet their work carefully.

When Section 962 Doesn't Make Sense

The election isn't always a winner. Skip it when:

• Your CFC tested income is small. If your inclusion is $20,000, the savings may not justify the preparation cost (often $1,500–$5,000 extra).
• You plan immediate distributions. If you'll pull the cash out this year or next, the second-layer distribution tax erodes most of the savings. Default treatment with regular FTCs may be simpler.
• The CFC is in a high-tax country. Use HTE instead.
• You have large QBAI (pre-2026 only, now eliminated). This is now mostly a historical concern.
• State tax piling on would absorb the federal savings. Run the combined federal+state model first.

Planning Ahead Through 2026 and Beyond

The OBBBA changes nudge the math. The effective rate climbs from 10.5% to 12.6%, but the increased FTC cap (90% vs. 80%) softens the blow for CFCs in moderate-tax countries. Net effect: Section 962 stays the dominant strategy for individuals owning CFCs in low-tax jurisdictions.

A few moves worth considering:

• Audit your CFC structure now. With the QBAI shelter gone, asset-heavy structures that previously avoided GILTI may suddenly produce inclusions. Run 2026 projections before year-end planning.
• Consider a domestic blocker. Holding the CFC through a US C-corporation (rather than directly as an individual) gives you the corporate treatment without an annual election. The trade-off: setting up and maintaining the blocker, and a permanent corporate-level tax on distributions out.
• Document your treaty position. If your CFC is in a treaty country, future distributions can qualify for the 15%/20% qualified dividend rate. Make sure the treaty is in force for the years involved and that you meet holding-period rules.
• Track PTEP from day one. The single biggest preventable error in Section 962 planning is sloppy E&P tracking. Build the spreadsheet (or get your CPA to maintain one) before the first distribution, not after.

Keep Your International Records Audit-Ready

GILTI, NCTI, Section 962, PTEP — international tax for individual CFC owners is a documentation game first and a tax game second. The IRS has been ramping up Form 5471 and Form 8992 enforcement, and missing or inconsistent records turn ordinary positions into expensive audits.

Beancount.io gives you plain-text accounting that makes multi-currency, multi-entity bookkeeping transparent and version-controlled. Track your CFC's foreign-currency operations, your PTEP buckets, and your basis adjustments in human-readable text files that your CPA — and, if it ever comes to it, the IRS — can audit step by step. Get started for free and bring the same rigor to your international tax records that the rules demand.