What is GILTI and which entities are subject to it under current U.S. tax law?

GILTI, or Global Intangible Low-Taxed Income, is a category of income earned by controlled foreign corporations (CFCs) that is subject to current U.S. taxation for their U.S. shareholders. Enacted under IRC Section 951A, it aims to deter profit shifting to low-tax jurisdictions. U.S. shareholders owning 10% or more of a CFC, either directly, indirectly, or constructively, are generally subject to GILTI inclusion, regardless of whether the income is distributed. This applies to C corporations, S corporations, partnerships, and individuals, though the mechanism and effective tax rates can differ significantly.

How is the GILTI inclusion amount calculated for a U.S. shareholder, specifically detailing the components of tested income and tested loss?

The GILTI inclusion is calculated by aggregating the 'tested income' of all CFCs of a U.S. shareholder and subtracting their 'tested loss,' along with a deduction for deemed tangible income return. Tested income is generally a CFC's gross income excluding certain items like Subpart F income, effectively connected income, and passive income, reduced by allocable deductions. Tested loss is the negative counterpart. The net tested income is then reduced by 10% of the CFCs' aggregate qualified business asset investment (QBAI), representing a deemed return on tangible assets, as per IRC Section 951A(b).

What is Qualified Business Asset Investment (QBAI) and how does it impact the GILTI calculation?

Qualified Business Asset Investment (QBAI) refers to the average of the aggregate adjusted bases of specified tangible property used in the trade or business of a CFC and of a type with respect to which depreciation is allowable under IRC Section 167. This tangible property must be used in the production of tested income. QBAI is crucial because 10% of the aggregate QBAI of all CFCs is subtracted from the U.S. shareholder's net tested income, reducing the GILTI inclusion. This deduction is intended to exempt a deemed routine return on tangible assets from GILTI taxation, as outlined in IRC Section 951A(b)(2).

Explain the GILTI high-tax exclusion election and its implications for U.S. shareholders.

The GILTI high-tax exclusion, formalized in Treasury Regulations Section 1.951A-2(c)(7), allows U.S. shareholders to elect to exclude tested income from GILTI if the foreign income tax rate with respect to such income exceeds 90% of the U.S. corporate tax rate (currently 18.9% for a 21% U.S. rate). This election is made annually and applies on a CFC-by-CFC basis. It can significantly reduce or eliminate GILTI inclusions for CFCs operating in high-tax jurisdictions, preventing double taxation and optimizing foreign tax credit utilization. The election is irrevocable for the taxable year it is made.

How do C corporations treat GILTI for U.S. tax purposes, including the Section 250 deduction and foreign tax credit implications?

C corporations generally receive a 50% deduction for GILTI inclusions under IRC Section 250, effectively reducing the U.S. corporate tax rate on GILTI from 21% to 10.5%. They are also allowed to claim a foreign tax credit for 80% of the foreign income taxes paid or accrued by the CFCs with respect to their tested income, subject to the Section 904 limitation. This 80% haircut on foreign tax credits, coupled with the Section 250 deduction, means that GILTI can still be subject to U.S. tax even with substantial foreign taxes paid, as detailed in IRC Section 960(d).

What are the specific challenges and considerations for S corporations and partnerships with GILTI inclusions?

S corporations and partnerships are pass-through entities, meaning GILTI is passed through to their individual shareholders or partners. Unlike C corporations, these individual owners generally do not qualify for the Section 250 deduction, leading to a higher effective U.S. tax rate on GILTI. They also face limitations on utilizing foreign tax credits for GILTI, as the 80% haircut still applies, and the credits are subject to individual foreign tax credit limitations. This often results in a higher U.S. tax burden on GILTI for owners of pass-through entities compared to C corporations, prompting many to consider a Section 962 election.

Explain the Section 962 election and its utility for individual U.S. shareholders of CFCs with GILTI.

The Section 962 election allows individual U.S. shareholders to elect to be taxed on their GILTI inclusions as if they were a domestic C corporation. This means they can claim the Section 250 deduction and the 80% foreign tax credit for GILTI, significantly reducing their current U.S. tax liability. However, future distributions of the previously taxed GILTI (PTI) will be subject to U.S. tax at ordinary income rates, effectively deferring rather than eliminating the higher individual tax. This election is made annually on Form 5471 and can be highly beneficial for high-income individuals.

What is the interaction between GILTI and Subpart F income, and how are potential overlaps addressed?

GILTI and Subpart F income are distinct categories of CFC income, both subject to current U.S. taxation. Subpart F income, defined in IRC Section 952, generally includes passive income (e.g., dividends, interest, rents, royalties) and certain types of active income (e.g., foreign base company sales and services income). Crucially, any income that is already classified as Subpart F income is explicitly excluded from 'tested income' for GILTI purposes under IRC Section 951A(c)(2)(A)(i)(II). This prevents double taxation of the same income under both regimes.

How does the foreign tax credit limitation under Section 904 apply to GILTI, particularly concerning the separate limitation category?

For foreign tax credit purposes, GILTI is generally assigned to a separate foreign tax credit limitation category, distinct from the general category income. This 'GILTI basket' prevents foreign taxes paid on GILTI from offsetting U.S. tax on other types of foreign-source income, and vice-versa, as per IRC Section 904(d)(1)(A). Furthermore, the 80% haircut on foreign taxes deemed paid with respect to GILTI (IRC Section 960(d)) means that even within the GILTI basket, only a portion of the foreign taxes can be credited, often leading to residual U.S. tax liability.

What are common pitfalls or mistakes U.S. shareholders make when calculating or reporting GILTI?

Common pitfalls include failing to correctly identify CFCs, miscalculating tested income or tested loss by incorrectly applying exclusions or deductions, and overlooking the QBAI calculation. Many taxpayers also fail to properly track and utilize foreign tax credits, especially with the 80% haircut and separate GILTI basket. For pass-through entities, neglecting the Section 962 election can lead to significantly higher tax burdens for individual owners. Inaccurate or incomplete Form 5471 filings are also frequent issues, leading to penalties.

What are the IRS audit risks associated with GILTI reporting, and what documentation should taxpayers maintain?

IRS audit risks for GILTI are significant due to its complexity and the potential for large tax adjustments. Key areas of scrutiny include the accurate calculation of tested income/loss, proper determination of QBAI, correct application of the high-tax exclusion, and substantiation of foreign taxes paid. Taxpayers should maintain detailed financial records for all CFCs, including trial balances, income statements, balance sheets, and foreign tax returns. Documentation supporting QBAI calculations, such as fixed asset registers and depreciation schedules, is also critical. Form 5471 and supporting schedules are primary audit targets.

Can GILTI create U.S. tax liability even if the CFC has no current earnings and profits (E&P)?

Yes, GILTI can create U.S. tax liability even if the CFC has no current earnings and profits (E&P) or even an accumulated deficit. Unlike Subpart F income, which is generally limited by E&P, GILTI is calculated based on 'tested income' and 'tested loss,' which are distinct from E&P. While E&P is relevant for determining whether a distribution is a dividend, the GILTI inclusion itself is not directly tied to the CFC's E&P balance. This can lead to situations where a U.S. shareholder has a GILTI inclusion but receives no actual cash distribution.

How does the GILTI regime interact with the U.S. anti-deferral rules for passive foreign investment companies (PFICs)?

The GILTI regime generally takes precedence over the PFIC rules for U.S. shareholders of CFCs that are also PFICs. If a foreign corporation is both a CFC and a PFIC, a U.S. shareholder that is also a U.S. shareholder of the CFC (i.e., owns 10% or more) is generally not subject to the PFIC rules with respect to that corporation. Instead, the CFC rules, including GILTI, apply. This is due to the 'CFC overlap rule' in IRC Section 1297(e), which prevents the application of both anti-deferral regimes simultaneously for the same income.

What is the impact of GILTI on the calculation of a U.S. shareholder's basis in their CFC stock?

A U.S. shareholder's basis in their CFC stock is increased by the amount of GILTI included in their gross income, similar to Subpart F inclusions, under IRC Section 961(a). This basis adjustment prevents double taxation when the previously taxed earnings are later distributed or when the stock is sold. Conversely, distributions of previously taxed GILTI (PTI) will reduce the basis in the CFC stock, as per IRC Section 961(b), but are generally excluded from gross income when received by the U.S. shareholder.

