IRC 960: Deemed-Paid Foreign Tax Credit on Subpart F, NCTI/GILTI, and PTEP Distributions -- Statutory Framework, OBBBA Changes, and Practitioner Planning Guide

Why IRC 960 Is the FTC Gateway for CFC Inclusions

When a US shareholder includes income from a controlled foreign corporation (CFC) -- whether as Subpart F income under IRC 951, as net CFC tested income (NCTI) under IRC 951A, or as a previously taxed earnings and profits (PTEP) distribution -- the CFC itself has often already paid foreign income taxes on that income. Without a mechanism to credit those taxes, the same economic income is taxed first by the foreign jurisdiction and then again by the United States, resulting in double taxation that can exceed 100 percent of the economic return.

IRC 960 is the mechanism Congress created to address this problem for CFC inclusions. Unlike the direct foreign tax credit under IRC 901 (which applies to taxes paid directly by the US taxpayer) or the historical indirect credit that applied to dividends, IRC 960 provides a deemed-paid credit: the US shareholder is treated as having paid a specified portion of the CFC's foreign income taxes, even though the CFC (not the shareholder) actually paid them. The deemed-paid credit is then claimed subject to the foreign tax credit limitation under IRC 904.

IRC 960 has three operative subsections that address three distinct triggering events. IRC 960(a) governs Subpart F inclusions. IRC 960(b) governs PTEP distributions. IRC 960(d) governs NCTI inclusions. Each subsection has distinct rules for the amount deemed paid, the applicable haircut (if any), and the IRC 904 basket into which the credit flows. The One Big Beautiful Budget Act (OBBBA), enacted in 2025 with key provisions effective for taxable years beginning after December 31, 2025, significantly restructured IRC 960(d) by raising the haircut from 80 percent to 90 percent and adding a new IRC 960(d)(4) layer for PTEP distributions arising from NCTI inclusions. Verify all OBBBA changes and their effective dates at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.

IRC 960(a): Deemed-Paid Credit on Subpart F Inclusions

IRC 960(a) provides the deemed-paid foreign tax credit for a domestic corporation that includes Subpart F income in its gross income under IRC 951(a)(1)(A). When a US shareholder has a Subpart F income inclusion, it is treated as having paid the same proportion of the CFC's foreign income taxes for the taxable year as the Subpart F income included bears to the CFC's earnings and profits (the "proportionate share"). This is a full-credit rule with no haircut -- the entire proportionate share of taxes is deemed paid, distinguishing IRC 960(a) from the partial-credit (haircut) regime under IRC 960(d).

The proportionate share computation works as follows. The numerator is the amount of the Subpart F income inclusion (or the applicable tested amount for the specific CFC). The denominator is the CFC's total earnings and profits for the taxable year, determined under US tax principles, not foreign accounting standards. The resulting fraction is applied to the CFC's total foreign income taxes paid or accrued for the year to arrive at the deemed-paid amount. For example, if a CFC has $500,000 of earnings and profits, $200,000 of which is Subpart F income included by the US shareholder, and $80,000 of foreign income taxes, the deemed-paid amount is $80,000 x ($200,000 / $500,000) = $32,000. Verify the current proportionate share formula and any regulatory modifications at IRS.gov.

The deemed-paid amount under IRC 960(a) is grossed up under IRC 78: the US shareholder must include the deemed-paid taxes in gross income as if they were an additional dividend, and then takes a credit for that grossed-up amount. This gross-up prevents the CFC taxes from escaping income inclusion while still allowing the credit. Verify the current IRC 78 gross-up mechanics and their interaction with the IRC 960(a) credit at IRS.gov.

Pro-Rata Ownership Rules

When a US shareholder does not own 100 percent of the CFC, the Subpart F inclusion is limited to the shareholder's pro-rata share of the CFC's Subpart F income for the year, determined under IRC 951(a)(2). The proportionate share of deemed-paid taxes under IRC 960(a) is computed on the same pro-rata basis -- the shareholder is deemed to have paid only that portion of the CFC's foreign taxes corresponding to its pro-rata share of Subpart F income. Verify the current pro-rata share rules and the interaction with tiered CFC structures at IRS.gov. In structures with multiple tiers of CFCs, IRC 960(a) applies at each tier where a Subpart F inclusion arises, but chain-attribution of taxes through tiered structures requires careful tracing; verify applicable regulations at IRS.gov.

