GILTI: Tax on a CFC's Excess Foreign Profit

Key Takeaways

• GILTI taxes a U.S. shareholder each year on a controlled foreign corporation's excess profits.
• A corporate shareholder's deduction historically cut the effective GILTI rate to roughly 10.5 percent.
• A common error is treating GILTI as deferred income; it is taxed currently like Subpart F.
• A 2025 law renamed it net CFC tested income and changed the deduction and rate.

What GILTI Is

GILTI is defined in Internal Revenue Code section 951A. It requires a U.S. shareholder of a controlled foreign corporation, or CFC, to include in income each year the CFC's tested income above a routine return. A CFC is a foreign corporation more than half owned by U.S. shareholders, each holding at least 10 percent.

The original 2017 design assumed that a normal return on tangible assets was not the target. So it let shareholders exclude 10 percent of the CFC's qualified business asset investment, or QBAI, the basis in depreciable tangible property. Anything above that routine return was treated as the intangible-driven profit the rules aimed at. A 2025 law removed the QBAI step and renamed the inclusion net CFC tested income.

The Intuition

Before GILTI, a U.S. company could park valuable patents in a low-tax country, book profit there, and defer U.S. tax until the cash came home. GILTI ends that deferral for the excess profit. It taxes the income now, mirroring how Subpart F taxes passive foreign income currently.

The word intangible is partly a label. The rule never measured intangibles directly. It taxed everything above a fixed return on tangible assets, on the theory that high returns usually come from intangibles. When the 2025 law dropped the tangible-asset carve-out, the calculation became simpler but broader.

How It Works

A U.S. shareholder aggregates tested income and tested losses across all its CFCs, then applies the formula and the section 250 deduction. The inclusion is computed on Form 8992.

Net tested income   = aggregate tested income - aggregate tested losses
GILTI inclusion     = net tested income (pre-2026: minus 10% QBAI return)
Corporate result    = inclusion - section 250 deduction, taxed at 21%

For tax years through 2025, a corporate shareholder deducted 50 percent of the GILTI inclusion under section 250. At a 21 percent corporate rate, that 50 percent deduction produced an effective rate near 10.5 percent. A partial foreign tax credit, limited to 80 percent of foreign taxes, reduced it further. For tax years beginning after 2025, the deduction is 40 percent, which lifts the effective corporate rate to roughly 12.6 percent, and the QBAI return is gone. Individual shareholders get no automatic deduction unless they make a Section 962 election.

Worked Example

Suppose a U.S. corporation owns a CFC with 5,000,000 dollars of tested income and, under pre-2026 rules, 10,000,000 dollars of QBAI in tangible assets.

Routine return     = 10% of 10,000,000 = 1,000,000
GILTI inclusion    = 5,000,000 - 1,000,000 = 4,000,000
Section 250 (50%)  = 2,000,000 deduction
Taxable amount     = 2,000,000
Tax at 21%         = 420,000  (effective ~10.5% of 4,000,000)

Under the post-2025 rules, the 1,000,000 dollar routine return disappears, the full 5,000,000 dollars is the inclusion, and the deduction is 40 percent, so more income is taxed at a higher effective rate.

Common Mistakes

1. Treating GILTI as deferred. GILTI is taxed in the year earned, like Subpart F. Waiting to bring cash home does not delay the tax.

2. Assuming individuals get the corporate rate. The 50 percent deduction and deemed-paid foreign tax credit historically belonged to corporations. Individuals need a Section 962 election to approximate them.

3. Forgetting the foreign tax credit haircut. Only 80 percent of foreign taxes attributable to the inclusion are creditable, so high foreign tax does not always erase GILTI.

4. Ignoring tested losses. Losses in one CFC offset tested income in another within the same shareholder, which can change the result significantly.

5. Using stale rates. The 2025 law changed the deduction percentage and removed QBAI. Applying old figures to a current year overstates the deduction.

Frequently Asked Questions

What is GILTI in simple terms? GILTI is a U.S. tax on the higher-than-routine profits a U.S.-owned foreign company earns abroad. It charges the U.S. owner tax on that income each year, even if the money stays overseas.

How does GILTI affect investment decisions? GILTI raises the U.S. tax cost of holding profit in low-tax foreign subsidiaries, so multinational owners weigh it when choosing where to locate operations and intangibles. The worked example shows how the deduction and rate determine the real cost.

What is a real-world example of GILTI? A U.S. corporation with a foreign subsidiary earning 5,000,000 dollars of tested income includes the excess over its routine asset return as GILTI, then takes a partial deduction so the income is taxed at a reduced effective rate.

How can investors avoid surprises with GILTI? Model GILTI with current-year deduction and rate figures, net tested income against tested losses, and consider a Section 962 election if an individual holds the CFC. A specialist can confirm the foreign tax credit limit.

How is GILTI different from Subpart F income? Subpart F taxes specific passive and mobile income of a CFC, while GILTI taxes the broad excess of a CFC's active profit above a routine return. Both are current inclusions, but they target different income.

Sources

1. Cornell Legal Information Institute. "26 U.S.C. 951A - Net CFC tested income included in gross income of United States shareholders." https://www.law.cornell.edu/uscode/text/26/951A
2. Cornell Legal Information Institute. "26 U.S.C. 250 - Foreign-derived deduction eligible income and net CFC tested income." https://www.law.cornell.edu/uscode/text/26/250
3. IRS. "Tax Cuts and Jobs Act, summary of changes to international tax provisions." https://www.irs.gov/businesses/international-businesses/tax-cuts-and-jobs-act-of-2017-summary-of-changes-to-international-tax-provisions
4. IRS. "About Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)." https://www.irs.gov/forms-pubs/about-form-8992

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.