Are there any de minimis rules or thresholds that exempt small CFCs or low-income CFCs from GILTI?

There is no specific de minimis rule that directly exempts small CFCs or low-income CFCs from GILTI inclusion based on their size or income level. However, the GILTI high-tax exclusion (Treasury Regulations Section 1.951A-2(c)(7)) can effectively exclude income from GILTI if the foreign effective tax rate is sufficiently high. Additionally, if a CFC's tested income is entirely offset by tested losses from other CFCs within the same U.S. shareholder's group, or if its QBAI is substantial relative to its tested income, the net GILTI inclusion could be zero.

How does the GILTI regime affect the decision to repatriate earnings from a CFC?

The GILTI regime significantly alters repatriation decisions. Since GILTI is taxed currently, any subsequent distributions of previously taxed GILTI (PTI) are generally excluded from gross income when received by the U.S. shareholder, as per IRC Section 959. This means that once GILTI has been taxed, there is generally no additional U.S. tax cost to repatriate those specific earnings. This incentivizes repatriation of PTI, as it avoids further U.S. taxation, unlike distributions of non-PTI earnings which would typically be taxed as dividends.

What are the reporting requirements for GILTI, specifically mentioning relevant IRS forms?

U.S. shareholders subject to GILTI must report their inclusion on Form 8992, 'U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)'. This form aggregates the tested income, tested loss, and QBAI of all CFCs. The resulting GILTI inclusion is then reported on Form 1120 (for C corporations), Form 1120-S (for S corporations), or Schedule K-1 (for partnerships) and subsequently on Form 1040 (for individuals). Additionally, Form 5471, 'Information Return of U.S. Persons With Respect To Certain Foreign Corporations,' is mandatory for each CFC, providing detailed financial and ownership information.

Can GILTI be offset by net operating losses (NOLs) of the U.S. shareholder?

Yes, GILTI inclusions are considered taxable income and can generally be offset by a U.S. shareholder's net operating losses (NOLs). For C corporations, the Section 250 deduction reduces the GILTI inclusion before NOLs are applied. For individuals, S corporations, and partnerships, the full GILTI inclusion (before any Section 962 election) contributes to taxable income against which NOLs can be utilized. However, the NOL deduction is subject to the 80% taxable income limitation for tax years beginning after December 31, 2020, as per IRC Section 172(a).

What recent legislative or regulatory changes have impacted the GILTI regime, and what potential future changes are anticipated?

The most significant regulatory change impacting GILTI was the finalization of the high-tax exclusion regulations in 2020 (Treasury Regulations Section 1.951A-2(c)(7)), which provided much-needed clarity and flexibility. While no major legislative changes to GILTI have occurred since the Tax Cuts and Jobs Act of 2017, discussions around potential modifications, such as increasing the Section 250 deduction or adjusting the 80% foreign tax credit haircut, periodically arise in legislative proposals. Future changes could also be influenced by international tax reform efforts like Pillar Two, which aims to establish a global minimum tax rate.

How does the GILTI regime affect the valuation of a CFC for acquisition or disposition purposes?

The GILTI regime significantly impacts CFC valuations. For buyers, the potential for future GILTI inclusions and the associated U.S. tax liability must be factored into the purchase price, especially if the target CFC operates in low-tax jurisdictions. The availability of QBAI, foreign tax credits, and the potential for a Section 962 election (for individual buyers) are critical considerations. For sellers, understanding the impact of GILTI on their post-sale tax position, including any previously taxed income that can be distributed tax-free, is essential for maximizing after-tax proceeds. Due diligence must thoroughly analyze the CFC's historical and projected tested income and foreign tax profile.

GILTI (NCTI) — Complete 2026 Guide

Overview: Navigating the Transition from GILTI to NCTI in 2026

The landscape of international taxation for U.S. shareholders of Controlled Foreign Corporations (CFCs) is undergoing a significant transformation in 2026. The familiar Global Intangible Low-Taxed Income (GILTI) regime, introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, is being replaced by a new framework: Net CFC Tested Income (NCTI). This shift, primarily driven by the One Big Beautiful Bill Act (OBBBA), aims to refine the taxation of foreign earnings and address perceived shortcomings of the original GILTI provisions [1].