Tax Pool Mechanics and the IRC 986 Functional Currency Rules

The deemed-paid credit computation under IRC 960 relies on accurate measurement of the CFC's foreign income taxes and earnings and profits, which in turn depends on the CFC's functional currency and the rules for translating foreign-currency-denominated taxes and earnings into US dollars.

IRC 986 provides the functional currency rules applicable to CFC tax pools. Under IRC 986(a), the amount of foreign income taxes paid or accrued by a CFC is translated into US dollars at the exchange rate for the year in which the taxes are paid or accrued. Earnings and profits are maintained in the CFC's functional currency and translated at the appropriate rate when the deemed-paid computation is performed. If the CFC operates in a high-inflation environment or experiences significant currency movements, the IRC 986 translation rules can produce results that differ substantially from the economic amount of the credit. Verify the current IRC 986 functional currency rules and the applicable exchange rate conventions at IRS.gov.

The CFC's "tax pool" -- the accumulated record of foreign income taxes attributable to its earnings and profits -- is the raw material for the IRC 960 deemed-paid computation. Errors in maintaining the tax pool (for example, misclassifying taxes as income versus non-income taxes, failing to adjust for foreign tax refunds, or using incorrect exchange rates) propagate directly into Form 5471, Schedule E, and from there into the Form 1118 computation. Practitioners should verify the completeness and accuracy of each CFC's tax pool records before computing the IRC 960 deemed-paid credit; verify the current Form 5471 Schedule E instructions and tax pool maintenance requirements at IRS.gov.

IRC 960(b): Deemed-Paid Credit on PTEP Distributions

IRC 960(b) provides the deemed-paid credit for foreign taxes attributable to a PTEP distribution. Previously taxed earnings and profits (PTEP) are CFC earnings that have already been included in the US shareholder's gross income under IRC 951(a) (Subpart F) or IRC 951A (NCTI). When a CFC later distributes those PTEP amounts to the US shareholder, IRC 959(a) excludes the distribution from the shareholder's gross income, preventing a second inclusion on the same income. But the distribution may have borne foreign withholding taxes or other taxes at the time of distribution, and those taxes generate an IRC 960(b) deemed-paid credit.

The IRC 960(b) credit is limited to the foreign taxes actually paid on the specific PTEP layer being distributed. This is a layer-specific rule: PTEP exists in separate pools corresponding to the type of inclusion that created it (Subpart F PTEP, NCTI PTEP, and various sub-categories), and the taxes available under IRC 960(b) correspond only to the taxes attributable to that specific pool. The ordering rules governing which PTEP pool is distributed first, and the resulting tax consequences, are prescribed by regulation under IRC 959; verify the current PTEP ordering regulations and pool definitions at IRS.gov.

There is no percentage haircut applied to the IRC 960(b) credit analogous to the IRC 960(d) haircut: the credit is for the actual taxes paid on the distributed PTEP amount, not a deemed fraction. However, the IRC 960(b) credit is limited by the applicable IRC 904 basket ceiling, and excess credits do not cross over to other baskets. The credit is reported on Form 1118 and is subject to the same IRC 904 limitation and carryback and carryforward rules as other FTCs. Verify current IRC 960(b) mechanics and the applicable Form 1118 line items at IRS.gov.

IRC 959 and IRC 960(b): Exclusion and Credit Working Together

IRC 959 and IRC 960(b) are complementary provisions that together address the tax treatment of PTEP distributions. Understanding their distinct functions is essential for correct reporting.

IRC 959(a) provides the exclusion rule: amounts distributed by a CFC out of PTEP are excluded from the US shareholder's gross income. The exclusion prevents the same earnings from being taxed twice -- once when included as Subpart F income or NCTI, and again when distributed. The exclusion applies automatically, without an election, whenever a distribution is traced (under the applicable ordering rules) to a PTEP pool. Verify the current IRC 959 exclusion rules and the ordering regulations at IRS.gov.

