On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (the Act). The Act has made key changes to the existing global intangible low-taxed income (GILTI) regime as tax practitioners have come to know it.
Background
Originally introduced under the Tax Cuts and Jobs Act of 2017 (TCJA), GILTI for U.S. shareholders has been calculated by taking into account net controlled foreign corporation (CFC) tested income (NCTI) less the net deemed tangible income return (net DTIR). The NCTI is the aggregate of the U.S. shareholder’s pro rata share of tested income and tested losses of all tested units within its CFC group. Net DTIR equals DTIR (10% of the US shareholder’s pro rata share of qualified business asset investment (QBAI)) less specified interest expense, which is the excess of the U.S. shareholder’s pro rata share of tested interest expense over its pro rata share of tested interest income. Net DTIR is effectively a substance-based exclusion that provides a shield from GILTI for some or all income derived by a CFC’s tangible assets. Certain U.S. shareholders (i.e., corporations and individuals making elections under section 962) are allowed a deduction of 50% of GILTI and, if applicable, a foreign tax credit of up to 80% of foreign income taxes deemed paid with respect to GILTI (subject to prescribed limitation). Under TCJA, GILTI is subject to a 10.5% tax rate, effectively 13.125% for most taxpayers availing themselves of a credit for deemed paid foreign taxes attributable to the income.
The Act
Taxpayers should be aware of the following key changes made by the Act that either directly, indirectly or proximately impact upon the application of the GILTI regime. These changes mostly will apply to taxable years beginning after Dec. 31, 2025, unless otherwise noted:
(1) the removal of the substance-based exclusion
(2) the reversion to an earnings before interest, taxes, depreciation and amortization (EBITDA) basis for adjusted taxable income (ATI), as calculated for section 163(j) business interest deduction limitation purposes
(3) the exclusion of NCTI and, separately, subpart F income, and section 78 gross-up amounts from ATI for section 163(j) purposes
(5) an increased allowable NCTI deemed paid foreign tax credit
(6) simplified expense allocation and apportionment for NCTI
(7) the reinstatement of a proscription on downward attribution from a foreign person under section 958(b)(4)
(8) the removal of the section 898 one-month deferral exception
(9) an update to the NCTI pro rata share rules
(10) the permanent extension of the CFC look-thru exception to subpart F income
The Act introduces changes that may be considered favorable or unfavorable to taxpayers. While some taxpayers may experience benefits, others may find potential drawbacks and some perhaps agnostic to the changes made by the Act because of the various pushes and pulls. Therefore, modelling based on taxpayer specific facts and circumstances can help ensure a holistic understanding of the overall impact of the GILTI, or rather NCTI, changes.
A note on accounting for income taxes: Most taxpayers that prepare U.S. generally accepted accounting principles (GAAP) financial statements and associated tax provision calculations account for GILTI as a period cost. However, for those that do not, these law changes, which primarily do not take effect until taxable years beginning after Dec. 31, 2025, need to be considered in the current financial period, including adjusting any deferred tax assets or liabilities accordingly.
1. Removal of the substance-based exclusion for taxable years beginning in 2026 and beyond
For taxable years beginning after Dec. 31, 2025, the substance-based exclusion, or net DTIR, is removed from the GILTI calculation. GILTI becomes NCTI and effectively functions as a quasi-minimum tax on all CFC income that is not subpart F income or otherwise considered high-taxed income.
Planning consideration: Taxpayers with substantial qualified business assets may have historically been shielded from an income inclusion (including by reason of being allowed to offset earnings of low-taxed CFCs with QBAI from other CFCs on an aggregate basis) under the GILTI regime, but may not find the same relief on an NCTI basis. More taxpayers may find themselves subject to U.S. taxation on NCTI for taxable years starting in 2026. It is important for taxpayers to understand the implications of this change (and others herein) and potentially consider any relief that may be provided through high-tax exception and/ or section 962 election planning. In the nearer term, these considerations will need to be incorporated into estimated tax and extension payments, as applicable, for taxable years beginning after Dec. 31, 2025.
Certain taxpayers may not have been required to conform CFC tax years to their own for U.S. tax reporting purposes, due to the absence of actual dividends received or a deemed inclusion under the GILTI (e.g., as may have resulted from substantial QBAI) or subpart F anti-deferral regimes. The removal of net DTIR could result in a newfound deemed inclusion of income for many U.S. shareholders, particularly for those holding CFCs operating in low-taxed jurisdictions, thereby implicating the need to conform the tax years of their majority owned CFCs to such U.S. shareholder’s own tax year pursuant to section 898 conformity rules. Taxpayers should consider this exposure in consultation with their tax advisors as this may expand the scope of applicable engagements.
