OBBBA Revises Existing GILTI Tax Rules For U.S. Shareholders Of CFCs

Forbes

6 days ago

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On July 4, 2025, President Trump signed into law Pub. L. No. 119-21, also known as the 'One Big Beautiful Bill Act' or 'OBBBA'. The OBBBA makes substantial revisions to many parts of the Internal Revenue Code of 1986, as amended (the 'Code'), including notable changes to the existing Global Intangible Low-Tax Income ('GILTI') inclusion rules. These revisions are discussed more below.
The GILTI Regime
Prior to the enactment of the Tax Cuts and Jobs Act of 2017 ('TCJA'), many U.S. shareholders with interests in controlled foreign corporations ('CFCs') enjoyed income tax deferral on the CFC's non-passive or 'active' trade or business income. Instead of paying income tax on the CFC's business income each year, U.S. shareholders paid income tax only when the funds earned from the CFC's business were repatriated to them in the form of a dividend. The TCJA modified the deferral rules, requiring U.S. shareholders to report most active business income of a CFC as a GILTI inclusion (regardless of whether the funds are repatriated to the U.S.).
Section 951A of the Code contains the GILTI inclusion rules. The provision is complex and chock full of statutory definitions and exclusions. At its basics, U.S. shareholders of a CFC include GILTI as income based on the CFC's 'tested income' with certain deductions. In turn, tested income is defined broadly to include most types of active business income earned overseas that are not already subject to U.S. income tax (e.g., tested income excludes subpart F income and income that is effectively connected with a U.S. trade or business).
The current GILTI regime includes two significant reductions to the GILTI inclusion. First, a U.S. shareholder may reduce the GILTI inclusion by a 'net deemed tangible income return' or 'NDTIR.' Very generally, shareholders compute their NDTIR as 10% of the shareholder's allocable share of 'qualified business asset investment,' i.e., the CFC's depreciable trade or business assets.
Second, a U.S. shareholder who is a domestic corporation or an individual who has made a valid election to be treated as a domestic corporation under Code section 962 may receive an additional GILTI deduction under Code section 250. For the 2025 tax year, the Code section 250 deduction is 50% of the GILTI inclusion. Prior to enactment of the OBBBA, this 50% rate was scheduled to be reduced to 37.5% starting in the 2026 tax year.
Example: Domestic Corporation ('DC') owns 100% of Foreign Corporation ('FC'), a CFC. In 2023, FC earned $1 million of trade or business income from non-passive activities outside the U.S. Also in 2023, FC had an average quarterly qualified business asset investment of $500,000.
To compute the GILTI inclusion, DC starts with the $1 million of active trade or business income and reduces that amount by the NDTIR, which is 10% of $500,000, or $50,000. With the 50% section 250 deduction of $475,000 ($950,000 x 50%), DC has a GILTI inclusion of $475,000. With current corporate tax rates of 21%, DC must pay U.S. tax of $99,750 with respect to the GILTI inclusion.
OBBBA's GILTI Revisions
The OBBBA makes several important revisions to the existing GILTI regime. As an initial matter, it eliminates the GILTI inclusion reduction for NDTIR and renames the GILTI inclusion 'Net CFC Tested Income.' Because foreign corporations no longer receive a NDTIR for eligible depreciable assets, U.S. shareholders should be mindful of the potential tax increases in 2026 when the OBBBA provisions become effective.
Although the removal of the NDTIR may increase some U.S. shareholders' Net CFC Tested Income, there are some taxpayer-friendly rules in the OBBBA. As mentioned previously, the Code section 250 deduction—currently 50% of the GILTI inclusion—was scheduled for a reduction of 37.5% in 2026. Under the OBBBA, the Code section 250 deduction is revised to 40% without any further reductions planned in the immediate future.
Example: Same facts as the example above except DC and FC are now subject to the OBBBA. With the removal of the NDTIR, DC may no longer claim a reduction in GILTI of $50,000 for FC's qualified business asset investment. In addition, DC's section 250 deduction is now 40% of the Net CFC Tested Income, or $400,000. Accordingly, DC must pay income tax of $126,000 (i.e., 21% of $600,000).
OBBBA's Foreign Tax Credit Revisions
Foreign tax credits often mitigate the U.S. income tax consequences of foreign business activities. Under GILTI, a U.S. corporate shareholder (or an individual shareholder who made a Code section 962 election) can claim deemed foreign tax credits against U.S. income taxes associated with the GILTI inclusion. However, GILTI limited the allowable foreign tax credits to 80% of the foreign taxes associated with the inclusion (subject to an income gross up).
The OBBBA also permits U.S. corporate shareholders (or individual shareholders with a Code section 962 election) to claim a deemed foreign tax credit with respect to the Net CFC Tested Income amounts. However, the OBBBA permits these shareholders to claim an increased 90% of the foreign taxes allocable to the income.
Summary
The U.S. tax rules associated with CFCs are complex and nuanced (e.g., the IRS Form 5471 filing obligation). Because these rules will change for the 2026 tax year, U.S. shareholders with interests in CFCs should consult with their tax advisors to determine the impact of the changes on their unique tax circumstances.