GILTI was the most consequential international tax change in the Tax Cuts and Jobs Act of 2017. Eight years later, OBBBA modified the rules again. For US shareholders of foreign corporations, understanding the framework matters more than tracking the moving parts: the calculation has to be run every year regardless of whether anything was distributed.
Quick Answer
GILTI requires US shareholders of CFCs to include their share of net CFC income above 10% of the CFC's qualified business asset investment (QBAI). Corporate shareholders take the Section 250 deduction and a partial foreign tax credit, producing an effective rate well below the headline 21%. Individual shareholders default to ordinary rates up to 37% but can elect Section 962 to access corporate treatment annually.
1. What GILTI Captures
Subpart F was designed in 1962 to capture passive and related-party income that could be easily moved to low-tax jurisdictions. Active business income earned by a CFC was generally outside its scope, on the theory that genuine business activity warranted deferral until distribution.
By the 2010s, that theory had been pressured by the rise of digital businesses, easily-relocated intellectual property, and intra-group services arrangements that produced active income in low-tax jurisdictions. The Tax Cuts and Jobs Act of 2017 introduced GILTI under IRC Section 951A as a minimum tax on the active CFC income that Subpart F was missing.
In simple terms, GILTI captures the share of CFC income that exceeds a presumed 10% return on tangible business assets. The reasoning: a 10% return on tangible assets is treated as routine. Anything above that line is presumed to be excess return attributable to intangible assets (intellectual property, brand, business processes), which is the income most likely to be artificially shifted to low-tax jurisdictions.
GILTI applies only to CFC shareholders. The threshold question of whether your foreign corporation is a CFC at all is covered in our post on Controlled Foreign Corporations, including the constructive ownership rules that often surprise individual founders.
2. How GILTI Is Calculated
The calculation runs through several steps for each US shareholder.
- Step 1: Calculate the CFC's tested income (gross income minus allowable deductions, with several specific exclusions)
- Step 2: Calculate the CFC's qualified business asset investment (QBAI), the adjusted basis of tangible depreciable property used in the trade or business
- Step 3: Calculate net deemed tangible income return (NDTIR), generally 10% of QBAI minus certain interest expense
- Step 4: GILTI is tested income above NDTIR, aggregated across all CFCs held by the shareholder
In practice, the calculation has more components: tested loss CFCs offset tested income CFCs, specified interest expense reduces NDTIR, and certain types of income (including Subpart F income, ECI, and high-taxed income) are excluded from the tested income base.
3. The OBBBA Changes Effective 2026
The One Big Beautiful Bill Act (Public Law 119-21) modified GILTI provisions effective for tax years beginning on or after January 1, 2026. The framework remains largely intact. The numbers around it changed.
Key OBBBA modifications:
- Section 250 deduction rate: the deduction available to corporate shareholders against their GILTI inclusion was modified, affecting the effective rate calculation.
- Foreign tax credit haircut: the portion of foreign taxes available as a credit against GILTI for corporate shareholders has been adjusted.
- Effective dates: the changes apply to tax years beginning on or after January 1, 2026, with implementation guidance from Treasury still being issued through 2026.
Specific mechanics remain subject to IRS implementation guidance. The framework above reflects current law. Operating decisions for 2026 and later years should account for the most recent guidance available at the time of the return.
4. The Section 250 Deduction
Under pre-OBBBA rules, US corporate shareholders could deduct 50% of their GILTI inclusion under IRC Section 250, producing an effective rate of 10.5% (50% deduction times 21% corporate rate). The deduction was scheduled to step down to 37.5% beginning in 2026, raising the effective rate to 13.125%.
OBBBA modified the post-2025 deduction rate. The exact figures and implementation details are subject to ongoing Treasury guidance. The functional effect remains the same: the deduction reduces the corporate-level effective rate on GILTI relative to the headline corporate rate of 21%.
The Section 250 deduction is available only to corporate shareholders by default. Individual shareholders accessing it require the Section 962 election, which treats them as if they were a domestic corporation for the year of the election.
