Introduction: Why Section 245A Does Not Reach American Individuals
Section 245A is the rule that lets a US corporation deduct 100 per cent of the foreign-source portion of dividends it receives from a foreign company it owns at least 10 per cent of, and it is the single most misunderstood provision among American founders who own UK companies personally. British advisers hear that America now has a "participation exemption" and assume it works like the UK dividend exemption. It does not. Moreover, American articles on the subject are written for multinational tax departments, so they rarely say plainly that an individual shareholder receives nothing from it.
Consequently, we regularly meet company owners, investors and investment bankers in London who have structured a business sale, a dividend policy or a holding company on the assumption that Section 245A will shelter the profits. Some have been told to interpose a Delaware holding company to "access the exemption". Others simply never filed the US returns that a UK company owner needs, because they believed the profits were exempt.
At TaxYork, we prepare US and UK returns for Americans who own British companies, and the question of whether a US holding company would unlock Section 245A comes up in almost every new engagement with a founder. This guide explains what the rule does, why individuals are excluded, how you are actually taxed instead, and when a US holding company genuinely helps rather than hurts.
What Section 245A Actually Says
The statutory text of Section 245A of the Internal Revenue Code allows a deduction for any dividend received from a "specified 10-percent owned foreign corporation" by a domestic corporation which is a United States shareholder of that foreign corporation. The deduction equals the foreign-source portion of the dividend. Congress enacted it in the Tax Cuts and Jobs Act of 2017, and it applies to distributions made after 31 December 2017.
In other words, Section 245A is the centrepiece of the territorial element of the post-2017 US system. Foreign profits that have already borne foreign tax, and that were not swept up by the anti-deferral rules, can come home to a US parent company without a second layer of federal tax. That is a powerful result. However, every word of the provision points to a corporate recipient.
Who This Guide Is Written For
This guide is for US citizens and green card holders who own 10 per cent or more of a UK limited company directly, whether they live in London, New York or elsewhere. It is equally relevant to dual national US UK founders and to accidental Americans who discovered their citizenship after building a British business. If you hold your shares personally, the analysis below applies to you. Furthermore, if you are considering a restructuring because someone mentioned Section 245A, read the case study before you sign anything.
How the Section 245A Deduction Works for a Corporation
Understanding the corporate rule first makes the individual position much easier to follow. Therefore, this section sets out the mechanics as a US parent company experiences them.
The Specified 10-Percent Owned Foreign Corporation
A specified 10-percent owned foreign corporation is any foreign company in which at least one domestic corporation is a United States shareholder, meaning it owns 10 per cent or more of the vote or value. A UK private limited company owned by a Delaware parent qualifies. However, the definition excludes a passive foreign investment company that is not also a controlled foreign corporation. In practice, most UK trading companies owned by a US parent are controlled foreign corporations, so the exclusion rarely bites for them.
The Foreign-Source Portion
The deduction covers only the foreign-source portion of each dividend. Section 245A computes this as the ratio of the UK company's undistributed foreign earnings to its total undistributed earnings, measured at the close of the year in which the dividend is paid. Earnings effectively connected with a US trade or business, and dividends the UK company itself received from US corporations, fall outside the foreign portion. For a UK company trading only in Britain, the foreign-source portion is usually 100 per cent.
Additionally, earnings already taxed to the US parent as subpart F income or net CFC tested income come out as previously taxed earnings under section 959, not as fresh dividends. Consequently, the deduction mainly shelters earnings that escaped the anti-deferral regimes, such as high-taxed income excluded under the high-tax exception.
The 365-Day Holding Period
The holding period is stricter than many advisers expect. Under section 246(c), the parent must hold the shares for more than 365 days during the 731-day period beginning 365 days before the ex-dividend date. Furthermore, the UK company must be a specified 10-percent owned foreign corporation, and the parent must be a United States shareholder, at all times during that holding period. A newly interposed holding company therefore cannot claim Section 245A on a dividend paid the week after it acquires the shares.
No Foreign Tax Credit and No Hybrid Dividends
Two further limits matter. First, section 245A(d) denies any foreign tax credit, and any deduction, for foreign taxes paid on a dividend that benefits from the deduction. Since a UK company pays dividends without withholding tax, this rarely costs anything. Second, section 245A(e) switches the deduction off for a "hybrid dividend", meaning a payment for which the paying company received a local tax deduction or other benefit.
Moreover, the regulations add an anti-abuse layer. Treasury Regulation 1.245A-5 can restrict the deduction where earnings arose from an "extraordinary disposition" between related parties, or where a controlling shareholder's interest drops sharply during the foreign company's year. Finally, section 961(d) reduces the parent's basis in the foreign shares by the amount of any deduction taken, solely for the purpose of computing a loss on a later sale. A corporate parent cannot take a tax-free dividend and then claim a loss on the same value.
