The GILTI tax, short for Global Intangible Low-Taxed Income, is a U.S. federal tax that requires certain U.S. owners of foreign corporations to include a share of the foreign company’s earnings in their U.S. taxable income each year, whether or not any money is distributed. It was created by the Tax Cuts and Jobs Act of 2017 and lives in Section 951A of the Internal Revenue Code. For 2026, domestic corporations face an effective federal rate of 12.6% on GILTI after the Section 250 deduction. Individual shareholders who don’t make a special election can owe up to 37%.1Internal Revenue Service. Concepts of Global Intangible Low-Taxed Income Under IRC 951A
The name is misleading. GILTI isn’t limited to royalties or patent income. It works by presuming that any foreign earnings above a 10% return on the company’s physical business assets came from hard-to-value intangibles, and taxing that excess currently in the United States.
Who Owes GILTI
GILTI reaches every “U.S. shareholder” of a “controlled foreign corporation.” Both terms are defined narrowly enough to matter and broadly enough to catch people who don’t expect it.
A U.S. shareholder is any U.S. person, including individuals, domestic corporations, partnerships, trusts, and estates, that owns at least 10% of the voting power or total value of a foreign corporation’s stock.2Legal Information Institute. 26 USC 951(b) – United States Shareholder A controlled foreign corporation, or CFC, is any foreign corporation in which U.S. shareholders together own more than 50% of the voting power or stock value on any day during the tax year.3eCFR. 26 CFR 1.957-1 – Definition of Controlled Foreign Corporation
If both conditions are met, every U.S. shareholder picks up their pro rata share of the CFC’s GILTI, even minority owners who have no control over distributions.
How the GILTI Inclusion Is Calculated
The calculation is aggregate across all your CFCs. Start with each CFC’s tested income, add them up, subtract tested losses from other CFCs, and then subtract a 10% deemed return on the group’s qualified business asset investment (QBAI). The remainder is your GILTI inclusion.1Internal Revenue Service. Concepts of Global Intangible Low-Taxed Income Under IRC 951A
Tested Income
Tested income is a CFC’s gross income after taking out several categories that are already handled by other rules:4Office of the Law Revision Counsel. 26 USC 951A – Global Intangible Low-Taxed Income
- Income effectively connected to a U.S. trade or business
- Subpart F income, which is calculated first and takes priority
- Income excluded under the high-tax exclusion
- Dividends received from related foreign corporations
- Foreign oil and gas extraction income
Subpart F ordering matters because Subpart F income doesn’t qualify for the Section 250 deduction that reduces the effective rate on GILTI.
QBAI and the 10% Return
QBAI is essentially the average adjusted basis of depreciable tangible property each CFC uses in its business to produce tested income. A CFC with factories, equipment, or real estate abroad generates more QBAI, which shields more earnings from GILTI. An asset-light CFC running on services or intellectual property generates little QBAI, and most of its earnings get swept in.
Tested Losses
If a CFC’s deductions exceed its gross tested income, it produces a tested loss. Losses from one CFC offset tested income from your other CFCs in the same year. They cannot be carried forward.
The Rate You Actually Pay
The statutory GILTI inclusion is the same regardless of who owns the CFC, but what you owe on it depends heavily on your entity type.
Domestic Corporations
C corporations get a Section 250 deduction against their GILTI inclusion. The percentage stepped down at the start of 2026:5Office of the Law Revision Counsel. 26 USC 250 – Foreign-Derived Deduction Eligible Income and Net CFC Tested Income
- Through December 31, 2025: 50% deduction, producing a 10.5% effective federal rate.
- Starting January 1, 2026: 40% deduction, producing a 12.6% effective federal rate.
One catch: the Section 250 deduction can’t exceed your taxable income. If losses elsewhere in the corporation push taxable income below the GILTI inclusion, part of the deduction is wasted, and there’s no carryforward for the unused portion.6Internal Revenue Service. IRC Section 250 Deduction – Foreign-Derived Intangible Income (FDII)
Individual Shareholders
Without a special election, an individual’s GILTI inclusion is added to ordinary income and taxed at marginal rates up to 37% for 2026. There’s no Section 250 deduction, and the deemed-paid foreign tax credit under Section 960 isn’t available. S corporations and partnerships get the same treatment; only C corporations get the deduction and the deemed-paid credit automatically.
