November 2025 - Monthly Newsletter

In this month’s newsletter, we review the imminent changes coming to the so-called “CFC” and “GILTI” rules for expat business owners, resulting from the recently-enacted "One Big Beautiful Bill Act" (OBBBA).

Expats owning foreign businesses should consider these important changes, which become effective starting with the 2026 tax year, to determine if they affect the tax efficiency of their structure.

Brief Background on CFCs and GILTI

Under U.S. tax law, if a foreign corporation is a “Controlled Foreign Corporation” (“CFC”), then a “United States Shareholder” who owns stock in the corporation on the last day of the taxable year is required to include in its gross income for the taxable year certain “deemed” income, primarily – such person’s pro-rata share of the corporation’s “Subpart F” and "GILTI" for such year.

Subpart F income (in brief, more passive-type income) and GILTI (in brief, more active-type income) are U.S. tax regimes designed to prevent the deferral of U.S. tax on certain income earned by CFCs. They both require U.S. shareholders to pay U.S. tax, at ordinary rates up to 37% for individuals, on their share of the CFC's income in the year it is earned, regardless of whether the income is distributed as a dividend.

Under current rules, GILTI is described as the excess of a US shareholder’s total net foreign income over a deemed return on tangible assets, which is defined as 10% of its foreign qualified business asset investment (“QBAI”) reduced by certain interest expense amounts.

Subpart F income and GILTI do not include income of a CFC subject to an effective rate of income tax imposed by a foreign country that is more than 90 percent of the maximum U.S. corporate income tax rate (the “high tax exception”), i.e., 18.9% (calculated as 90% of the corporate tax rate of 21%).

Also, with respect to GILTI, an individual U.S. shareholder who holds at least 10% of a CFC can make a so-called “962 election” to be taxed as a corporation, which allows for current taxation at the 21% corporate rate with an indirect foreign tax credit (currently limited to 90% of the foreign tax) and a Section 250 deduction (currently 50%).

Key Changes to GILTI under the OBBBA

For tax years beginning after December 31, 2025, the U.S. tax law, specifically amended by the "One Big Beautiful Bill Act" (OBBBA), introduces several key changes to the GILTI rules:

• Renaming to Net CFC Tested Income (NCTI): The term "GILTI" is replaced by "Net Controlled Foreign Corporation (CFC) Tested Income" (NCTI) to reflect the broadened scope of income included in the calculation.
• Elimination of QBAI Exclusion: The 10% deemed return on qualified business asset investment (QBAI), which previously allowed taxpayers to exclude income attributable to tangible assets, is eliminated. This means nearly all net CFC income may be subject to the U.S. tax inclusion.
• Reduced Section 250 Deduction: The special deduction for corporations (and individuals making a Section 962 election) against this income is reduced from 50% to 40%. This increases the effective U.S. corporate tax rate on this income from 10.5% to 12.6% (before foreign tax credits).
• Increased Foreign Tax Credit (FTC) Allowance: The percentage of deemed-paid foreign taxes that can be credited against the U.S. tax liability for NCTI is increased from 80% to 90%. This results in a "crossover rate" of 14%, meaning U.S. residual tax generally arises only if the foreign effective tax rate is below 14%.