International tax rarely gets a clean win, but the proposed rules released in September 2026 are close to one for many US companies with foreign operations. They change how expenses get pushed against foreign income, and the direction of the change is favorable. If your firm has clients with controlled foreign corporations or export income, this is worth understanding now, because the comment window is short and the effective date is already here.
A quick note on status: these are proposed regulations, not final. The rules can shift before they are locked in, and comments were due November 10, 2026. But taxpayers generally need to plan around them for 2026 returns, so here is what REG-117273-25 does and why it matters.
Two acronyms got renamed and reworked, so start there. The old GILTI regime, the tax on global intangible low-taxed income, is now built around net CFC tested income, or NCTI. The old FDII benefit, for foreign-derived intangible income, now runs through foreign-derived deduction eligible income, or FDDEI.
The mechanics of both still turn on a familiar question: how much of a company's expenses get allocated and apportioned against these categories of foreign income. That allocation matters because it shrinks the income eligible for a benefit and can squeeze the foreign tax credit. Our explainer on how GILTI became NCTI walks through the underlying regime if you want the full backdrop.
Here is the heart of it. Under the proposed rules, interest expense and research and experimental (R&E) expense are excluded when computing deduction eligible income and FDDEI. In plain terms, two of the biggest expense categories no longer drag down the income that qualifies for the export benefit.
On the NCTI side, only a narrow set of items gets allocated to foreign-source section 951A category income. According to EY's analysis of the proposed regulations, the items that do get apportioned there are limited to things like the section 250 NCTI deduction, the section 78 gross-up, and certain state and local taxes. Keeping most other expenses out of that basket is what makes the change favorable.
The practical payoff shows up in the foreign tax credit. When fewer US expenses are allocated against foreign-source income, the foreign tax credit limitation goes up, which means a company can use more of the foreign taxes it already paid.
That is the whole game for many multinationals. Foreign taxes are only useful if you can credit them, and the credit is capped by how much foreign-source income you have after expense allocation. By keeping interest and R&E out of the FDDEI calculation and limiting what hits NCTI-category income, the rules leave more room under the limit. For clients who have been stranding foreign tax credits, this can free them up. If the foreign tax credit mechanics are unfamiliar, our guide to how the foreign tax credit works covers the limitation in detail.
Timing is the part to watch. The proposed rules apply to tax years beginning after December 31, 2025, so they reach 2026 returns even though they are still proposed. That is the awkward spot: the rules are not final, but they cover a year already underway.
Comments were due November 10, 2026, which means the shape of the final rules could still move based on that feedback. For a 2026 return, the reasonable approach is to plan around the proposed rules while flagging that they are not yet final, and to keep an eye out for the final version before positions are locked.
There is a loose end worth naming. The NCTI regime does not plug neatly into the global minimum tax framework. The blended CFC allocation approach that applied under the old GILTI rules was not carried over to NCTI, which leaves an open question about how NCTI taxes enter Pillar Two effective tax rate calculations.
For US-parented groups, this sits alongside the broader international picture where the OECD side-by-side arrangement lets many US groups avoid the top-up taxes while still filing information returns. The point for planning is that NCTI and FDDEI do not exist in isolation, and a company's Pillar Two position may interact with how these expense rules land. This is genuinely unsettled territory, so it is a watch item rather than a solved problem.
The favorable direction does not mean nothing to do. A few steps make sense.
Re-run foreign tax credit projections for clients with CFCs, since excluding interest and R&E from the relevant calculations can change the limitation and free up stranded credits. Revisit expense apportionment workpapers to match the proposed methodology rather than the old one. Flag clients with significant export income, because the FDDEI benefit gets more valuable when fewer expenses reduce it. And document that positions rest on proposed rules, so there is a clean trail if the final version differs.
Because this is proposed guidance covering a live tax year, the safest path is to model it now and confirm against the final regulations before filing. International expense allocation is detailed, workpaper-heavy work, and it is exactly where offshore support earns its keep. Madras Accountancy helps US CPA firms with the apportionment schedules and foreign tax credit calculations that these rules turn on, so the numbers hold up under review.
Start with the foreign tax credit projections. That is where the benefit shows up first, and where a wrong assumption costs the most.
What is REG-117273-25? It is a set of proposed Treasury regulations released September 11, 2026 that change how expenses are allocated and apportioned to NCTI-category income and FDDEI. The rules generally keep interest and R&E expense from reducing this foreign income.
What is the difference between NCTI and GILTI? NCTI, net CFC tested income, is the reworked version of the old GILTI regime for taxing income of controlled foreign corporations. The name and some mechanics changed, but it still taxes foreign earnings of US shareholders.
What is FDDEI? FDDEI, foreign-derived deduction eligible income, is the reworked version of the old FDII export benefit. It provides a deduction for income US companies earn from serving foreign markets.
Why does excluding interest and R&E help taxpayers? Excluding those expenses from the FDDEI and NCTI calculations leaves more foreign-source income, which raises the foreign tax credit limitation. That lets companies use more of the foreign taxes they already paid and preserves more of the export benefit.
When do the proposed rules take effect? They apply to tax years beginning after December 31, 2025, so they reach 2026 returns. Because they are still proposed, taxpayers should plan around them while confirming against the final regulations before filing.
Are these rules final? No. REG-117273-25 is proposed guidance. Comments were due November 10, 2026, and the final rules could differ, so positions should note that they rest on proposed regulations.
How do the rules affect the foreign tax credit? By reducing the expenses allocated against foreign-source income, the rules increase the foreign tax credit limitation. Clients who could not fully use their foreign tax credits may be able to use more of them under the new approach.
Do these rules interact with Pillar Two? Yes, though not cleanly. The blended CFC allocation from the old GILTI rules was not extended to NCTI, leaving an open question about how NCTI taxes enter Pillar Two effective tax rate calculations. It remains an area to monitor.
Section 4960's 21% excise tax now reaches far more nonprofit employees. See who is a covered employee in 2026 and what changed.
The Section 45S paid family leave credit is permanent for 2026 with new options. See who qualifies, the amounts, and how to claim it.
Opportunity zones become permanent in 2027 under the One Big Beautiful Bill. See the new deferral, rural bonus, and the 2026 handoff.
