If your client owns a piece of a company overseas, there is a good chance the U.S. wants its share of those foreign profits every year, even if not a dollar comes home.
That is GILTI, and it catches more people than most expect. It reaches any American who owns at least 10 percent of a foreign company they control, and it does not wait for a dividend. The rules are dense, the rate math is fiddly, and a recent reform rewrote a big part of it. So here is the whole picture, from what the rule actually is to how you calculate and report it.
GILTI stands for global intangible low-taxed income, and it is a tax on foreign earnings that Americans control.
Congress built it into the 2017 Tax Cuts and Jobs Act to close a gap. Before that tax reform, a business could shift its most mobile income, especially profits from intangible assets like patents, trademarks, and software, into a foreign subsidiary in a low-tax country and leave it there untouched by the U.S. GILTI is intended to discourage exactly that. As a matter of tax policy it pulls a slice of those foreign earnings back into the tax base each year. The taxation of that income closes the gap, so parking profit offshore no longer works as a clean tax avoidance play.
The name is a little misleading. Despite the word "intangible," the rule does not only hit income from intangible assets. The formula sweeps in most active business income earned by a foreign subsidiary above a routine return, which is why so many ordinary multinational structures get caught. It sits beside a sibling provision, foreign-derived intangible income, which works in the opposite direction by rewarding income that stays in the country.
You are exposed if you are a U.S. shareholder of a controlled foreign corporation, or CFC. Both halves of that phrase carry weight.
A CFC is a foreign company more than 50% owned by vote or value by U.S. owners. An American who owns at least 10% of the company is the owner the rule targets. When both conditions are met, each owner has to include a pro rata share of the corporation's income on their own return, which catches individuals, corporations, partnerships, and trusts alike.
Here is the part that surprises people. The amount is included in the gross income of the owner whether or not the company pays out a single dollar. You can leave every penny inside the foreign company, reinvest all of it, and still owe the U.S. on your slice. That annual inclusion, sitting on money you never received in cash, is what makes the rule sting. One timing point changed recently: an owner who holds stock at any time during the tax year now picks up a share, not just those holding on the last day, which closes an old move where ownership was shuffled before year end.
People mix these two up constantly, and the distinction matters for the math.
Subpart F is an older anti-deferral rule that taxes specific categories of passive and mobile earnings, things like interest income, dividends, rents, and certain related-party sales, the moment a foreign subsidiary earns them. The newer rule was designed to catch what Subpart F leaves behind: the broad base of active business income that was escaping current tax. The two work together, and Subpart F is carved out of the calculation so the same dollars are not taxed twice.
The math runs at the owner level, and it starts by pooling income across all your foreign companies.
Under the rules as originally written, you calculate the inclusion as net CFC tested income minus a net deemed tangible income return. Tested income is the company's gross income less allocable deductions, after stripping out items like Subpart F amounts, income connected to a U.S. business, and high-taxed income. The deemed tangible income return was the routine slice the law let you exclude, set at 10% of qualified business asset investment, or QBAI, reduced by certain interest expense. That business asset investment is basically the adjusted basis of the firm's depreciable tangible property used in its trade.
In plain terms, the old formula assumed a normal return on real, physical assets and taxed only the income above that line, on the theory that anything extra looked like the mobile profit the rule was chasing. A subsidiary heavy in factories and equipment therefore shielded more than an asset-light software firm. You run these tax calculations on Form 8992, the U.S. shareholder calculation of global intangible low-taxed income, which carries the result to your main return.
The headline tax rate on GILTI depends entirely on whether the owner is a corporation or a person, and the gap is large.
For a C corporation, a special deduction under Section 250 historically let it deduct half of the inclusion. Half of the 21 percent corporate tax rate produces an effective tax rate of 10.5 percent, which is where the corporate rate sat to begin with, a rate of 10.5 that the original law then scheduled to climb toward 13.125 percent in later years. A person gets no automatic Section 250 deduction, so a citizen owning the stock directly is taxed on this GILTI income at ordinary rates that follow their tax bracket and can reach 37%, unless they make a Section 962 election to be taxed like a corporation.
Then there is relief from taxes already paid abroad. A corporation can claim a credit for foreign taxes the company paid, historically up to 80% of them. Because of that credit, a subsidiary paying a high enough rate could owe little or nothing extra to the U.S. There is also a high tax exception: income already taxed abroad at a rate of at least 18.9 percent, which is 90% of the 21% U.S. rate, can be left out of the calculation entirely. For a company in a country with real corporate income taxes, that exception often does the heavy lifting.