Why American Individuals Get Nothing From Section 245A
The heading of this article is deliberately blunt. If you own your UK company personally, Section 245A gives you nothing, and no election converts you into a corporation for this purpose.
The Words Domestic Corporation
The statute says "domestic corporation", and the drafting is deliberate. The older dividends received deductions in sections 243 and 245 also refer only to corporations, but Section 245A goes further by requiring the recipient to be both a domestic corporation and a United States shareholder of the paying company. An individual, however wealthy, is neither. Accordingly, every dividend a UK company pays you personally is ordinary dividend income on your Form 1040, subject only to the qualified dividend rate where the treaty conditions are met.
The asymmetry runs right through the 2017 reforms. For example, the section 250 deduction against net CFC tested income, and the ability to claim deemed-paid credits for UK corporation tax, are also corporate benefits. Similarly, the 2019 regulations that neutralised section 956 for corporate shareholders were tied to Section 245A, so an individual who borrows from their own UK company still faces a full deemed dividend, as we explain in our guide to the director's loan account and US tax.
Section 962 Is Not a Back Door
Many founders hear that a section 962 election lets an individual be "taxed like a corporation". That is only partly true. The election taxes your subpart F and net CFC tested income inclusions at the corporate rate under section 11, and it treats those inclusions as received by a domestic corporation for foreign tax credit purposes under section 960. It says nothing about actual dividends, and it does not grant Section 245A.
Indeed, section 962(d) works the other way. When the UK company later distributes earnings that were taxed under a 962 election, you include in income the amount by which the distribution exceeds the US tax already paid on those earnings. Consequently, the election defers a second layer of tax rather than removing it. Our detailed guide to the section 962 election for UK company owners shows how the treaty and UK dividend tax then interact.
S Corporations, Partnerships and LLCs
Holding your UK shares through a pass-through entity does not help either. An S corporation is a corporation under state law, but for this purpose it is treated like an individual shareholder, so its owners cannot claim Section 245A. Likewise, a partnership or a single-member LLC that has not elected corporate status is looked through to its owners. Only a C corporation, taxed separately at 21 per cent, qualifies. That fact is the starting point for every holding company discussion below.
How an Individual Owner Is Actually Taxed on UK Company Profits
Because Section 245A is unavailable, three other regimes decide your US tax. Understanding them is also the key to US tax returns for expats who own businesses, because each one carries its own reporting.
Net CFC Tested Income and the High-Tax Exclusion
If US persons own more than 50 per cent of your UK company, it is a controlled foreign corporation. From 2026, the old GILTI regime is renamed net CFC tested income, and an individual shareholder includes their share each year at ordinary rates of up to 37 per cent, without the corporate deduction and without credit for UK corporation tax. That would be ruinous. Fortunately, the high-tax exclusion removes income taxed locally at more than 90 per cent of the US corporate rate, which is 18.9 per cent. A UK company paying corporation tax at 25 per cent comfortably clears that line.
Alternatively, a section 962 election taxes the inclusion at 21 per cent less the 40 per cent section 250 deduction that applies from 2026, with 90 per cent of the UK tax creditable. Either route typically reduces the annual US charge to nil for a full-rate UK company. Therefore, the real question is not whether profits are taxed annually, but what happens when cash comes out. You report the position on Form 5471 and on Form 8992, and each missed Form 5471 carries a $10,000 initial penalty.
Dividends From the UK Company
When the UK company pays you a dividend out of earnings that were excluded under the high-tax exception, that dividend is fully taxable in America. Because the US-UK income tax treaty is a comprehensive treaty, the UK company is a qualified foreign corporation, and the dividend usually qualifies for the 20 per cent top rate. Additionally, the 3.8 per cent net investment income tax applies to US citizens wherever they live.
Britain charges no withholding tax on dividends, so you have no foreign tax to credit if you live in America. Consequently, a US-resident owner pays 25 per cent UK corporation tax and then 23.8 per cent US tax on what remains, a combined rate of about 42.9 per cent. If you live in Britain instead, HMRC taxes the dividend at up to 39.35 per cent under the UK dividend tax rates for 2026/27. The UK tax then usually absorbs the regular US tax through the foreign tax credit, leaving the 3.8 per cent surtax as the residual US cost.
Section 1248 on a Sale
When you sell the shares of a controlled foreign corporation, section 1248 recharacterises the gain as a dividend to the extent of the company's untaxed earnings and profits accumulated while you owned it. For an individual, that dividend portion is normally taxed at qualified dividend rates where the company is a treaty-qualified foreign corporation, so the result is broadly similar to capital gain. For a corporate seller, however, section 1248(j) treats the same amount as a dividend eligible for Section 245A, provided the shares were held for at least one year. This is the single biggest reason corporate sellers fare better, and it explains why US holding companies are so often suggested at exit.
