A GILTI inclusion is the share of a controlled foreign corporation’s foreign earnings that a U.S. shareholder must report as current U.S. taxable income, even when nothing has been distributed. For a domestic corporation, the effective U.S. rate on that inclusion is roughly 12.6% after the Section 250 deduction. For an individual U.S. shareholder, it hits at ordinary rates up to 37% unless a Section 962 election is made to be taxed like a corporation.
The provision came from the Tax Cuts and Jobs Act of 2017 and was substantially revised by the One Big Beautiful Bill Act, signed on July 4, 2025.1The White House. President Trump’s One Big Beautiful Bill Is Now the Law The 2025 law officially renamed it “Net CFC Tested Income” (NCTI), though the IRS still uses the GILTI label on its forms. The purpose is the same: keep U.S. companies from parking profits in low-tax countries and deferring U.S. tax indefinitely.
Who Has to Report a GILTI Inclusion
Two definitions decide whether you are in the GILTI net.
A foreign corporation is a controlled foreign corporation (CFC) if U.S. shareholders collectively own more than 50% of either the voting power or the value of its stock.2Office of the Law Revision Counsel. 26 U.S.C. 957 – Controlled Foreign Corporations; United States Persons A U.S. shareholder is any U.S. person (individual, corporation, partnership, trust, or estate) who owns at least 10% of a foreign corporation’s voting power or stock value.3Office of the Law Revision Counsel. 26 U.S.C. 951 – Amounts Included in Gross Income of United States Shareholders
Ownership counts stock held directly and stock attributed under Section 958 and the constructive ownership rules of Section 318. One notable 2026 change: the One Big Beautiful Bill restored Section 958(b)(4), which blocks “downward attribution” from a foreign parent to its U.S. subsidiaries. That reverses a TCJA-era expansion that sometimes swept foreign corporations into CFC status even when no U.S. person directly owned enough stock. The universe of CFCs is now narrower.
How the Inclusion Is Calculated
The math starts inside each CFC. A CFC computes its “tested income” or “tested loss” — its net foreign business earnings after several categories are carved out.
Tested income begins with gross income calculated as if the CFC were a U.S. corporation. Excluded categories:4Office of the Law Revision Counsel. 26 U.S.C. 951A – Net CFC Tested Income Included in Gross Income of United States Shareholders
- Subpart F income, which is already taxed to U.S. shareholders under a separate regime.
- Income effectively connected with a U.S. business, taxed under the regular U.S. rules.
- Dividends received from related corporations, to avoid stacking income twice inside a group.
- Foreign oil and gas extraction income, which has its own regime.
- Income qualifying for the high-tax exclusion, discussed below.
The CFC then subtracts deductions allocable to what remains — interest, depreciation, operating costs — to reach net tested income or net tested loss.
At the shareholder level, you add up your pro rata share of tested income from every CFC and subtract your pro rata share of tested losses. That figure is your net CFC tested income. If aggregate losses exceed aggregate income, the inclusion is zero, but the excess loss does not carry forward.5Internal Revenue Service. Concepts of Global Intangible Low-Taxed Income Under IRC 951A Each year starts fresh. A bad year in one CFC only offsets a good year in another when they land in the same tax year.
One structural change matters here. Through 2025, shareholders could reduce the inclusion by a “net deemed tangible income return” — a notional 10% return on the CFC’s Qualified Business Asset Investment (QBAI), meant to shelter a normal return on tangible depreciable assets.6U.S. Government Publishing Office. 26 U.S.C. 951A The OBBBA eliminated the QBAI exemption for tax years beginning in 2026. The full net CFC tested income is now the inclusion, with no offset for tangible assets. Capital-intensive foreign operations feel this the most.
The High-Tax Exclusion
If a CFC’s income is already taxed heavily abroad, shareholders can elect to leave it out of tested income entirely. The threshold is an effective foreign rate greater than 90% of the maximum U.S. corporate rate. At a 21% corporate rate, that means an effective foreign rate above 18.9%.7eCFR. 26 CFR 1.951A-2 – Tested Income and Tested Loss
The election is made on a CFC-by-CFC, year-by-year basis. Income that qualifies drops out of the GILTI calculation. For CFCs in countries whose corporate rates approach or exceed the U.S. rate, this election can zero out the inclusion. With QBAI gone, the base inclusion is larger, and the high-tax exclusion has become a more important planning lever in 2026.
