The passing of the 2025 Tax Act (referred to as the One Big Beautiful Bill Act (OBBBA)) ushers in several changes to local and international tax legislation. A significant revision occurred under Section 951A, where the concept of global intangible low-taxed income (GILTI) was renamed to net controlled foreign corporation (CFC) tested income (NCTI) for tax years beginning after December 31, 2025. This change and the potential impacts of NCTI are extremely complex, as are the steps taken for those who make an election under §962.
This article is intended to offer some considerations for individuals with NCTI and illustrate potential challenges that taxpayers may face as they navigate elections under §962 and inclusions under Section 951A.
Changes to §951A From the 2025 Tax Act
The OBBBA made adjustments to CFC inclusions under §951A and §250. First, it repealed the net deemed tangible income return requirement. For years beginning before December 31, 2025, this requirement stated that net deemed tangible income return be considered in the computation of GILTI, i.e., the 10% return on qualified business asset investment (QBAI). In so doing, the current GILTI regime has been reclassified as NCTI.
Other Noteworthy Changes From the 2025 Tax Act
The legislation also amends the pro-rata share rules of Section 958 to provide that if a foreign corporation is a CFC at any time during a tax year, U.S. shareholders must include in gross income its pro rata share of the corporation’s Subpart F income and NCTI for the tax year. This may catch inclusions that were previously transitioned to another taxpayer.
This is a deviation from the historical rule that requires a U.S. shareholder of a foreign corporation that is a CFC at any time during any tax year and who owns stock in that foreign corporation on the last day of the tax year to include its share of Subpart F income, GILTI, and §956 income, i.e., the “last day rule.”
Background on §962
In general, §962 allows an individual U.S. shareholder that owns at least 10% of a CFC to elect to treat its §951 foreign earnings in its 10% or more owned CFCs as if it were taxed as a corporation. Therefore, the §962 election allowed GILTI income, and now NCTI, to be eligible for a §250 deduction (revised to 40%) and to offset those earnings with 90% of the related foreign tax credits (FTCs). These rules remain in effect and are still applicable to NCTI.
Without making the §962 election, an individual taxpayer is taxed at ordinary rates and is not eligible to take either the §250 deduction or claim FTCs arising at the CFC level against their NCTI income. Therefore, this creates double tax, once at the foreign jurisdiction and again in the United States.
Under the current law for years beginning after December 31, 2025, the taxpayer with an eligible NCTI inclusion making a §962 election is taxed at 14% on those NCTI earnings before claiming FTCs. Assuming the U.S. effective tax rate of those CFC earnings (based on U.S. principles) is above 14%, there is generally no additional U.S. tax due in the current year.
However, under §962, while previously taxed earnings and profits (PTEP) may or may not be created, taxpayers need to consider a second layer of tax. To the extent the §962 earnings and profits do not result in a tax liability at the U.S. individual level, then a distribution of the earnings and profits is taxed to the extent it exceeds that tax actually paid.
This means that when those earnings are later distributed, they are taxable as a dividend to the individual if no tax was due when the election was made. Only qualified dividends are eligible for the current reduced dividend rate of 20%, plus net investment income tax (NIIT) of 3.8%, if applicable. However, if the taxpayer’s CFC is located in a non-treaty country, then ordinary rates apply on the later distribution. Therefore, the taxpayer must carefully analyze their tax position to determine whether a §962 election is beneficial in the long run.
There is also a state tax implication of §962, which many states have provided limited guidance on to date. If the taxpayer moves after making the §962 election, this may impact the taxation of the future distribution of the §962 earnings and profits (as most states review the transaction as of the date of the distribution, regardless of the treatment by another state at time of initial inclusion).
Alternatives to §962
If a taxpayer’s NCTI inclusion has an effective rate of tax of at least 90% of the corporate tax rate (currently 18.9%), calculated based on U.S. tax principles, the NCTI high-tax election (HTE) may be a feasible alternative. Treasury swiftly proposed these regulations in 2019 and finalized them in 2020, after the implications of the new §951A were considered. The regulations allow a 24-month period to amend returns and apply the regulations. HTE allows for an election on the current return (or amended) via a single statement claiming the election. No further specific tracking of the earnings and profits for future distributions is required. This is a welcome compliance relief, as the §962 election is more burdensome during actual reporting in the return and future tracking of earnings and profits.
Top Takeaways for Individuals With NCTI or Subpart F
U.S. individual taxpayers need to precisely track and report their CFC’s income and help ensure that they’ve appropriately picked up their inclusions under §951(a) and §951A. While many have leaned on making §962 elections, there is an additional burden and risk to track future distributions and make sure that those entities are still eligible for the qualified dividend rate at the time of those distributions. It is encouraged to consider whether a §962 election is best for your return, or if the ease of making an HTE (if available) is a more viable option. If neither of these are feasible, potential restructuring can assist.
How Forvis Mazars Can Help
Navigating the complexities of NCTI and §962 requires precision and attention to detail, along with an understanding of the nuances that come with tax legislation. Our specialized international tax team at Forvis Mazars has the experience and knowledge to assist inbound and outbound multinational companies in navigating complex regulations with the pace and forward vision often required with international tax rules.
For more information or any questions, please reach out to a professional at Forvis Mazars.