The biggest shake-up in years arrived with the One Big Beautiful Bill Act, which reshapes both the name and the numbers for tax years beginning after December 31, 2025. The Act renames the provision and resets the rates at once.
Start with the name. Going forward, U.S. tax laws stop calling it GILTI and refer to net CFC tested income, or NCTI. That rename is not cosmetic, because the underlying calculation changed too. Three moves matter most. The Section 250 deduction drops from 50% to a permanent 40%, which pushes the effective corporate rate upward to 12.6%. The foreign tax credit allowance rises from 80% to 90%, so a foreign rate near 14% can now wipe out the residual tax. And the net deemed tangible income return is gone, because the QBAI exclusion is repealed, so there is no longer a carve-out for a routine return on tangible property.
That last change is the one to watch. Removing the qualified business asset investment break widens the base, so companies with heavy physical assets that used to shelter income now find more of it exposed. These new GILTI rules cut both ways, raising the rate while loosening the credit, and the net effect depends on a given company's earnings mix and where it pays tax. Last year's structure may not be the best answer now, and the only way to know is to model it under the new law.
Reporting is a multi-form exercise, and missing a piece is a common, expensive mistake.
The company itself is disclosed on Form 5471, the information return for U.S. persons with interests in foreign businesses. The computation lives on Form 8992, and the Section 250 break is claimed on Form 8993. From there the inclusion flows into your Form 1040 or corporate income tax return as part of taxable income. Because the rules tie the same 10% ownership threshold to both the Form 5471 filing and the income inclusion, most shareholders of foreign businesses already know they have reporting duties, but plenty underestimate how the result interacts across multiple companies and tax years.
This area rewards planning and punishes guesswork, and the 2026 reset raised the stakes on both.
The calculation pulls together CFC income, foreign income taxes paid or accrued, ownership percentages, and elections that must be applied consistently across every foreign company a client holds. Get one input wrong, or miss the high-tax exception where it applies, and a client either overpays or walks into an exam unprepared. This is detailed, repeatable, numbers-heavy work, exactly what an experienced offshore partner is built to carry. Madras Accountancy supports U.S. CPA firms with this kind of international tax work, from building the Form 8992 calculation to reconciling foreign books and modeling the rate impact under the new rules. Clean, well-documented inputs are what make the return itself straightforward when filing season hits, so a client's tax liability holds no surprises.
Handled early, this is a number you plan around. Handled late, it is a shock on a return that was already due.
GILTI, or global intangible low-taxed income, is a levy on the yearly profits of a foreign company that Americans own. It makes an owner report a share of the foreign company's income whether or not profits are distributed, which stops businesses from sheltering income in low-tax countries. It works much like a minimum tax on foreign earnings.
Any owner who holds at least 10 percent of a foreign company is caught by the rule. That includes individuals, corporations, and other entities. A CFC is a foreign company more than 50% owned by U.S. persons, so if your stake crosses both thresholds, the rules apply to you.
For C corporations, the Section 250 deduction historically set the effective rate at a rate of 10.5, scheduled to rise toward 13.125 percent. Individuals are taxed at ordinary rates tied to their bracket unless they elect corporate treatment. Under the new law, the effective corporate rate climbs to 12.6%.
Under the original rules, the inclusion equals net CFC tested income minus a net deemed tangible income return, which was 10% of qualified business asset investment. For tax years beginning after December 31, 2025, the QBAI exclusion is repealed, so the full tested income is generally taxed. The tax on foreign earnings is reported on Form 8992.
Under the Act, the rule is renamed net CFC tested income. The Section 250 break falls from 50% to 40%, lifting the effective corporate rate to 12.6%, the credit rises from 80% to 90%, and the QBAI exclusion is eliminated, which subjects more foreign income to tax.
A corporation can claim a foreign tax credit for taxes the company already paid abroad, and a high tax exception lets you exclude income taxed at a rate of at least 18.9 percent. Individuals often make a Section 962 election to reach the corporate deduction and the credit. The right path depends on your foreign rate and full set of foreign companies.
The foreign corporation is reported on Form 5471, the calculation goes on Form 8992, and the Section 250 deduction is claimed on Form 8993. The inclusion then flows into your Form 1040 or corporate income tax return as part of your taxable income.
No. Subpart F income taxes specific passive and related-party earnings as they arise, while the newer rule catches the broader active business income left over. Those earnings are excluded from the calculation, so the same dollars are not taxed under both rules at once.
This is general information about GILTI and the related tax rules, not tax advice for a specific situation. The rules under the Internal Revenue Code are complex and changed significantly for 2026, so confirm the current requirements with the IRS or a qualified international tax professional before acting.
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