Understanding GILTI, Subpart F & Section 962
Own a foreign company? These three tax rules determine how — and how much — the U.S. taxes your foreign earnings. We break them down in plain English so you can make informed decisions.
First, the Key Concept: CFC
Before diving in, you need to understand one term that ties everything together.
Controlled Foreign Corporation (CFC)
A CFC is simply a foreign corporation where U.S. shareholders (each owning 10% or more) collectively own more than 50% of the company. Think of it this way: if Americans control a foreign company, the IRS wants to tax certain income from that company — even before any money is sent back to the U.S.
Real-world example:
Sarah owns 60% of a software company incorporated in Ireland. Because she (a U.S. person) owns more than 50%, it is a CFC. She must report its income on her U.S. tax return — even if the company never pays her a dividend.
What Is Subpart F Income?
The original anti-deferral rule — in effect since 1962 — designed to prevent U.S. taxpayers from parking passive income offshore.
In Plain English
If you own more than 50% of a foreign corporation (a CFC), certain types of "passive" income earned by that corporation are taxed to you immediately — even if you never received the money. It is like the IRS saying: "We know that foreign company is just holding your investment income offshore, so we are going to tax you on it now."
How Subpart F Works
U.S. Shareholder
You (owns 50%+)
CFC's Passive Income
Dividends, interest, rents...
No actual distribution required — you are taxed as if you received the income
Types of Subpart F Income
Foreign Personal Holding Company Income
Dividends, interest, rents, royalties, and capital gains from the CFC's passive investments.
Foreign Base Company Sales Income
Income from buying or selling goods manufactured outside the CFC's country — acting as a middleman.
Foreign Base Company Services Income
Income from services performed outside the CFC's country for or on behalf of a related party.
Insurance Income
Premiums and investment income earned by a CFC that operates as an insurance company.
What Is GILTI?
Global Intangible Low-Taxed Income — the 2017 Tax Reform's new minimum tax on CFC earnings.
In Plain English
After the 2017 Tax Reform, if you own 10% or more of a CFC, you are taxed on the company's income that exceeds a 10% return on its tangible assets — even if you never received it. Think of it as a minimum tax on foreign earnings. The logic: if a company earns more than its physical assets would normally generate, that "excess" profit is probably coming from intangible assets (brand, IP, know-how) that could easily be moved offshore — so the U.S. taxes it now.
Key difference from Subpart F:
Subpart F only targets passive income. GILTI applies to all active business income — it is much broader. If your CFC runs a real business and earns profits, GILTI probably applies to you.
The GILTI Formula
Result
GILTI
CFC's Earnings
Tested Income
Deemed Return on Assets
10% × QBAI
Adjustment
Interest Exp.
Tested Income
The CFC's gross income minus deductions, excluding Subpart F income, certain high-tax income, and effectively connected income.
QBAI (Qualified Business Asset Investment)
The average adjusted tax basis of the CFC's tangible depreciable property — factories, equipment, buildings. More assets = lower GILTI.
Interest Expense
Specified interest expense that reduces the deemed return, ensuring the 10% return isn't artificially inflated by borrowed assets.
Analogy: Imagine your foreign company owns a factory worth $1 million. The IRS says "a normal return on that factory is $100,000 (10%)." If your company earns $400,000, the IRS considers the extra $300,000 as "GILTI" — excess profits that probably come from things like brand value or proprietary technology, not the factory itself.
Applies to Active Income
Unlike Subpart F, GILTI targets all business income — manufacturing, services, sales — not just passive income. This means most CFC shareholders are affected.
50% Deduction for C-Corps
C-corporations get a 50% deduction under Section 250, effectively halving the GILTI tax rate from 21% to 10.5%. Individuals don't automatically get this — unless they make the Section 962 election.
The Section 962 Election
The most powerful tool for individual CFC shareholders to reduce their tax burden on GILTI and Subpart F income.
In Plain English
Normally, individual shareholders of CFCs pay tax at individual rates (up to 37%). Section 962 lets you elect to be taxed as if you were a corporation — meaning you can claim the 50% GILTI deduction and foreign tax credits that are normally only available to C-corps. It is like getting the best of both worlds: staying an individual while being taxed like a corporation on your CFC income.
Side-by-Side Comparison
Without 962 Election
Individual tax rate: up to 37%
GILTI and Subpart F taxed at your marginal rate
No Section 250 deduction
The 50% GILTI deduction is only for C-corps
Limited foreign tax credits
No deemed-paid FTCs under Section 960
Effective rate on GILTI
Up to 37%
With 962 Election
Corporate tax rate: 21%
Elect to be taxed as if you were a C-corp
50% Section 250 deduction on GILTI
Effectively cuts the taxable GILTI in half
Deemed-paid foreign tax credits
Claim Section 960 credits against CFC-level taxes
Effective rate on GILTI
As low as 10.5%
When Does 962 Make Sense?
High foreign tax rate (above ~13.125%)
Section 962 may eliminate your U.S. tax entirely. The deemed-paid foreign tax credits can fully offset the reduced corporate-rate tax. This is the most compelling scenario for the election.
Low foreign tax rate
Section 962 still reduces your effective rate from up to 37% down to approximately 10.5%. Even without full FTC offset, the rate reduction is significant.
Planning to repatriate cash soon?
Consider the additional tax on actual distributions. When the CFC later pays you a dividend, you may owe the difference between your individual rate and the corporate rate already paid. Factor this "second layer" into your planning.
Important: The "Second Layer" of Tax
Section 962 is not a permanent tax reduction — it is a deferral strategy. When the CFC actually distributes dividends to you, you will owe additional tax equal to the difference between the individual rate and the corporate rate you already paid.
Example: You used 962 and paid 10.5% on $100,000 of GILTI ($10,500). When the CFC distributes that $100,000 to you, you may owe an additional $15,500 (the difference between your 26% individual rate and the 10.5% already paid). However, if the CFC never distributes, or you hold long-term, the deferral benefit can be substantial.
GILTI & Section 962 Estimator
Enter your CFC's financial details to see an estimated comparison of your U.S. tax with and without the Section 962 election.
Net income of the CFC (Schedule I-1)
Average basis of tangible property
Taxes paid to foreign governments
Filing Requirements Checklist
Forms and schedules you may need to file as a CFC shareholder with GILTI or Subpart F income.
Form 5471
Information Return of U.S. Persons With Respect to Certain Foreign Corporations
The main information return for CFC shareholders. Reports the CFC's financial details, ownership, and income.
Schedule I
Summary of Shareholder's Income From CFC (Form 5471)
Reports your share of the CFC's Subpart F income, previously taxed earnings, and other inclusions.
Schedule I-1
Information for GILTI (Form 5471)
Reports tested income, tested loss, QBAI, and interest expense — the building blocks for the GILTI calculation.
Form 8992
U.S. Shareholder Calculation of GILTI
Calculates your total GILTI inclusion by aggregating tested income across all your CFCs.
Form 1116 / 1118
Foreign Tax Credit
Claims foreign tax credits against your U.S. tax on GILTI and Subpart F income. Individuals use 1116; corporations use 1118.
962 Election Statement
If 962 electedSection 962 Election
A statement attached to your individual return electing to be taxed at corporate rates on CFC inclusions.
Form 8993
If 962 electedSection 250 Deduction for FDII and GILTI
Calculates the Section 250 deduction — available to C-corps and individuals who make the 962 election.
Need Help with GILTI, Subpart F, or Section 962?
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