IRS guidance clarifies new haircut of foreign taxes attributable to certain distributions of GILTI (or NCTI) PTEP

The IRS and Treasury have released Notice 2025-77 which clarifies the new rules surrounding the haircut of foreign taxes paid (or deemed paid) on distributions of global intangible low-taxed income (GILTI) or net CFC tested income (NCTI) previously taxed earnings and profits (PTEP), specifically addressing timing and tracking of annual GILTI (or NCTI) PTEP accounts as well as taxes properly allocable and apportionable to such PTEP.

Overview

The Tax Cuts and Jobs Act (TCJA) in 2017 introduced the GILTI regime that imposed a quasi-minimum tax on a U.S. shareholder’s pro rata share of the aggregate derived intangible income of its foreign subsidiaries, specifically, controlled foreign corporations (CFCs). Along with a related deduction to reduce this inclusion of income, U.S. corporations are also eligible for an 80% foreign tax credit on foreign taxes deemed paid with respect to GILTI earned by CFCs included in such shareholder’s taxable income. CFC income, to the extent it is previously taxed under the GILTI regime (or, separately, the subpart F regime) is generally not subject to tax again upon distribution to its U.S. shareholder (special rules apply with respect to individual U.S. shareholders that make a section 962 election with respect to the earlier deemed inclusion of income). Under TCJA, any foreign income tax paid or accrued (or deemed paid) properly allocable to a distribution of GILTI PTEP may be creditable (by means of an increased foreign tax credit limitation) and not subject to a haircut. This exercise generally requires tracking annual PTEP accounts and foreign income taxes attributable to each PTEP category (e.g., GILTI, passive, etc.).

OBBBA and Notice 2025-77

The One Big Beautiful Bill Act (OBBBA) reduces the existing 20% foreign tax haircut to 10% in allowing for a 90% foreign tax credit on foreign taxes deemed paid with respect to GILTI (or NCTI post-2025). OBBBA further introduces symmetry on distributions of GILTI (or NCTI) PTEP by imposing a corresponding 10% haircut on taxes paid (or deemed paid) on such distributions.

The IRS and Treasury have released Notice 2025-77, which is the third of four notices on the various OBBBA international tax provisions. The Notice announces forthcoming proposed regulations on this change, as well as promised amendments to the already proposed PTEP regulations. The Notice clarifies that this rule will apply to taxes paid or accrued (or deemed paid) with respect to distributions that are attributable to a GILTI or NCTI inclusion of a U.S. shareholder which was included in a taxable year of the