This comprehensive guide will delve into the intricacies of NCTI for the 2026 tax year, providing U.S. taxpayers with the essential information needed to understand, qualify for, and properly claim this evolving international tax provision. We will cover its definition, eligibility criteria, the claiming process, specific 2026 limits and rates, common pitfalls to avoid, and the relevant IRS code sections. Our goal is to equip you with the knowledge to navigate these changes effectively and optimize your international tax strategy.

What is GILTI (Now NCTI)?

Originally, GILTI was designed to discourage U.S. multinational corporations from shifting profits to low-tax jurisdictions by imposing a minimum tax on certain foreign earnings of CFCs. It aimed to capture income that was considered \"intangible\" in nature, often associated with intellectual property, and subject it to U.S. taxation on an accrual basis, regardless of whether the income was repatriated to the U.S. [2].

However, for tax years beginning after December 31, 2025, the GILTI regime is terminated and replaced by the Net CFC Tested Income (NCTI) regime [1]. While similar in its objective to tax certain foreign earnings, NCTI introduces critical modifications. The most notable change is the elimination of the \"net deemed tangible income return,\" which was a 10% exclusion based on a CFC's Qualified Business Asset Investment (QBAI) – essentially, a return on tangible assets. This elimination means that the NCTI regime no longer indirectly targets returns on intangible assets specifically, but rather a broader base of a CFC's net tested income [1].

In essence, NCTI is the net income of a CFC, calculated by aggregating its tested income and tested loss, after certain adjustments. This amount is then included in the gross income of U.S. shareholders on an accrual basis, subject to a deduction and foreign tax credits.

Who Qualifies for NCTI?

The qualification criteria for NCTI largely mirror those of the former GILTI regime, focusing on U.S. shareholders of Controlled Foreign Corporations (CFCs). To be subject to NCTI, two primary conditions must be met:

U.S. Shareholder Status: An individual or entity is considered a U.S. shareholder if they own 10% or more of the total combined voting power of all classes of stock of a foreign corporation entitled to vote, or 10% or more of the total value of shares of all classes of stock of a foreign corporation [2]. This ownership can be direct, indirect, or constructive.
Controlled Foreign Corporation (CFC) Status: A foreign corporation is classified as a CFC if more than 50% of its total combined voting power or more than 50% of the total value of its stock is owned by U.S. shareholders on any day during the taxable year [2].

If a U.S. shareholder owns an interest in a CFC, they will generally be required to include their pro rata share of the CFC's NCTI in their gross income. This applies to various U.S. persons, including individuals, corporations, partnerships, and trusts. It is particularly relevant for U.S. citizens and residents who operate businesses through foreign corporate structures, such as Canadian corporations, where the foreign entity qualifies as a CFC.

It is important to note that while the rules primarily target corporate structures, individuals who are U.S. shareholders of CFCs can make a Section 962 election to be taxed as if they were a U.S. corporation for GILTI (and now NCTI) purposes. This election can allow individuals to benefit from the corporate deduction and foreign tax credits available for NCTI, potentially reducing their overall U.S. tax liability [1].

How to Claim NCTI (Formerly GILTI)

The process of claiming and reporting NCTI involves specific calculations and forms. U.S. shareholders of CFCs are required to calculate their share of NCTI and report it on their U.S. income tax return. The primary form used for this purpose is Form 8992, \"U.S. Shareholder Calculation of Global Intangible Low-Taxed Income,\" and its accompanying Schedule A [3].

While the form name still references \"Global Intangible Low-Taxed Income,\" this form will be updated to reflect the NCTI rules for the 2026 tax year and beyond. The form and its accompanying Schedule A are used to determine the U.S. shareholder's pro rata share of the CFC's tested income and tested loss, ultimately leading to the NCTI inclusion [3].