IRC 960(b) then provides the credit rule for the same distribution. Even though the distribution is excluded from gross income under IRC 959, the CFC may have paid foreign taxes on that distribution (most commonly withholding taxes imposed at the source country level on the dividend payment). Those taxes are creditable under IRC 960(b), limited to the taxes actually paid on the PTEP pool distributed. The credit is claimed on Form 1118 in the applicable basket. Verify the current interaction of IRC 959 and IRC 960(b), including any regulatory guidance on PTEP pool tracing for withholding tax purposes, at IRS.gov.

A practical consequence: a US shareholder who receives a PTEP distribution must (1) apply the IRC 959 ordering rules to identify the PTEP pool from which the distribution is made, (2) determine the foreign taxes attributable to that pool (including any withholding taxes on the current distribution), and (3) claim the IRC 960(b) credit on Form 1118 in the appropriate basket. Errors in PTEP pool tracing lead to incorrect exclusion amounts and incorrect FTC claims simultaneously. Verify all applicable PTEP pool tracing and credit mechanics at IRS.gov.

IRC 960(d): Deemed-Paid Credit on NCTI/GILTI Inclusions

IRC 960(d) provides the deemed-paid foreign tax credit for domestic corporations that include net CFC tested income (NCTI) in gross income under IRC 951A. It is the NCTI analog of IRC 960(a), but with a critical difference: whereas IRC 960(a) provides the full proportionate share of CFC taxes with no haircut, IRC 960(d) applies a haircut that disallows a portion of the CFC-level taxes from being credited at the US shareholder level.

The statutory structure of IRC 960(d) before the OBBBA was as follows. A domestic corporation that had an NCTI inclusion was deemed to have paid an amount equal to 80 percent of the foreign income taxes that the CFC paid or accrued on its tested income (the "tested foreign income taxes"). The 80 percent was the creditable fraction; the remaining 20 percent was permanently disallowed and could not be carried forward, carried back, or claimed in any other basket. The credit was subject to the NCTI basket under IRC 904.

The OBBBA modified this structure by raising the disallowed fraction from 20 percent to 90 percent (reducing the creditable fraction from 80 percent to 10 percent), and by adding a new subsection IRC 960(d)(4) to address PTEP distributions arising from prior NCTI inclusions. These changes are described in detail in the following section.

The gross-up rule of IRC 78 applies to the IRC 960(d) deemed-paid amount as well: the 10 percent deemed-paid credit amount (post-OBBBA) must be grossed up into the US shareholder's income. Verify the current IRC 78 gross-up mechanics as applied to the IRC 960(d) credit at IRS.gov.

OBBBA Changes in Detail: 90 Percent Haircut and New IRC 960(d)(4)

The One Big Beautiful Budget Act (OBBBA) made two significant structural changes to IRC 960(d) under OBBBA Section 70231, effective for inclusions in taxable years beginning after December 31, 2025. Verify all details of the OBBBA changes, their effective dates, and any transition rules at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.

Change 1: Haircut Raised from 80 Percent to 90 Percent

The OBBBA amended IRC 960(d) to raise the disallowance percentage from 20 percent (leaving 80 percent creditable) to 90 percent (leaving only 10 percent creditable). For taxable years beginning after December 31, 2025, a domestic corporation with an NCTI inclusion is deemed to have paid only 10 percent of the tested foreign income taxes attributable to its NCTI inclusion. The remaining 90 percent of those taxes is permanently disallowed -- it cannot be credited in any basket, carried back, or carried forward. Verify this change at IRS.gov and consult independent counsel, as this provision is recently enacted and implementation guidance may be pending.

The practical effect is severe for CFC groups in high-tax jurisdictions. If a CFC pays foreign taxes at a 25 percent effective rate on $1,000,000 of tested income ($250,000 of foreign taxes), only $25,000 (10 percent) is available as a deemed-paid FTC against the US shareholder's NCTI tax. Combined with the 12.6 percent effective US rate on NCTI (post-OBBBA IRC 250 deduction at 40 percent), the US tax on this example is $126,000, reduced by $25,000 of FTC to $101,000 net US tax, in addition to $250,000 of foreign tax already paid -- a combined burden of $351,000 on $1,000,000 of income. These figures are illustrative only; verify all applicable rates, percentages, and computations at IRS.gov and consult independent counsel before applying to any actual fact pattern.