Should You Put a US Holding Company Above Your UK Company?
Once founders understand the asymmetry, the obvious idea is to interpose a Delaware C corporation between themselves and the UK company. The holding company would then be the domestic corporation that Section 245A requires. On paper, this works. In practice, the second layer of tax and two anti-avoidance regimes usually destroy the benefit.
What the Holding Company Gains
A US holding company receives UK dividends tax-free under Section 245A once it has held the shares for more than 365 days. It claims the section 250 deduction and deemed-paid credits against any net CFC tested income. On a sale of the UK company, the section 1248 portion of its gain becomes a deductible dividend, and only the remaining gain is taxed at 21 per cent. If the money stays inside the corporate group and is reinvested in active business, that is genuine deferral.
The Second Layer of Tax
The difficulty is that you do not want cash in a Delaware company. You want it personally. Every dollar the holding company pays you is a US-source dividend taxed at 20 per cent plus 3.8 per cent. Furthermore, any capital gain taxed at 21 per cent inside the holding company is a cost you would never have borne owning the shares directly, because an individual's long-term gain is taxed at 20 per cent anyway. Consequently, the structure typically converts one layer of tax into two.
Moreover, contributing your existing UK shares to a new US company under section 351 is not free of consequences. The holding company inherits your low base cost, and it must satisfy its own holding period requirements before Section 245A applies, so you should never assume that the years you held the shares personally will count.
Personal Holding Company Tax and the Accumulated Earnings Tax
Two older penalty taxes exist precisely to stop individuals parking investment income inside a corporation. A company is a personal holding company where at least 60 per cent of its adjusted ordinary gross income is passive income such as dividends and more than 50 per cent of its shares are owned by five or fewer individuals. A pure holding company owned by one founder meets both tests immediately. Undistributed personal holding company income then attracts a 20 per cent tax.
Critically, section 545(b)(3) disallows the corporate dividends received deductions when computing that income. So the dividend that Section 245A exempts from corporation tax can still be hit by the 20 per cent personal holding company tax unless the company pays it out by the year end. Separately, the accumulated earnings tax charges 20 per cent on earnings retained beyond the reasonable needs of the business. Either way, the holding company is pushed to distribute, which triggers the second layer.
A Delaware Company Run From London Is British Too
If you live in Britain, a further problem arises. HMRC treats a foreign-incorporated company as UK resident if its central management and control is exercised in the UK, as explained in HMRC's International Manual on company residence. A Delaware holding company whose only director makes every decision from a London office is therefore very likely to be UK resident as well as a US domestic corporation.
The treaty does not solve this automatically. Article 4(5) asks the competent authorities to agree how the treaty applies to a dual-resident company and, failing agreement, denies the company most treaty benefits. In practice, a UK-resident holding company still benefits from the UK dividend exemption and from the substantial shareholding exemption on a sale. Nevertheless, it adds a UK corporation tax return to the US Form 1120, and it makes a clean exit far harder to plan. We therefore treat the dual residence point as a core part of tax treaty optimisation for any founder considering this structure.
Illustrative Case Study: A London Founder Weighs a Delaware Holding Company
The following case study is illustrative. The founder is fictional, the figures are rounded, and we convert sterling at $1.30 to the pound for simplicity.
The Facts
Rachel is a US citizen who has lived in London for nine years and owns 100 per cent of a UK software company she founded. The company has retained earnings and profits of $6,000,000, all of it taxed in Britain at 25 per cent and excluded from US net CFC tested income under the high-tax exception. A buyer offers $20,000,000 for her shares, and her base cost is $200,000, giving a gain of $19,800,000.
Rachel's previous adviser suggested that she first transfer her shares into a new Delaware company so that the sale would fall under Section 245A. She asked us to compare the two routes before signing heads of terms.
Owning the Shares Personally
If Rachel sells personally, HMRC charges capital gains tax. Business Asset Disposal Relief at 18 per cent applies to the first £1,000,000 of lifetime gains, as set out on the gov.uk Business Asset Disposal Relief page, and the balance is taxed at 24 per cent. That gives UK tax of about $4,674,000.
In America, section 1248 treats $6,000,000 of the gain as a dividend and the remaining $13,800,000 as long-term capital gain, all taxed at 20 per cent, giving regular US tax of $3,960,000. Because Rachel is UK resident, the UK tax is credited against that liability under the treaty's resourcing rules, so her regular US tax falls to nil. However, the 3.8 per cent net investment income tax on $19,800,000 adds $752,400. Her total tax is therefore about $5,426,000, an effective rate of 27.4 per cent.