2. Reversion to an EBITDA basis for ATI, as calculated for section 163(j) for taxable years beginning in 2025 and beyond
The tested income or tested loss calculated on a CFC basis with respect to GILTI or NCTI (and, separately, subpart F income) is generally inclusive of any necessary tax adjustments and consistent with those required for federal income tax purposes with section 163(j) being no exception. For taxable years beginning after Dec. 31, 2024, ATI reverts to an EBITDA basis rather than an earnings before interest and taxes (EBIT) basis, which has been applied for the taxable years beginning after Dec. 31, 2021.
Planning consideration: The reversion to an EBITDA basis may result in taxpayers experiencing greater interest deductibility at the CFC level, resulting in decreased deemed inclusions under anti-deferral regimes, such as GILTI (taxable years beginning after Dec. 31, 2024, but before Jan. 1, 2026) or NCTI (taxable years beginning after Dec. 31, 2025)(and, separately, subpart F). This change will apply earlier than other changes to GILTI (i.e., taxable years beginning in 2025), so taxpayers will want to update their relevant deemed inclusion calculations for the remainder of their 2025 estimated tax and/or extension payments, as well as for the taxable years that follow. Taxpayers may also wish to consider the viability, or continued viability, of any CFC grouping election, which is subject to five year irrevocability absent any newly released guidance necessitated by the Act, with respect to the section 163(j) business interest deduction limitation.
3. Exclusion of NCTI and related section 78 gross-up amounts from U.S. ATI for section 163(j) purposes applying to taxable years beginning in 2026 and beyond
Effective for taxable years beginning after Dec. 31, 2025, NCTI and related section 78 gross-up amounts (and, separately, subpart F income), will be excluded from the U.S. ATI calculation for purposes of the business interest deduction limitation. This exclusion does not affect the calculation of NCTI, specifically, but instead clarifies how NCTI and any related section 78 gross-up plays a role(or rather does not play a role) in the U.S. interest expense limitation calculation on a go-forward basis.
Planning consideration: While the reversion to an EBITDA basis in determining ATI is a taxpayer favorable change, the exclusion of these deemed income inclusions may result in decreased U.S. interest expense deductibility, particularly by U.S. corporations that are highly leveraged with profitable CFCs giving rise to deemed income inclusions. Here too, taxpayers may wish to consider the viability, or continued viability, of any CFC grouping elections. A likely result of this change will be the elimination of the U.S. ATI bump attributable to a ratable share of deemed income inclusions resulting from the tier-up of excess ATI calculated at the CFC group level for those taxpayers making such election. Taxpayers will need to consider this change for their estimated tax and extension payments for taxable years beginning in 2026.
4. Decreased NCTI deduction to 40% for taxable years beginning in 2026 and beyond
For taxable years beginning after Dec. 31, 2025, the NCTI deduction (formerly GILTI deduction) will decrease from 50% to 40%, which is applied against the NCTI inclusion plus any applicable section 78 gross-up amount and subject to a taxable income limitation.
Planning consideration: With this change, the applicable tax rate on NCTI transitions from 10.5% to 12.6%. Taxpayers should consider the impact of this change under their given facts and circumstances in conjunction with other changes to the former GILTI regime for their 2026 estimated tax and extension payments. Individual taxpayers that may benefit from a NCTI deduction may also choose to evaluate the viability of making a section 962 election.
5. Increase in allowable deemed paid foreign tax for taxable years beginning in 2026 and beyond
Effective for taxable years beginning after Dec. 31, 2025, the allowable deemed paid foreign tax attributable to NCTI will increase to 90% from 80% for foreign tax credit purposes.
Effective for distributions of previously taxed earnings and profits (PTEP) attributable to GILTI or NCTI paid after June 28, 2025, foreign tax deemed paid with respect to such distributions will also be subject to a 10% haircut. As under TCJA, the deemed paid foreign tax credit with respect to NCTI or distributions of NCTI PTEP will not be subject to carryforward or carryback.
Planning consideration: Considering this change, the effective rate of tax on NCTI transitions from 13.125% to 14% for most taxpayers availing themselves of a credit for deemed paid foreign taxes attributable to the income. Taxpayers should consider the impact of any increase in allowable foreign tax credit with respect to NCTI inclusions in conjunction with other changes to the NCTI regime for their 2026 estimated tax and extension payments, tax provisions, and tax returns. Taxpayers paying distributions attributable to GILTI PTEP will need to consider the haircut on taxes deemed paid, with respect to distributions paid after Jun. 28, 2025 for their 2025 estimated tax and extension payments and their 2025 tax returns.
6. Simplified expense allocation and apportionment for taxable years beginning in 2026 and beyond
Aside from the allocation of the NCTI deduction, taxpayers will no longer need to allocate and apportion U.S. expense deductions, including those for interest and research and development (R&D), that are not directly allocable to NCTI for taxable years beginning after Dec. 31, 2025. Any amount of interest, R&D or other expenses that would have been allocated to the NCTI category prior to this change, will be allocated and apportioned to sources within the U.S.