Change 2: New IRC 960(d)(4) for NCTI-Sourced PTEP Distributions

The OBBBA added IRC 960(d)(4), a new provision that provides an explicit deemed-paid credit mechanism for PTEP distributions that trace to prior NCTI inclusions (the "NCTI PTEP layer"). Before the OBBBA, the credit mechanics for NCTI-sourced PTEP distributions were addressed primarily through general PTEP pool principles and the interaction of IRC 960(b) with the applicable PTEP pool. The OBBBA added IRC 960(d)(4) to provide a more specific statutory hook for the credit on NCTI PTEP distributions and to coordinate the credit amount with the revised IRC 960(d) haircut framework. Verify the precise statutory text of IRC 960(d)(4) and any implementing regulations or guidance at IRS.gov and consult independent counsel, as this provision is recently enacted and implementation guidance may be pending.

IRS Notice 2025-77

IRS Notice 2025-77 provided initial guidance addressing the OBBBA changes to IRC 960(d), including the transition from the 80 percent to the 10 percent creditable fraction and preliminary guidance on IRC 960(d)(4). Practitioners should consult Notice 2025-77 for current IRS positions and verify whether subsequent guidance, regulations, or corrections have been issued at IRS.gov before relying on any specific interpretation. The guidance landscape on the OBBBA's international tax provisions is actively evolving; verify at IRS.gov and consult independent counsel before finalizing any return position that depends on OBBBA-specific provisions.

IRC 250 Interaction: Modeling the Deduction and FTC Together

The IRC 960(d) deemed-paid credit and the IRC 250 deduction are the two primary US-level mechanisms for reducing the net US tax burden on NCTI inclusions. They operate at different stages of the tax computation and must be modeled together to determine the optimal position for each CFC group.

The IRC 250 deduction operates at the taxable income level: it reduces the NCTI inclusion amount that is subject to the 21 percent corporate rate. Under the post-OBBBA regime, the IRC 250 deduction is 40 percent of the NCTI inclusion (reduced from 50 percent), producing an effective US tax rate on NCTI of 12.6 percent (21 percent x 60 percent of the inclusion); verify this rate at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.

The IRC 960(d) deemed-paid credit then operates at the tax liability level: it reduces the US income tax otherwise owed on the NCTI inclusion, dollar for dollar, up to the IRC 904 NCTI basket limitation. The credit is limited to 10 percent of the tested foreign income taxes (post-OBBBA); verify at IRS.gov and consult independent counsel.

The critical interaction: because the IRC 250 deduction reduces the gross NCTI inclusion before the tax is computed, and the FTC is limited to the taxes computed on that reduced inclusion, the two provisions interact in a way that requires sequential modeling. Practitioners who model only one mechanism without the other will reach incorrect conclusions about the net US tax cost of a CFC group's NCTI. The high-tax exclusion adds a third variable: excluding high-tax income reduces both the NCTI gross inclusion and the available FTC, so the net effect must be computed for each CFC's specific fact pattern. Verify all applicable interaction rules and limitations at IRS.gov and consult independent counsel before finalizing any NCTI tax model.

High-Tax Exclusion: How the 90 Percent Haircut Shifts the HTE Calculus

The high-tax exclusion (HTE) election under Treas. Reg. 1.951A-2(c)(7) allows a CFC to exclude from gross tested income any item of income for which the effective rate of foreign tax exceeds 18.9 percent (90 percent of the 21 percent US corporate rate); verify the current HTE threshold and computation methodology at IRS.gov. Income excluded under the HTE is not tested income, does not enter the NCTI inclusion, and does not generate any IRC 960(d) deemed-paid credit -- because the income is removed from the NCTI basket entirely.

The OBBBA's 90 percent haircut changes the relative economics of the HTE in a material way. Before the OBBBA, the choice between retaining high-tax income in the tested-income basket (to generate an 80 percent deemed-paid FTC) and excluding it under the HTE (sacrificing the FTC entirely) was closer to break-even for many CFC groups: in some fact patterns, the 80 percent FTC on high-tax income was more valuable than full exclusion. After the OBBBA, the FTC available on retained high-tax income is only 10 percent of the foreign taxes paid -- a much smaller offset against the 12.6 percent US rate. In most fact patterns, excluding high-tax income under the HTE will now be more favorable than retaining it in the tested-income basket solely to generate a small FTC.

The HTE effective rate is not the foreign country's statutory rate; it is computed as the effective rate of tax actually imposed on the specific item of income for the CFC's qualified business unit (QBU), taking into account the actual taxes paid net of foreign-level deductions and incentives. A CFC operating in a country with a 30 percent statutory rate may have an HTE effective rate below 18.9 percent for specific items of income if favorable deductions or incentives reduce the actual tax. Practitioners should compute the HTE effective rate on a per-QBU, per-income-item basis; verify the current HTE computation rules and the QBU definition at IRS.gov. The HTE election is annual and is made at the controlling domestic shareholder level, applying consistently to all CFCs in the group; consult independent counsel regarding the group-wide consistency requirement and any pending guidance on the HTE post-OBBBA.

IRC 904 Basket Rules: General, NCTI, and PTEP Baskets

The IRC 960 deemed-paid credit is subject to the foreign tax credit limitation under IRC 904, which segregates foreign taxes and foreign income into separate "baskets" for limitation purposes. No cross-basket crediting is permitted: excess credits in one basket cannot offset US tax on income in another basket. The basket assignment determines both the maximum credit available in each year and the extent to which excess credits can carry back one year and forward ten years. Verify the current basket rules and any post-OBBBA modifications at IRS.gov.

General Limitation Basket (IRC 960(a) Credits)

Deemed-paid credits under IRC 960(a) on Subpart F inclusions flow primarily to the general limitation basket (or to the passive category basket for passive-category Subpart F income, depending on the character of the underlying Subpart F income under the look-through rules of IRC 904(d)). The general basket captures most categories of active business income from CFCs, including foreign base company sales income, foreign base company services income, and other Subpart F inclusions that are not passive. Verify the current basket assignment for each category of Subpart F income at IRS.gov.

NCTI Basket (IRC 960(d) Credits)

Deemed-paid credits under IRC 960(d) on NCTI inclusions flow exclusively to the NCTI basket (formerly called the GILTI basket; verify the current basket name and rules at IRS.gov). The NCTI basket is a separate limitation category from the general basket. Post-OBBBA, because only 10 percent of CFC tested-income taxes is creditable, many CFC groups that previously had excess NCTI basket credits may now have deficit NCTI basket credits (meaning the available FTC does not fully offset the US tax on the NCTI inclusion). Excess NCTI basket credits, if any, carry back one year and forward ten years; verify the current carryback and carryforward rules at IRS.gov.

PTEP Basket Assignment

PTEP distributions and the associated IRC 960(b) credits are assigned to the basket of the PTEP pool from which the distribution is made. A PTEP pool arising from Subpart F income flows into the general basket (or passive basket, depending on the Subpart F character); a PTEP pool arising from NCTI inclusions flows into the NCTI basket. The new IRC 960(d)(4) layer added by the OBBBA for NCTI-sourced PTEP distributions also flows into the NCTI basket. Verify the current PTEP basket assignment rules and any post-OBBBA modifications at IRS.gov and consult independent counsel, as these provisions are recently enacted and implementation guidance may be pending.

Form 1118 Mechanics: Schedules B, E, and G

The IRC 960 deemed-paid credit is computed and claimed on Form 1118 (Foreign Tax Credit -- Corporations). Domestic corporations use Form 1118; individual US shareholders making an IRC 962 election also use Form 1118 (or the applicable individual FTC form; verify current instructions at IRS.gov). The form has multiple schedules that capture different categories of foreign taxes and income by basket.

Schedule B: Foreign Tax Credit Carryover

Schedule B of Form 1118 tracks foreign tax credit carryovers and carrybacks for each basket. Excess credits from prior years (including unused NCTI basket credits and general basket credits) are recorded on Schedule B and applied against the current year's US tax on basket income, subject to the IRC 904(c) ordering rules. Verify the current Schedule B instructions and the applicable carryback and carryforward periods at IRS.gov.

