What Are the Current GILTI Regulations?

The Global Intangible Low-Taxed Income, or GILTI, regime is a set of U.S. tax rules established by the Tax Cuts and Jobs Act of 2017. The purpose of these regulations is to discourage multinational companies from shifting profits from intangible assets, such as patents, copyrights, and trademarks, to countries with low tax rates. It functions as a minimum tax on foreign earnings, aiming to reduce the incentive for U.S. businesses to move intellectual property offshore.

Before its enactment, many foreign earnings were not taxed in the U.S. until they were brought back, or repatriated, to the parent company. The GILTI regime now subjects a broad base of foreign income to U.S. tax on an annual basis, regardless of whether the cash is distributed back to the United States.

Determining Applicability of GILTI

The GILTI tax provisions are not universal; they specifically target certain U.S. taxpayers with ownership in foreign corporations. Applicability hinges on two definitions: the “U.S. Shareholder” and the “Controlled Foreign Corporation” (CFC).

A “U.S. Shareholder” is defined as a U.S. person—which includes individuals, domestic corporations, partnerships, trusts, and estates—that owns 10% or more of a foreign corporation’s stock. This ownership threshold can be met through direct ownership, indirect ownership, or constructive ownership, where stock owned by a related person is attributed to the U.S. person.

A foreign corporation is classified as a “Controlled Foreign Corporation” or CFC if U.S. Shareholders collectively own more than 50% of its stock, measured by either voting power or total value. For a foreign entity to be considered a CFC, this ownership test must be met by individuals or entities who each independently satisfy the 10% U.S. Shareholder definition. If this control test is met, the foreign corporation becomes a CFC, and its U.S. Shareholders become subject to the GILTI regime.

Calculating the GILTI Inclusion Amount

The calculation of the GILTI inclusion amount is a multi-step process that determines how much foreign income a U.S. Shareholder must report. The formula is the shareholder’s “Net CFC Tested Income” minus their “Net Deemed Tangible Income Return” (NDTIR). This resulting figure represents the income that is presumed to be from intangible assets and is subject to U.S. tax.

The starting point is determining the Net CFC Tested Income. For each CFC, “tested income” is calculated, which is the CFC’s gross income less certain deductions. Specific categories of income are excluded from this calculation, such as Subpart F income, income that is effectively connected with a U.S. trade or business, and income that qualifies for a high-tax exception. The tested income or loss from each of a shareholder’s CFCs is then aggregated to arrive at the Net CFC Tested Income.

Next, the Net Deemed Tangible Income Return (NDTIR) is calculated, which acts as an allowance for the return on tangible assets. This begins with identifying the “Qualified Business Asset Investment” (QBAI), which is the average adjusted basis of specified tangible, depreciable property used in the CFC’s trade or business. The NDTIR is then calculated as 10% of this aggregate QBAI, which is subtracted from the Net CFC Tested Income.

To illustrate, imagine a U.S. Shareholder has one CFC with $350,000 of tested income after deductions. The CFC also has tangible assets (QBAI) with an average adjusted basis of $1,000,000. The deemed tangible income return is 10% of the QBAI, which is $100,000. The final GILTI inclusion amount for the shareholder would be the tested income of $350,000 minus the NDTIR of $100,000, equaling $250,000.

Tax Treatment of the GILTI Inclusion

Once a U.S. Shareholder calculates their GILTI inclusion amount, the tax consequences vary significantly depending on whether the shareholder is a C-Corporation or an individual. For domestic C-Corporations, the tax impact of a GILTI inclusion is softened by two primary mechanisms. A corporation is allowed to deduct 50% of its GILTI inclusion, which, combined with the 21% corporate tax rate, results in an effective tax rate of 10.5%. For tax years beginning in 2026, this deduction is scheduled to decrease to 37.5%, which will increase the effective tax rate to 13.125%.

In addition to the deduction, C-Corporations can claim a “deemed-paid” credit for 80% of the foreign income taxes attributable to the income that generated the GILTI. This credit further reduces the U.S. tax liability on the GILTI inclusion. However, these foreign tax credits associated with GILTI cannot be carried back or forward to other tax years.

The situation is markedly different for individual shareholders, such as U.S. citizens or residents who directly own stock in a CFC. By default, individuals must include the full GILTI amount in their gross income, where it is taxed at their ordinary marginal income tax rates, which can be as high as 37%. They are not eligible for the 50% deduction or the deemed-paid foreign tax credits that corporations receive.

To address this disparity, individual shareholders can make a special annual election to be taxed on their GILTI and Subpart F income at corporate rates. Making the election allows the individual to claim the same 50% deduction and the 80% deemed-paid foreign tax credit that a C-Corporation would.

The GILTI High-Tax Exception

The high-tax exception allows a U.S. Shareholder to make an annual election to exclude a CFC’s income from its GILTI calculation entirely. This provision provides relief for income that is already subject to a substantial level of foreign taxation.

To qualify for this exception, the income must be subject to a foreign effective tax rate that is greater than 90% of the highest U.S. corporate tax rate. With the U.S. corporate rate at 21%, this means the foreign effective tax rate must exceed 18.9%. If the income meets this threshold and the shareholder makes the election, that income is removed from the “tested income” pool and is not factored into the shareholder’s GILTI inclusion amount for the year.

The election is made by the controlling domestic shareholders of a CFC and is generally binding on all U.S. shareholders of that CFC. Final regulations provide flexibility, allowing the election to be made on an annual basis, which permits taxpayers to adapt to changing foreign tax rates or business circumstances. By excluding the high-taxed income, the shareholder also forfeits the associated foreign tax credits that could otherwise have been used to offset U.S. tax on other, low-taxed foreign income.

Reporting and Compliance Requirements

Fulfilling the obligations of the GILTI regime involves specific reporting on Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), and Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.

The process begins at the level of the individual foreign corporation. For each CFC, the U.S. Shareholder must prepare a Form 5471. A key part of this form is Schedule I-1, which is used to calculate that specific CFC’s tested income or loss and its Qualified Business Asset Investment (QBAI).

The data from one or more Form 5471, Schedule I-1s is then aggregated and carried over to Form 8992. This form is where the U.S. Shareholder consolidates the information from all of their CFCs to compute their final, aggregate GILTI inclusion amount. Once completed, Form 8992 is attached to the U.S. Shareholder’s main income tax return, such as Form 1120 for a corporation or Form 1040 for an individual. The filing deadlines for these forms coincide with the taxpayer’s regular income tax return deadline.