Major U.S. Tax Reform: Key International Changes

The new tax legislation introduces significant changes to several international tax provisions. Most changes apply to tax years beginning after December 31, 2025. Here’s what you need to know.

Foreign-Derived Deduction Eligible Income (FDDEI) – Formerly FDII

• FDII is now called FDDEI, with a permanent 33.34% deduction rate which is down from 37.5%.
• FDDEI now yields a 14% effective tax rate (up from 13.125%).
• The Qualified Business Asset Investment (QBAI) limitation is eliminated – historically the FDII eligible income was reduced by up to 10% of its QBAI. Further, interest and R&E expenses are no longer allocated to FDDEI.
• Certain income is no longer eligible for the deduction, such as gains on the sale or disposition of depreciable, amortizable, or depletable property as well as certain deemed royalty income. This provision is applicable to transactions occurring after June 16, 2025.

Overall, the changes to FDDEI appear favorable for taxpayers. Although the ETR increased from 13.125% to 14%, many taxpayers may see the FDDEI deduction increase thanks to the elimination of QBAI, and fewer expenses allocated to FDDEI.

Net CFC Tested Income (NCTI) – Formerly GILTI

• GILTI is now called “Net CFC Tested Income” (NCTI), with a permanent 40% deduction which is down from 50%.
• The U.S. rate on GILTI is now 12.6% (up from 10.5%).
• Like FDDEI the QBAI is eliminated, therefore CFC income that was historically excluded from GILTI by virtue of being less than 10% of QBAI will now be included in the GILTI inclusion base.
• Foreign Tax Credits (FTC):
• The haircut on deemed FTCs under IRC 960 is reduced from 20% to 10%. Thus, taxpayers are generally able to credit up to 90% of CFC taxes instead of 80%.
• FTCs for withholding tax on Previously Taxed Earnings and Profits (PTEP) distributions is reduced to 90% (from 100%).
• For GILTI FTC basket calculations, only directly allocable expenses (e.g. IRC 250 deduction, state income tax) apply to the NCTI basket.

NCTI will now apply to a larger income base due to eliminating QBAI. However, taxpayers paying at least 14% foreign tax may end up with no residual U.S. tax liability due to larger FTCs and the removal of expense allocation to the NCTI basket.

Controlled Foreign Corporations (CFCs)

Downward Attribution

Repealed via reinstating IRC 958(b)(4) but selectively reinstated via new IRC 951B. The result is that fewer U.S. shareholders will be required to file Forms 5471 and pay tax on Subpart F & GILTI, especially when the reason for doing so is due to a U.S. C-Corporation existing in the structure.

Pro-Rata Share for Subpart F and GILTI Inclusions

The “last-day” rule no longer applies — U.S. shareholders now pick up their share of Subpart F / GILTI for the portion of the year they held CFC shares, regardless of whether they owned the shares at the end of the year.

Subpart F Look-Through

Made permanent under IRC 954(c)(6) rather than expiring at end of 2025.

Year-End Deferral

One-month deferral under IRC 898 is eliminated; a CFC must now align its tax year with the majority U.S. shareholder’s U.S. tax year. For example, if the majority U.S. shareholder is on a calendar year, the CFC’s tax year must also be on a calendar year for Form 5471 and Subpart F / GILTI purposes.

BEAT Adjustments

• BEAT rate permanently set to 10.5%.
• Makes permanent an adjustment for R&D and certain other credits when computing BEAT.

IRC 163(j) Interest Limitation

• When calculating the 30% limitation, taxpayers use EBITDA rather than EBIT. This applies for tax years beginning after December 31, 2024.
• When calculating Adjusted Taxable Income (ATI) limitation, any CFC deemed income such as Subpart F, GILTI, IRC 78 gross-up and IRC 956 is excluded from ATI for tax years beginning after December 31, 2025.

IRC 174 R&E Capitalization

• Foreign R&E remains subject to capitalization and 15-year amortization.

1% Remittance Tax

• Applies to cross-border remittances when a U.S. sender transfers funds abroad. The tax typically applies when the sender provides cash, money order, cashier’s check, or similar instrument to be transferred.
• Many exceptions apply, such as transfers where the funds are deducted from accounts held at FDIC insured banks & financial institutions, commercial banks, trust companies, credit unions, brokers / dealers, or transfers funded with U.S. issued debit/credit cards.

Next Steps in International Tax Changes

Our international tax team is actively tracking Treasury developments for forthcoming notices and regulations. We’ll continue to review the implications of this tax legislation and what it means for you.