United States: Code §962 Election Offers Benefits Under U.S. Tax Reform

Last Updated: May 16 2018
Article by Ruchelman PLLC and Galia Antebi


Under Code §962, an individual U.S. Shareholder may elect to be treated as a domestic C-corporation for the purpose of computing income tax on its share of Subpart F Income. This special election was enacted in 1962, and Treasury Regulations followed in 1965 and 1976. As a result of certain international provisions of the Tax Cuts and Jobs Act of 2017 ("T.C.J.A.") and the lowering of the corporate income tax rate to 21%, it has recently gained more attention. Specifically, the Code §962 election has garnered importance with respect to the transition tax under Code §965 and the new tax on global intangible low-taxed income ("G.I.L.T.I.") under Code §951A.

The controlled foreign corporation ("C.F.C.") rules impose an anti-deferral regime that requires a U.S. Shareholder to recognize certain income, known as Subpart F Income, in a current tax year. This income inclusion is applicable regardless of whether the C.F.C. made an actual distribution to the U.S. Shareholder during the tax year. Subpart F Income generally includes passive-type investment income. However, other types of income may also be caught. A U.S. Shareholder is a U.S. person who directly, indirectly, or constructively owns 10% or more of a foreign corporation's vote or, beginning January 1, 2018, value. A C.F.C. is a foreign corporation in which more than 50% of the vote or value is owned by one or more U.S. Shareholders.

Code §962 generally allows an individual U.S. Shareholder (including a trust or estate) to elect to be treated as a domestic C-corporation for the purpose of computing the individual's income tax on its share of Subpart F Income. As a result

  • the amount will equal the tax imposed under Code §11 (relating to corporations), rather than under Code §1 (relating to individuals), and
  • the individual may obtain an indirect foreign tax credit for the foreign taxes paid or accrued by the C.F.C. with respect to the Subpart F Income under Code §960.

The election is beneficial when an individual U.S. Shareholder's graduated income tax rate is higher than the corporate income tax rate. It also allows the taxpayer to obtain a deemed-paid deduction, which otherwise would not be available to an individual.


In order to create a level playing field for all earnings accumulated abroad in C.F.C.'s and certain other non-U.S. corporations, the T.C.J.A. imposes a transition tax on post-1986 deferred earnings and profits.

Under Code §965, an individual or corporate U.S. Shareholder must include in taxable income its pro rata share of accumulated post-1986 deferred foreign earnings of a deferred foreign income corporation ("D.F.I.C.") (the "Code §965(a) inclusion"). This amount is included in a U.S. Shareholder's income as Subpart F Income. A D.F.I.C. is a C.F.C. or any foreign corporation with respect to which one or more domestic corporations is a U.S. Shareholder1 with positive earnings and profit that have not been subject to U.S. tax. The calculation of the Code §965(a) inclusion relies upon to the greater of a D.F.I.C.'s post-1986 deferred foreign earnings as of November 2, 2017, or December 31, 2017. Taxpayers may use the earnings as of October 31, 2017, instead of November 2, 2017.

The Code §965(a) inclusion is eligible for a dividends received deduction under Code §965(c) (the "Code §965(c) deduction"). The calculation of the Code §965(c) deduction is based on the highest rate of tax applicable to corporations under Code §11 in the taxable year of the inclusion, even if the U.S. Shareholder is an individual. As a result of the Code §965(c) deduction, transition tax on the Code §965(a) inclusion generally applies at two rates: (i) 15.5% for earnings treated as cash or cash equivalents ("cash position") and (ii) 8% for the balance of the earnings. However, because the calculation is based on the corporate rate, the Code §965(c) deduction would result in a higher tax rate for individuals in the highest tax bracket (for whom the current tax rate at 37%). To mitigate this result, the Code §962 election is expected to be made by many individuals.

It should be noted that the determination of the "cash position" is made based on the balance sheet by reference to cash measurement dates. For calendar year taxpayers, the cash position is the higher of (i) the amount on December 31, 2017, or (ii) the average on December 31, 2016, and December 31, 2015.

In recently issued guidance, the I.R.S. stated that an individual U.S. Shareholder, or an individual investor in a U.S. Shareholder that is a pass-thru entity, can make an election under Code §962 to be subject to the corporate tax rates for the year of the inclusion. 2 In that case, the Code §965(c) deduction will apply to the tax imposed under the corporate income tax rates, rather than the individual income tax rates. As a result, the transition tax rates of 15.5% on the cash position and 8% rate in all other cases will apply.

In the case of a U.S. Shareholder that is a pass-thru entity, the I.R.S. guidance clarifies that the Code §965(a) inclusion and the Code §965(c) deduction are determined at the level of the entity, and the owners of the entity will be subject to tax on their allocable share of the inclusion regardless of whether they are U.S. Shareholders with respect to the foreign corporation. However, the guidance states that regulations will provide that a Code §962 election will be available for individual owners (including trusts and estates) with respect to their share of the income inclusion only if they themselves are U.S. Shareholders with respect to the foreign corporation – meaning only individuals who own directly or indirectly 10% or more of the vote or value in the foreign corporation may make a Code §962 election.

The I.R.S. guidance also provides that the Code §965(c) deduction allowed in determining the taxable income and the tax due as a result of the Code §962 election cannot be used to reduce the individual's tax under Code §1 (i.e., the individual's other taxable income).

Additionally, as with a corporate U.S. Shareholder, an individual U.S. Shareholder that makes an election under Code §962 is eligible for an indirect foreign tax credit attributable to foreign taxes paid or accrued on the C.F.C.'s Code §965(a) inclusion (although the credit is subject to a haircut), 3 which will lower the overall effective tax rate applicable for the Code §965(a) inclusion.


1 Code §965(e)(1).

2 Notice 2018-26, §5.

3 Code §965(g).

To view the full article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Seyfarth Shaw LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Seyfarth Shaw LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions