About
Foundational Principles In the Community Diversity, Equity & Inclusion Technical Excellence Alumni TIAG Membership
Careers
Why Cohen & Company Our Culture Total Rewards & Benefits Intern & Entry Level Opportunities Experienced Opportunities
Contact
Akron, OH Baltimore, MD Chicago, IL Cleveland, OH Detroit, MI Milwaukee, WI New York, NY Philadelphia, PA Pittsburgh, PA St. Clair Shores, MI Youngstown, OH
Client Portal
Services Industries Knowledge Center People

About Our Services

We offer tailored solutions — whether private company or owner; public or private fund, adviser or fund service provider; or Fortune 1000 enterprise. Learn how we can help you.

Learn More

Assurance Services

Employee Benefit Plan Audits Internal Controls Investment Company Audits Private Company Audits SOC Readiness & Compliance

Tax Services

Federal Tax Planning & Compliance High Net Worth & Wealth Transfer International Filings & Structuring Investment Company Tax State & Local Tax Tax Credits & Incentives Transaction Tax Planning

Advisory Services

Business Valuations Data & Insights Digital Finance Solutions IT Strategy & Implementation M&A Advisory Outsourced Accounting Solutions Risk Assurance & Advisory Transaction Services Turnaround & Restructuring

Our Industry Expertise

Our industry experience means you can find professionals who speak your language and bring earned insights to the table. Learn how we can help you.

Learn More

Key Industries

Digital Assets Investment Companies Manufacturing Private Companies Private Equity Real Estate & Construction Technology & Life Science
VIEW THE COMPLETE LIST

Knowledge Center

Our team wants to help your team stay up to date. Browse our thought leadership, events and news for insights and a point of view on business-critical topics.

Learn More

Insights

Browse valuable articles and publications our experts have written to help you and your organization answer key questions — and consider new ones.

Read Our Insights

Events

Join us in person and online for events that address timely topics and key business considerations.

Explore Our Events

News

Find out what is happening at Cohen & Company, from industry recognitions and growth updates, to where we are contributing to important media stories.

Read Our News
People
Foundational Principles In the Community Diversity, Equity & Inclusion Technical Excellence Alumni TIAG Membership
Why Cohen & Company Our Culture Total Rewards & Benefits Intern & Entry Level Opportunities Experienced Opportunities
Akron, OH Baltimore, MD Chicago, IL Cleveland, OH Detroit, MI Milwaukee, WI New York, NY Philadelphia, PA Pittsburgh, PA St. Clair Shores, MI Youngstown, OH
Client Portal
Back to Insights

Section 962 to the Rescue: How U.S. Shareholders Can Get a Foreign Tax Credit to Help with GILTI

by Ray Polantz

December 04, 2020 Federal Tax Planning & Compliance, International Filings & Structuring

Pass-through forms of business such as S Corporations and partnerships offer certain domestic tax benefits — namely, the avoidance of double taxation and the ability to claim the 20% deduction under IRC Code Section 199A. However, the global intangible low-taxed income (GILTI) provisions of the Tax Cuts and Jobs Act (TCJA) can provide significant and unique challenges to pass-through and individual owners of foreign corporations.

The GILTI provisions provide that individuals with investments in profitable foreign corporations, including pass-through entities, will encounter immediate double taxation on foreign earnings. The local country will tax the corporation’s earnings, and then the U.S. will tax those same earnings through the GILTI provisions. U.S. C Corporations often don’t face these harsh consequences. The lower corporate tax rate, the special 50% GILTI deduction and the availability of indirect foreign tax credits often mitigate or eliminate a C Corporation’s U.S. tax on GILTI income.

However, Sec. 962 allows an individual U.S. shareholder to make an annual election to be taxed as a C Corporation on certain specific income earned by its foreign subsidiary (including GILTI). By making this election, the shareholder may claim an indirect foreign tax credit for foreign taxes the corporation paid.

What is the Sec. 962 Election?

Sec. 962 was designed to allow individuals investing in foreign corporations to elect the same treatment had they invested through a domestic corporation doing business abroad.

By making a Sec. 962 election, the individual will generally pay tax on their pro rata share of GILTI as if they were a U.S. C Corporation. Therefore, the lower corporate rate of 21% will apply and the individual may claim an indirect credit for foreign taxes the foreign corporation has paid. In March, Treasury issued proposed regulations allowing the individual to claim the 50% deduction against GILTI, which is otherwise only available to corporations.

When a foreign corporation makes a distribution to a U.S. shareholder who has made a Sec. 962 election, the individual will pay tax on this deemed dividend out of the hypothetical C Corporation, but only to the extent the amount of the distribution exceeds the amount of tax previously paid as a result of the Sec. 962 election.

Tax Planning Using Sec. 962

The Sec. 962 election can be a powerful planning tool in mitigating or deferring the inherent double-taxation of being a U.S. shareholder of a foreign company. There are a number of benefits to making a Sec. 962 election for GILTI. It is a flexible annual election that allows individual taxpayers access to the lower corporate tax rate, the 50% GILTI deduction and indirect foreign tax credits — all of which are typically only available to C Corporations.

However, certain things must be considered, including additional administrative requirements, a possible automatic second layer of tax upon repatriation and the inability to garner other C Corporation benefits. Careful consideration should be given before making this election.

Contact Ray Polantz at rpolantz@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.

About the Authors

Ray Polantz, CPA, MT

Partner, Tax
rpolantz@cohencpa.com
216.774.1148

Sign Up for Our Emails & Events

Receive insights from our specialists in a variety of areas and timely information on upcoming events directly to your inbox as they go live in our online Knowledge Center.

Subscribe Today
Subscribe to our newsletter
About Contact Submit RFP Privacy Policy
LinkedIn Twitter Facebook
© 2023 Cohen & Company