The process generally involves:

Determining CFC Status: Confirming that the foreign corporation meets the definition of a CFC.
Calculating Tested Income/Loss: Each CFC's gross income is reduced by deductions properly allocable to such income to arrive at tested income or tested loss.
Aggregating Tested Income/Loss: For U.S. shareholders, the tested income and tested loss of all CFCs are aggregated to arrive at the net CFC tested income.
Applying the Deduction: A deduction is then applied to the net CFC tested income (see \"2026 Limits, Amounts, or Rates\" below).
Reporting on Form 8992: The final NCTI inclusion is reported on Form 8992, which is filed with the U.S. shareholder's income tax return (e.g., Form 1040 for individuals, Form 1120 for corporations).
Foreign Tax Credit: U.S. shareholders may be eligible for a foreign tax credit for a portion of the foreign income taxes paid or accrued by the CFC that are attributable to the NCTI [4].

It is crucial to consult the latest IRS instructions for Form 8992 for the 2026 tax year, as these will provide the most up-to-date guidance on calculation and reporting requirements.

2026 Limits, Amounts, or Rates for NCTI

The transition from GILTI to NCTI brings several significant changes to the applicable rates and deductions for the 2026 tax year:

Deduction Rate: The deduction available to U.S. corporate shareholders (and individuals making a Section 962 election) in calculating their NCTI inclusion is reduced from 50% to 40% [1].
Effective Tax Rate: This reduction in the deduction rate results in an increased effective U.S. tax rate on NCTI. For U.S. corporations, the effective tax rate on NCTI will increase from 10.5% to 12.6% (21% corporate tax rate × 60% of NCTI remaining after the 40% deduction) [1].
Elimination of QBAI: As mentioned, the 10% deemed return on Qualified Business Asset Investment (QBAI) is eliminated. This means that the entire net tested income of a CFC is potentially subject to NCTI, without the previous carve-out for tangible assets [1].
Foreign Tax Credit (FTC): The availability of the foreign tax credit for foreign income taxes attributable to NCTI is increased. U.S. shareholders can now claim a foreign tax credit for 90% of the foreign income taxes deemed paid on NCTI, up from the previous 80% [1] [4].
High-Tax Exclusion Threshold: To avoid an NCTI inclusion on an accrual basis, a CFC will generally need to pay a foreign tax rate of at least 14% (up from the previous 13.125% under GILTI) [1]. This is a critical threshold for tax planning, especially for businesses operating in jurisdictions with lower corporate tax rates, such as those eligible for small business deductions in Canada [1].

Common Mistakes That Cost Taxpayers Money

The complexities of international tax law, particularly with the shift from GILTI to NCTI, present several opportunities for taxpayers to make costly errors. Awareness of these common mistakes can help in effective tax planning:

Misunderstanding the QBAI Elimination: The most significant change is the removal of the QBAI deduction. Taxpayers accustomed to reducing their GILTI inclusion based on tangible assets may overlook this change, leading to an underestimation of their NCTI liability. The absence of QBAI means a broader base of income is now subject to U.S. taxation [1].
Incorrectly Calculating the Effective Tax Rate: The change in the deduction rate from 50% to 40% directly impacts the effective U.S. tax rate on NCTI. Failing to apply the new 12.6% effective rate for corporations can lead to inaccurate tax provisions and potential underpayment penalties [1].
Overlooking the Increased High-Tax Exclusion Threshold: The new 14% foreign tax rate threshold for avoiding an NCTI inclusion is crucial. Businesses in lower-tax jurisdictions that previously met the GILTI high-tax exclusion might no longer qualify under NCTI, triggering an unexpected U.S. tax liability [1].
Errors in Form 8992 Preparation: Even with the rebranding, Form 8992 remains the primary reporting mechanism. Mistakes in aggregating tested income and loss, applying the correct deduction, or calculating the foreign tax credit can result in IRS scrutiny and potential penalties.
Failure to Account for Foreign Tax Credit Limitations: While the foreign tax credit availability has increased to 90%, there are still limitations and complexities in its application. Incorrectly calculating the foreign tax credit can lead to double taxation or missed opportunities to reduce U.S. tax liability [4].
Ignoring the Interaction with Other International Tax Provisions: NCTI does not operate in a vacuum. Its interaction with other international tax provisions, such as Subpart F income, Section 962 elections, and other foreign tax credit rules, can be intricate. A holistic approach to international tax planning is essential to avoid unintended consequences.
Lack of Timely Professional Advice: The transition to NCTI is a significant change. Relying on outdated information or failing to seek timely advice from qualified tax professionals specializing in international taxation can lead to substantial compliance issues and financial repercussions.