Schedule E: Taxes Paid or Accrued (CFC Level)

Schedule E (and its companion Schedule E-1) captures the foreign income taxes paid or accrued by each CFC for the taxable year, organized by basket. The CFC-level data on Schedule E flows from Form 5471 Schedule E (which records each CFC's foreign tax payments in its functional currency and translated into US dollars under IRC 986). Schedule E of Form 1118 then aggregates the CFC-level data at the US shareholder level and computes the deemed-paid amounts under IRC 960(a) and IRC 960(d) before applying the applicable haircuts. Verify the current Schedule E instructions and the post-OBBBA line items reflecting the 10 percent creditable fraction at IRS.gov.

Schedule G: Other Dispositions of Foreign Taxes

Schedule G of Form 1118 addresses foreign taxes that were previously claimed as a credit but are subsequently disallowed, refunded, or otherwise adjusted. Adjustments to the IRC 960 deemed-paid credit -- for example, because a CFC receives a foreign tax refund for a year in which a deemed-paid credit was previously claimed -- are reported on Schedule G. These adjustments can affect the US shareholder's tax liability in the year the adjustment is made and may require recalculation of prior-year FTC claims. Verify the current Schedule G instructions and the applicable redetermination rules under IRC 905(c) at IRS.gov.

Individual US Shareholders and the IRC 962 Election

Individual US shareholders of CFCs cannot directly claim the IRC 960 deemed-paid credit on Subpart F or NCTI inclusions without making an IRC 962 election. Without that election, the individual is taxed on the full inclusion at individual ordinary income rates (verify the current top individual rate at IRS.gov) and receives no FTC for the CFC-level foreign taxes. This creates a significant disadvantage relative to corporate US shareholders, who access both the IRC 250 deduction and the IRC 960 credit automatically.

The IRC 962 election allows an eligible individual to elect to be taxed on Subpart F income and NCTI inclusions as if the individual were a domestic corporation. The election is made annually on the individual's federal income tax return; verify the current Form 1040 attachment requirements and election procedures at IRS.gov. Under an IRC 962 election:

• The individual's Subpart F and NCTI inclusions are taxed at the 21 percent corporate rate rather than individual rates.
• The individual may claim the IRC 960(a) deemed-paid credit on Subpart F inclusions (no haircut; full proportionate share).
• The individual may claim the IRC 250 deduction on NCTI inclusions (40 percent post-OBBBA, producing a 12.6 percent effective rate; verify at IRS.gov and consult independent counsel).
• The individual may claim the IRC 960(d) deemed-paid credit on NCTI inclusions, limited to 10 percent of tested foreign income taxes post-OBBBA (verify at IRS.gov and consult independent counsel).

The IRC 962 election does not eliminate the eventual second-level tax on subsequent CFC distributions of previously taxed earnings. Under IRC 962(d), when the CFC distributes earnings that were previously included under the IRC 962 election, the shareholder is taxed on the excess of the distribution over the US tax previously paid under IRC 962. This second-level tax converts the IRC 962 benefit into a deferral benefit rather than a permanent reduction. Post-OBBBA, with the 10 percent FTC haircut reducing the credit available on NCTI inclusions, the economics of the IRC 962 election must be re-modeled for each individual shareholder; consult independent counsel and verify the current IRC 962 election procedures at IRS.gov.

Computation Example: IRC 960 Credits Side by Side

Amounts are illustrative only. The following examples use round numbers to illustrate the mechanical differences among IRC 960(a), IRC 960(b), and IRC 960(d) in a post-OBBBA year. These examples do not constitute tax advice and do not reflect the specific circumstances of any taxpayer. All rates, percentages, and statutory provisions must be verified at IRS.gov and with qualified independent counsel before applying to any actual return or planning engagement. OBBBA provisions are recently enacted and implementation guidance may be pending.

IRC 960 Credit Types Comparison Table

The following table compares the three IRC 960 credit types across key structural parameters. All figures marked with an asterisk (*) reflect post-OBBBA rules effective for taxable years beginning after December 31, 2025; verify each parameter at IRS.gov and consult independent counsel regarding OBBBA provisions, as these are recently enacted and implementation guidance may be pending.