If you have CFC interests and are working out the GILTI calculation for the first time, an international tax review establishes the baseline before the return is started.
5. Foreign Tax Credits Against GILTI
US corporate shareholders can claim a foreign tax credit (FTC) against GILTI for foreign income taxes paid by the CFC, subject to a haircut. Pre-OBBBA, the haircut was 20%, meaning corporate shareholders could credit 80% of foreign taxes against GILTI.
OBBBA modified the haircut percentage. Implementation details remain subject to guidance. The effect is that GILTI's effective rate increases when the foreign tax rate is below a specific threshold and decreases when foreign taxes are higher.
Separately, the high-tax exception allows GILTI inclusions to be excluded entirely if the CFC's income faces an effective foreign tax rate above the regulatory threshold. Our standalone post on GILTI high tax exemption covers the threshold mechanics, the CFC-by-CFC election, ordering rules with FTC, and when the election produces a better outcome than running GILTI with credits.
6. The Individual Shareholder Problem
Individual US shareholders of CFCs face a structural disadvantage on GILTI.
- Individuals do not get the Section 250 deduction by default
- Individuals do not get a foreign tax credit on GILTI inclusions by default
- GILTI is taxed as ordinary income at rates up to 37%, plus the 3.8% net investment income tax may apply
In a CFC operating in a country with even modest income tax (say, 15%), an individual US shareholder can face combined effective tax (foreign + US) above 50% on GILTI. The same income at the corporate level under the standard rules produced an effective rate closer to 13%.
The Section 962 election allows an individual shareholder to elect to be taxed as if they were a domestic corporation for purposes of their CFC income inclusion. The election restores access to the Section 250 deduction and the foreign tax credit. It must be made annually and applies on a return-by-return basis.
The Section 962 election is one of the most consequential planning tools available to individual CFC owners. Our post on the Section 962 election covers the full math, the distribution-side trap, and when the election helps versus when it does not.
7. Pre-OBBBA vs Post-OBBBA at a Glance
The framework comparison, with specific numbers subject to Treasury guidance:
| Element | Pre-OBBBA | Post-OBBBA (2026+) |
|---|---|---|
| Headline corporate rate | 21% | 21% |
| Section 250 deduction (corporate) | 50% (37.5% scheduled for 2026) | Modified by OBBBA, subject to guidance |
| FTC haircut on GILTI | 20% (so 80% creditable) | Modified by OBBBA, subject to guidance |
| Individual default rate | Up to 37% ordinary | Up to 37% ordinary |
| High-tax exception threshold | 18.9% effective foreign rate | 18.9% effective foreign rate |
| Section 962 election availability | Yes, annual | Yes, annual |
8. Common Mistakes
- Treating CFC income as deferred: GILTI requires current inclusion regardless of distribution. The post-2017 framework eliminates the older deferral approach for the categories of income that GILTI captures.
- Skipping the Section 962 election analysis: for individual shareholders with CFCs in moderate-tax jurisdictions, the election can produce significantly lower US tax. The default treatment is rarely the optimal treatment.
- Missing the high-tax exception in higher-tax CFCs: for CFCs paying foreign tax above the regulatory threshold, the high-tax exception can eliminate the GILTI inclusion entirely. Shareholders who run GILTI mechanically without checking the exception sometimes pay tax that the regulations would have eliminated. Our GILTI high tax exemption post covers when this election applies.
- Calculating QBAI on the wrong basis: QBAI is the adjusted basis of tangible depreciable property used in the trade or business. Using book value, gross asset value, or the CFC's local tax basis instead of the US adjusted basis produces incorrect GILTI.
- Not coordinating Subpart F and GILTI: Subpart F income is excluded from the GILTI tested income calculation. Failing to remove it produces double inclusion of the same income.
This post is for general informational purposes only and does not constitute professional tax, legal, or accounting advice for your specific situation. Reading this post does not create a CPA-client relationship. Tax laws are complex and subject to change. If you would like advice tailored to your situation, consult a qualified tax professional, including through the services offered on this site.