IRS Code Section Reference

The primary Internal Revenue Code section governing Global Intangible Low-Taxed Income (GILTI) and its successor, Net CFC Tested Income (NCTI), is Section 951A. This section outlines the rules for determining a U.S. shareholder's pro rata share of a CFC's tested income and tested loss, and the subsequent inclusion in the U.S. shareholder's gross income [2].

Ready to Optimize Your International Tax Strategy?

Navigating the complexities of international tax, especially with the evolving rules around NCTI, requires expert guidance. Understanding these provisions is crucial for U.S. shareholders of CFCs to ensure compliance and optimize their tax positions. Don't let these intricate rules lead to unexpected tax liabilities. Our team of experienced tax strategists and CPAs at Uncle Kam is here to help you understand the nuances of NCTI and develop a robust international tax plan tailored to your specific situation.

Book a consultation with Uncle Kam today to discuss your international tax planning and ensure you're prepared for the 2026 tax year and beyond.

Frequently Asked Questions (FAQs) About NCTI (Formerly GILTI)

Q: What is the main difference between GILTI and NCTI?: A: The primary difference is the elimination of the Qualified Business Asset Investment (QBAI) deduction under NCTI, which was a key component of GILTI. This means that under NCTI, more of a CFC's tested income is potentially subject to U.S. taxation, as the carve-out for tangible asset returns no longer applies. Additionally, the deduction rate for U.S. corporate shareholders has decreased, and the effective tax rate on this income has increased.
Q: When do the NCTI rules become effective?: A: The NCTI rules are effective for tax years beginning after December 31, 2025. This means that for the 2026 tax year and subsequent years, U.S. shareholders of CFCs will apply the NCTI framework instead of the former GILTI rules.
Q: Who is considered a U.S. shareholder for NCTI purposes?: A: A U.S. shareholder is generally a U.S. person (individual, corporation, partnership, or trust) who owns 10% or more of the total combined voting power or the total value of shares of all classes of stock of a foreign corporation. If such a foreign corporation is a Controlled Foreign Corporation (CFC), its U.S. shareholders are subject to NCTI.
Q: What is the effective U.S. tax rate on NCTI for corporations in 2026?: A: For U.S. corporations, the effective U.S. tax rate on NCTI for the 2026 tax year is 12.6%. This is a result of the 21% corporate tax rate applied to 60% of the NCTI, after a 40% deduction is applied to the net CFC tested income.
Q: How does the foreign tax credit work with NCTI?: A: U.S. shareholders can claim a foreign tax credit for 90% of the foreign income taxes paid or accrued by the CFC that are attributable to the NCTI. This is an increase from the 80% foreign tax credit allowed under the previous GILTI regime, offering greater relief from double taxation.
Q: What forms are used to report NCTI?: A: U.S. shareholders will continue to use Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income, along with its Schedule A, to calculate and report their NCTI inclusion. The form and its instructions will be updated by the IRS to reflect the new NCTI rules for the 2026 tax year.
Q: What is the high-tax exclusion threshold under NCTI?: A: To avoid an NCTI inclusion on an accrual basis, a CFC will generally need to pay a foreign income tax rate of at least 14%. This threshold is higher than the previous 13.125% under GILTI, making it more challenging for CFCs in lower-tax jurisdictions to qualify for the high-tax exclusion.

References

[1] Altro LLP. (2026, January 5). New rules replace the GILTI — applicable 2026. https://altrolaw.com/new-rules-replace-the-gilti-applicable-2026/

[2] Thomson Reuters. (n.d.). Global Intangible Low-Taxed Income (GILTI). https://tax.thomsonreuters.com/en/glossary/global-intangible-low-taxed-income

[3] IRS. (2026, January 23). About Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income. https://www.irs.gov/forms-pubs/about-form-8992

[4] Bloomberg Tax. (n.d.). How to Calculate GILTI Tax (Now NCTI) on Foreign Earnings. https://pro.bloombergtax.com/insights/international-tax/how-to-calculate-gilti-tax-on-foreign-earnings/

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