Planning consideration: Taxpayers could see increased creditability of foreign taxes that are allocable to NCTI as this change will result in an increased foreign tax credit limitation. The consequence of allocating and apportioning U.S. expense deductions not directly allocable to GILTI subjected many taxpayers to a double taxation on GILTI, and this change more closely aligns NCTI as a minimum tax as originally intended. Taxpayers are encouraged to consider the impact of the simplified apportionment with respect to NCTI inclusions in conjunction with other changes to the NCTI regime for their 2026 estimated tax and extension payments, tax provisions and tax returns.
7. The reinstatement of section 958(b)(4) applying to taxable years beginning in 2026 and beyond
The Act reinstated section 958(b)(4) to prevent constructive ownership of foreign stock to a U.S. person through downward attribution for taxable years beginning after Dec. 31, 2025.
Planning consideration: Under the GILTI (and, separately, subpart F) anti-deferral regime, certain U.S. shareholders (i.e., individuals holding share investments of 10% or more in foreign corporations) may have been subject to expanded reporting and deemed inclusions of income, which was due to the earlier TCJA repeal of a proscription on the downward attribution of shares from a foreign person. These same shareholders might now see relief through the Act’s reinstatement of the previous proscription, warranting a reassessment on whether they are still subject to those deemed inclusion rules and the associated compliance burden (e.g., the filing of Forms 5471).
Under newly enacted section 951B, a continuing application of downward attribution from foreign persons remains for a more limited class of certain foreign controlled U.S. shareholders of certain foreign controlled CFCs. This would result in the continued potential for expanded reporting and associated deemed income inclusions in cases where such a foreign controlled U.S. shareholder is also a direct U.S. shareholder of a foreign controlled CFC under section 958(a).
8. The removal of the section 898 one-month deferral exception for taxable years of foreign corporations beginning after Nov. 30, 2025
The Act removes the one-month deferral exception that allowed CFCs to have taxable years that end one month earlier than their majority U.S. shareholders. This change applies to specified foreign corporations, which utilized the one-month deferral exception and to which section 898 conformity applied, with taxable years beginning after Nov. 30, 2025.
Planning consideration: It is important to understand the removal of the one-month deferral exception and its impact on associated NCTI inclusions, deemed paid foreign tax credits and overall tax liabilities. Taxpayers, who would be required to change the tax year of their applicable CFCs due to the removal of the one-month deferral exception, should take into consideration how the change in tax year will alter the credibility of foreign income tax on a fixed and determinable basis with respect to such specified foreign corporations, including deemed paid foreign taxes attributable to NCTI. The method of allocating impacted foreign taxes will be prescribed by forthcoming regulations or other guidance provided by the secretary (or a delegate thereof). Taxpayers required to transition applicable CFCs to their taxable year will need to align the next taxable year of their applicable CFCs beginning after Nov. 30, 2025, with the required year-end date. Taxpayers for which this change is relevant should anticipate a broadened scope for applicable tax engagements for the transition year.
9. An update to the NCTI pro rata share rules for taxable years beginning in 2026 and beyond
The Act made changes to the CFC deemed inclusion pro rata share rules with respect to NCTI (and, separately, subpart F income). These changes would ensure U.S. shareholders holding stock of a CFC at any point during the foreign corporation’s taxable year, rather than the last day of the taxable year under current law, picks up their pro rata share of NCTI (and separately, subpart F income) based on (i) the period of the taxable year the shareholder held the CFC, (ii) the period the U.S. person was a U.S. shareholder and (iii) the period the foreign corporation was a CFC. Any inclusions resulting from a section 956 inclusion will be based on the U.S. shareholder(s) who hold(s) such stock on the last day of the taxable year.
Planning consideration: Taxpayers who are undertaking any mergers, sales, acquisitions and/or other restructuring should note this change for transactions occurring during foreign corporation taxable years beginning after Dec. 31, 2025. It is important to consider the impact on deal economics amongst a buyer and seller in the determination of purchase price, as well as on relevant quarterly tax estimates, extensions, tax provisions and tax returns. Taxpayers should also consider the application or nonapplication of the section 245A extraordinary reduction rules, which might no longer have an effect because of this change.
10. The permanent extension of CFC look-thru provision for taxable years beginning in 2026 and beyond
The Act permanently extends the applicability of section 954(c)(6) that provides an exception to subpart F income. This exception applies to certain dividends, interest, rents and royalties received from related CFCs, which, absent this rule, could be treated as foreign personal holding company income. The permanent extension ensures that applicable income would be subject to the NCTI rules rather than the subpart F income rules. This change would be applicable to taxable years of foreign corporations beginning after Dec. 31, 2025.
Planning Consideration: If the CFC look-thru rule had expired as planned on Dec. 31, 2025, the applicable income from related CFCs would have been subject to a higher effective rate of tax under the subpart F regime for which there is no corresponding section 250 deduction as otherwise available to corporations and individuals making a section 962 election with respect to NCTI. This permanent extension prevents a lapse in relief and ensures that the applicable income is taxable at the lower NCTI effective tax rate of 12.6%, as adjusted by the Act.
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