Section 962 Election
Published on March 28, 2025
Published by
Reviewed by
Sparsh Ganeriwala, an IRS Enrolled Agent with over 12 years of expat tax experience, specializes in filing US taxes for Americans living in Canada, US/Foreign Trusts, and GILTI Tax.
Table of Contents
[Section 962 Election] How can I mitigate double taxation on my foreign business income as a US expat in the UK?
If you’re a US expat living in the UK and running a business abroad, you might be worried about being taxed twice—once by the UK and again by the US.
The good news is that there are ways to reduce or even avoid double taxation. One option is making a Section 962 election, and another is using the GILTI high-tax exception. These are strategies designed to lower your US tax bill on income from foreign companies.
How does a Section 962 election work?
Here’s how it works: Normally, if you own a controlled foreign corporation (CFC), the US might tax you on that company’s profits—even if you don’t take the money out. But with a Section 962 election, the IRS temporarily treats you as if you were a US company.Â
That means you get access to a lower tax rate (21% instead of your higher individual rate) and you can also use foreign taxes you’ve already paid to lower what you owe in the US.
To make this election, you’ll need to include it when filing your US tax return—specifically with Form 1040 and Form 8993. Many expats work with a qualified tax professional to help with this since the rules can get a bit technical.
Am I eligible to make a Section 962 election as a US expat?
Yes, most US expats who are shareholders in a foreign corporation may qualify. To be eligible, you need to be what the IRS calls a “United States shareholder.” This usually means you own at least 10% of a foreign corporation’s stock, either directly or indirectly.
How does a Section 962 election compare to other tax provisions?
A Section 962 election is a tax tool that can help US expats who own at least part of a foreign business. When you use this option, the IRS treats you as if you were a US corporation for that part of your income.Â
This matters because US corporations pay a lower tax rate than individuals, and they’re allowed to claim credit for some of the foreign taxes that have already been paid.
This approach often makes sense if your business is in a country like the UK, where taxes are relatively high. If you don’t make this election, you might end up paying your regular US income tax rate on profits you already paid UK tax on.
There’s also the GILTI high-tax exception, which is another way to avoid being taxed again in the US. It works by excluding certain types of income from US tax if that income has already been taxed at a high enough rate abroad—usually at least 18.9%.Â
Depending on your situation, one of these two options (Section 962 election or GILTI high-tax exception) may offer better tax savings.
Who can make a Section 962 election, and when?
Any US expat who owns shares in a foreign company can make a Section 962 election. This includes individuals, trusts, and estates. You don’t need to be a large business owner—even small business owners or freelancers operating through a foreign company in the UK can qualify.
To use this option, you must include the election with your US tax return for the year you want it to apply. It’s not automatic and doesn’t carry over to future years. So, if you want the same benefit next year, you’ll need to make the election again when you file that return.
Why use the IRS Streamlined Tax Amnesty Program?
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties.
Connect with over 10,000+ expats today!
Embarking on an international journey shouldn’t mean navigating the complex world of US taxation alone. If you’re living and working abroad, our friendly, supportive Expat Tax Online Help Facebook group is here to assist. We’ve designed a community that serves as a comprehensive guide and resource platform tailored for US expats.
How do foreign tax credits interact with a Section 962 election?
If you’ve already paid taxes in the UK on your business income, you might be able to get credit for those taxes when filing your US tax return. A Section 962 election makes this easier, because it lets you use something called an “indirect foreign tax credit.” In simple terms, it means you can apply some of the UK taxes your company already paid as a credit against what you owe the IRS.
So, instead of being taxed again in full, your US tax bill could be reduced or even brought down to zero, depending on how much tax you paid in the UK. This can be especially helpful if you’re dealing with GILTI income, which normally would be taxed in the US even if it’s already been taxed abroad.
Missing the deadline means you can’t use the election for that year, which could leave you stuck paying higher US taxes on your foreign income.
What forms are involved in the process?
If you decide to make this election, you’ll need to file a few extra forms along with your regular US tax return (Form 1040):
- Form 8993 – This helps calculate deductions related to your GILTI income (short for global intangible low-taxed income).
- Form 1118 – This is used to report any foreign taxes your foreign company already paid, so you can potentially claim those as a credit.
- In some cases, Form 8992 may also be needed to figure out how much GILTI you have to report.
You don’t have to fill these out on your own. Many US expats work with international tax professionals to handle these filings, especially since rules can change and paperwork can get detailed.
What are some real-world examples of a Section 962 election in action?
Let’s say you’re a US expat who owns a business in the UK through a foreign company, and that company makes US$100,000 in profits. The UK takes about US$19,000 in corporate taxes. Without a Section 962 election, the US could tax the full US$100,000 again at your personal rate—sometimes as high as 37%.
Now, if you use a Section 962 election:
- You’re taxed like a US company, which pays only 21%.
- The US lets you deduct half of your business income under the GILTI rule, so only US$50,000 is taxed.
- You can also claim most of the UK taxes as a credit against your US tax.
End result? You might owe little to no additional US taxes. That’s why many expats consider this option if they own a profitable business abroad.
What are the tax benefits and drawbacks of making a Section 962 election?
Benefits for US expats:
- Lower US tax rates – You’re taxed at the corporate rate (21%) instead of your personal rate, which is often higher.
- Use of foreign taxes paid – You can claim a credit for some of the taxes your business already paid in the UK.
- Possible tax savings under GILTI – You get a 50% deduction on certain income, which reduces your US taxable amount.
Drawbacks to consider:
- Taxed again when you bring money home – If you eventually take profits out of the company as dividends, you could be taxed again in the US.
- More paperwork – Forms like 8993 and extra calculations make tax filing more complex.
-
Some states might not follow the same rules – If you’re still connected to a US state, state taxes could still apply differently.
Spread the word. Please share… 👉
