IRC 960: The Deemed-Paid Foreign Tax Credit
How a U.S. corporation claims credit for foreign taxes paid by its foreign subsidiaries, after the 2017 and 2025 rewrites
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Section 960 lets a domestic C corporation that is a United States shareholder of a controlled foreign corporation claim a foreign tax credit for taxes the subsidiary paid on income the shareholder includes currently — subpart F income and net CFC tested income, formerly GILTI. The credit is "deemed paid"; from 2026, tested-income taxes count at 90 percent.
On this page
What problem does section 960 solve?
A U.S. corporation owning a foreign subsidiary can be taxed twice on the subsidiary's income: the foreign country taxes the subsidiary, and the United States taxes the U.S. parent when the income is included under the anti-deferral rules. The direct foreign tax credit (section 901) covers taxes the U.S. taxpayer paid itself; it does nothing for taxes paid by a separate foreign entity. Section 960 treats the subsidiary's foreign taxes as paid by the U.S. corporate shareholder, in proportion to the income included, so the credit can be claimed on Form 1118 against the U.S. tax on the inclusion.
How does it work now?
| Provision | What it does |
|---|---|
| Section 960(a) — subpart F inclusions | A domestic corporation including subpart F income (passive income, related-party sales and services income, and similar categories) of a CFC is deemed to have paid the foreign taxes properly attributable to that income |
| Section 960(d) — net CFC tested income (formerly GILTI) | The corporation is deemed to have paid 90 percent of the foreign taxes attributable to tested income (80 percent before 2026) — a permanent 10 percent haircut — with the credit computed in a separate basket and no carryback or carryover of excess credits; taxes on later distributions of previously taxed tested income are 10 percent non-creditable as well |
| Section 960(b) — previously taxed income | When a CFC later distributes income that was already included (previously taxed earnings and profits), the foreign income taxes a CFC paid that are properly attributable to that distribution (for instance, taxes an upper-tier CFC paid on a distribution from a lower-tier CFC) are deemed paid at that time; withholding tax imposed on the U.S. corporation itself is a direct credit instead |
| Actual dividends of untaxed earnings | No deemed-paid credit — the 2017 law repealed section 902 and replaced it with the section 245A participation exemption, which exempts most foreign-source dividends from tax entirely, so no credit is needed |
The credit is computed on a current-year basis, income category by income category (the old multi-year pooling was repealed), and it is subject to the general foreign tax credit limitation — the credit cannot exceed the U.S. tax on the foreign-source income in the relevant basket — with tested-income credits in their own basket and unusable in any other. The 2025 legislation reworked the regime for tax years beginning after 2025: GILTI became net CFC tested income; the deemed tangible income return (the exemption for a return on foreign tangible assets) was repealed; the section 250 deduction was set at 40 percent, for an effective U.S. rate of 12.6 percent before credits; the deemed-paid percentage rose to 90 percent; and only the section 250 deduction and directly allocable deductions — no interest or research expense — are allocated to the tested-income basket.
Who can use it?
Only domestic C corporations. An individual who owns a CFC directly — a U.S. citizen with a Canadian operating company, for example — includes subpart F income and net CFC tested income but gets no deemed-paid credit under section 960, because the section applies to corporate shareholders. The individual's route is the section 962 election: for the year, the individual is taxed on the inclusions as if a corporation, at corporate rates, with the section 960 credit and the section 250 deduction available — at the cost of a second tax when the earnings are actually distributed. For the cross-border owners this site serves, the section 962 election is where section 960 matters (the cross-border guides on this site cover the Canadian-company cases).
Where do the traps sit?
Attribution: only taxes "properly attributable" to the included income are creditable — foreign taxes on income that isn't included (high-taxed income excluded under the high-tax exception, for instance) are not creditable and not carried anywhere. The tested-income basket: excess credits die in the year; a shareholder with high-taxed and low-taxed CFCs cannot blend them freely. Timing mismatches: foreign taxes accrued in a different year than the U.S. inclusion require the redetermination rules. And the section 245A dividend exemption means a corporation that waits for a dividend instead of including currently gets an exemption, not a credit — a different regime with different consequences for the shareholder's basis and the CFC's earnings.
Worked example
A U.S. C corporation owns 100 percent of a German subsidiary that earns US$1 million before tax and pays US$300,000 of German tax, leaving US$700,000 of tested income for 2026. Inclusion: US$700,000 of net CFC tested income plus the US$300,000 section 78 gross-up = US$1 million. Section 250 deduction at 40 percent: US$400,000, leaving US$600,000 taxed at 21 percent — US$126,000 of U.S. tax. Deemed-paid foreign taxes under section 960(d): 90 percent of US$300,000 = US$270,000, limited to the US$126,000 of U.S. tax in the basket (ignoring other expense allocation). The credit wipes out the U.S. tax, and the excess US$144,000 expires — it cannot be carried back, carried forward, or used against other income — on top of the US$30,000 the haircut disallows. Had the same subsidiary been owned by an individual, the inclusion would be taxed at individual rates with no deemed-paid credit — unless the individual made a section 962 election, which brings section 960 and the section 250 deduction into play for that year.
Frequently asked questions
What is IRC 960?
The section that lets a domestic corporation claim a foreign tax credit for income taxes paid by its controlled foreign corporation on subpart F income and net CFC tested income (formerly GILTI) included in the corporation's income — the deemed-paid credit.
Who can claim the deemed-paid credit?
Domestic C corporations that are United States shareholders of a CFC. Individuals get it only by making a section 962 election to be taxed as a corporation on their CFC inclusions.
How did the 2017 law change section 960?
It repealed the dividend-based section 902 credit (replaced by the section 245A dividend exemption), tied the deemed-paid credit to current subpart F and GILTI inclusions, limited GILTI taxes to 80 percent creditability in a separate basket with no carryover, and moved to current-year computation without pooling. The 2025 legislation raised the percentage to 90 for tax years beginning after 2025 and renamed GILTI net CFC tested income.
How does section 960 relate to GILTI?
Section 960(d) provides the credit for foreign taxes on GILTI — renamed net CFC tested income from 2026 — at 90 percent of the taxes attributable to tested income (80 percent before 2026), in a separate basket, with any excess lost in the year.
Official sources
The Instructions for Form 1118 state: “Use Schedule C to compute taxes deemed paid by the domestic corporation filing the return with respect to inclusions under section 951(a)(1). Use Schedule D to compute taxes deemed paid by the domestic corporation filing the return with respect to inclusions under section 951A.” — Internal Revenue Service, Instructions for Form 1118, Foreign Tax Credit — Corporations, https://www.irs.gov/instructions/i1118
Next step
Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles international structuring for U.S. corporations with foreign subsidiaries, Form 1118 and net CFC tested income (formerly GILTI) computations, and section 962 election analysis for individual owners of Canadian and other foreign companies. See pricing or book a call.
Cross-border taxes, handled in one place
U.S. and Canadian filings prepared together by our U.S. and Canadian Tax Desks.
Book a free fit call