How Corporate Shareholders Are Taxed
Domestic corporations get two benefits that pull the effective rate well below 21%.
The first is the Section 250 deduction. A corporate shareholder deducts 40% of its GILTI inclusion, including the Section 78 gross-up for deemed-paid foreign taxes.8Office of the Law Revision Counsel. 26 U.S.C. 250 – Foreign-Derived Deduction Eligible Income and Net CFC Tested Income Against the 21% corporate rate, that yields an effective U.S. rate of about 12.6% before foreign tax credits. The deduction was 50% (a 10.5% effective rate) under the original TCJA through 2025; the OBBBA set it at 40% permanently.
The second is the deemed-paid foreign tax credit under Section 960. A domestic corporation is treated as having paid 90% of the foreign income taxes its CFCs paid on tested income.9Office of the Law Revision Counsel. 26 U.S.C. 960 – Deemed Paid Credit for Subpart F Inclusions The other 10% is permanently disallowed. Under prior law the haircut was 20%, so more foreign tax is now creditable.
These credits sit in their own foreign tax credit basket. Excess GILTI-basket credits cannot be carried back or forward, and they cannot offset U.S. tax on domestic income or other categories of foreign income.10Internal Revenue Service. Foreign Tax Credit – General Principles A mismatch in a given year permanently loses credits. The OBBBA did remove one longstanding problem: U.S.-parent-level interest expense and research costs no longer get allocated to the GILTI basket when computing the credit limitation, which under prior law often cut usable credits significantly.
How Individual Shareholders Are Taxed
Individuals face the GILTI inclusion at ordinary rates as high as 37%. Without any adjustment, that runs roughly triple the effective corporate rate.
The relief valve is a Section 962 election. An individual can compute tax on the inclusion as if they were a domestic corporation, getting the 21% rate, the 40% Section 250 deduction, and the deemed-paid foreign tax credits.5Internal Revenue Service. Concepts of Global Intangible Low-Taxed Income Under IRC 951A For a top-bracket taxpayer, that can more than halve the current-year bill.
There is a back end. When the CFC later distributes those earnings, the individual includes the distribution in gross income to the extent it exceeds the U.S. tax already paid under the election. Whether that distribution qualifies for the preferential dividend rate (up to 20% plus the 3.8% net investment income tax) or is taxed as ordinary income depends on whether the distributing CFC is a “qualified foreign corporation,” generally one in a country with a comprehensive U.S. income tax treaty. Without treaty coverage, it is ordinary income.
Previously Taxed Earnings Prevent Double Tax
Once income runs through the GILTI rules, it becomes “previously taxed earnings and profits” (PTEP) under Section 959. The point is to keep the same income from being taxed twice when the CFC actually distributes it.11Office of the Law Revision Counsel. 26 U.S.C. 959 – Exclusion From Gross Income of Previously Taxed Earnings and Profits
For corporate shareholders, PTEP distributions are excluded from gross income. For individuals who made a Section 962 election, the exclusion runs only up to the U.S. tax previously paid, and the excess can be taxable as a dividend. PTEP accounts have to be tracked category by category and year by year across every CFC, which is where compliance often gets thick.
Forms to File and the Penalties for Missing Them
Form 8992 is the primary form for computing the GILTI inclusion. U.S. shareholders file it with their income tax return, together with Schedule A reporting the pro rata amounts from each CFC.12Internal Revenue Service. About Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)
Form 5471 is the information return for U.S. persons with interests in foreign corporations. It reports the CFC’s financial activity, earnings and profits, and PTEP accounts. Missing a complete and correct Form 5471 by the due date triggers a $10,000 penalty per form. If the IRS sends a notice and you still do not file within 90 days, another $10,000 accrues for each 30-day period, up to a $50,000 continuation penalty per form.13Internal Revenue Service. International Information Reporting Penalties
Those penalties are per CFC, per year. A U.S. shareholder with interests in five CFCs who misses the filing deadline can face $300,000 in information-return penalties alone, before any tax deficiency, interest, or accuracy-related penalties. That is the place where GILTI compliance most often goes wrong for smaller shareholders who underestimate the depth of the reporting obligation.