Owning Through a US Holding Company
Assume the Delaware company had held the shares for more than a year, which in reality it would not have done. On a sale, section 1248(j) converts $6,000,000 into a dividend eligible for Section 245A, so that slice bears no corporation tax. The remaining $13,800,000 of gain is taxed at 21 per cent, costing $2,898,000. If the company is UK resident and the substantial shareholding exemption applies, Britain charges nothing.
The company now holds about $17,100,000. If it keeps the $6,000,000 dividend slice undistributed at the year end, the personal holding company tax could add $1,200,000. If instead it pays the cash to Rachel, she receives a US-source dividend. America taxes it at 23.8 per cent, Britain taxes it at 39.35 per cent, and after the treaty credits the combined rate is about 43.15 per cent, or roughly $7,380,000. Her total tax is about $10,278,000, an effective rate of 51.4 per cent, nearly double the direct route.
The Verdict
Rachel kept her shares personally. Even ignoring the holding period problem, the personal holding company exposure and the cost of the restructuring itself, Section 245A would have saved corporation tax on $6,000,000 while creating a 21 per cent charge and a second dividend layer on everything else. Had Rachel lived in New York, the comparison would still have favoured direct ownership, at roughly $4,712,000 against $6,968,000. Before the sale we also caught up two years of missed Form 5471 filings, so the buyer's due diligence raised no US compliance questions.
When Section 245A Does Help an American Family
None of this means a US holding company is always wrong. Section 245A genuinely helps in a narrower set of cases, and identifying them is a core part of our cross-border work.
An Operating US Group
If you already run a US C corporation with real operations, and the UK company is a subsidiary of that group, Section 245A is valuable. Dividends from the UK subsidiary fund US expansion without further federal tax, and the profits stay inside an active business that is neither a personal holding company nor exposed to the accumulated earnings tax. This is typical after a Delaware flip, where venture investors require a US parent anyway.
Reinvesting Inside the Corporate Group
Similarly, if you intend to keep the proceeds of a UK business sale inside a corporation and redeploy them in new active ventures for many years, the deferral can outweigh the eventual second layer. However, that is a long-term commitment, and the personal holding company rules make passive investment of the proceeds inside the company expensive. Consequently, we model the full lifecycle, including the eventual distribution or liquidation, before recommending it.
Catching Up Before Restructuring
Finally, no restructuring should happen while past returns are outstanding. Many founders who believed their UK company's profits were "exempt" never filed Form 5471, never made a high-tax exception or section 962 election, and never reported the company bank account on their FBAR. Those missed US tax returns must be dealt with first, often through the IRS Streamlined Filing Compliance Procedures, because a restructuring layered on top of unreported years multiplies the penalties. Signature authority over the company account also brings the account within the FinCEN FBAR rules, so our FBAR and FATCA reporting service usually runs alongside the catch-up.
How TaxYork Can Help
We provide comprehensive US and UK tax preparation and compliance for Americans who own British companies. For founders and investors, that means preparing Form 1040 with Forms 5471, 8992 and 1118 where needed, computing earnings and profits and previously taxed earnings, making the high-tax exception or section 962 election correctly, and preparing the matching UK Self Assessment return.
Where a holding company is proposed, we prepare both sides of the comparison, including Section 245A, section 1248, the personal holding company tax and UK residence, so that you can see the actual numbers before you restructure. Furthermore, if past years are missing, we prepare the catch-up filings first so that any later transaction starts from a clean compliance record. Our IRS Streamlined Filing service handles that work for clients whose omissions were non-wilful.
Conclusion
Section 245A is a corporate rule. It gives a US C corporation a 100 per cent deduction for the foreign-source portion of dividends from a foreign company it owns at least 10 per cent of, subject to a 365-day holding period, the hybrid dividend rule and a ban on foreign tax credits. It gives an individual American shareholder nothing, and neither a section 962 election nor an S corporation changes that.
For most founders who own UK companies personally, the better answer is to manage the high-tax exception or section 962 election each year, time dividends against UK and US rates, and use section 1248 and the treaty credits on exit. A US holding company makes sense mainly where an active US group already exists. Ultimately, before you restructure on the strength of Section 245A, have both routes modelled with real figures.
Contact Us
If you own a UK company and want to know how your profits, dividends or a planned sale will be taxed in America and Britain, book a consultation with our specialist team. You can also email hello@taxyork.com or call 020 3488 8606. We will review your structure, your filing history and your exit plans, and we will show you the numbers for each route.
Disclaimer
This article is for general information only and does not constitute tax, legal or financial advice. Tax rules in the United States and the United Kingdom change frequently, and their application depends on your individual circumstances. The case study is illustrative, its figures are rounded, and the people described are fictional. You should obtain professional advice tailored to your situation before acting on any information in this article. TaxYork accepts no liability for any loss arising from reliance on this content.