The Section 962 Election
Section 962 lets an individual elect to be taxed on GILTI and Subpart F inclusions as though they were a domestic corporation. That caps the rate at 21%, opens up the Section 960 deemed-paid foreign tax credit, and provides the Section 250 deduction, bringing the effective federal rate to 12.6% for 2026.
The tradeoff comes later. When the CFC eventually distributes the previously taxed earnings, the individual may owe additional tax on the difference between the corporate-rate tax already paid and the tax that would have applied at individual rates. The election is made annually on the return and can be changed year to year, but the mechanics are complex enough that most people making it work with an international tax specialist.
Foreign Tax Credits on GILTI
Domestic corporations are deemed to have paid a portion of the foreign taxes their CFCs paid on tested income. For 2026, the deemed-paid credit equals 90% of those foreign taxes, up from 80% under the original TCJA rules.7Office of the Law Revision Counsel. 26 USC 960 – Deemed Paid Credit for Subpart F Inclusions
The 10% haircut means you never get full credit for foreign taxes on GILTI. As a rough benchmark, a CFC paying a foreign tax rate of around 14% or higher generates enough credit to fully offset the 12.6% U.S. rate. Below that, some residual U.S. tax remains.
Two limits sharpen the credit’s edge:
- GILTI sits in its own foreign tax credit basket. Taxes paid on GILTI can only offset U.S. tax on GILTI, not on domestic, branch, or passive category income.8Office of the Law Revision Counsel. 26 USC 904 – Limitation on Credit
- Excess GILTI foreign tax credits cannot be carried forward or backward. Each year stands alone.9eCFR. 26 CFR 1.904-2 – Carryback and Carryover of Unused Foreign Tax
Companies with volatile foreign earnings feel this. A year of high foreign taxes produces wasted credits, and a year of low foreign taxes triggers a full U.S. GILTI bill, with no way to smooth them.
The High-Tax Exclusion
If a CFC’s income is already taxed by a foreign country at an effective rate above 18.9% (which is 90% of the 21% maximum U.S. corporate rate), you can elect to exclude that income from GILTI entirely.10Office of the Law Revision Counsel. 26 USC 951A – Net CFC Tested Income Included in Gross Income of United States Shareholders
The election is annual and all-or-nothing: if you make it, it applies to every CFC item that clears the 18.9% threshold. You can’t pick and choose. The tradeoff is that excluded income can’t generate foreign tax credits to offset U.S. tax on your remaining GILTI, so the election is most useful when the excluded operations would otherwise produce residual U.S. tax with no other credit-generating income to soak it up.
Forms and Penalties
GILTI comes with a stack of information returns and steep penalties for missing them.
- Form 5471 is the foundational information return for U.S. shareholders of CFCs. Schedule I-1 reports each CFC’s tested income, tested loss, and QBAI.
- Form 8992 calculates your total GILTI inclusion across all CFCs. Most filers use Schedule A; members of a U.S. consolidated group use Schedule B.11Internal Revenue Service. Instructions for Form 8992 (Rev. December 2024)
- Form 8993 is required to claim the Section 250 deduction.
Domestic partnerships no longer file Form 8992 themselves. They report GILTI information on Schedules K-2 and K-3 of Form 1065 and pass the details through to their partners.11Internal Revenue Service. Instructions for Form 8992 (Rev. December 2024)
Failing to file a complete and correct Form 5471 by the due date triggers a $10,000 penalty per form, per annual accounting period. If the IRS sends a notice and the form still isn’t filed within 90 days, an additional $10,000 penalty accrues for each 30-day period of continued noncompliance, up to a $50,000 continuation cap.12Internal Revenue Service. International Information Reporting Penalties For a shareholder with multiple CFCs, penalties stack across forms. Three unfiled Forms 5471 running through the full continuation period would generate $180,000 in penalties before any tax is assessed.
GILTI vs. the OECD Global Minimum Tax
GILTI isn’t the only minimum tax on cross-border earnings. The OECD’s Pillar Two framework, adopted by more than 140 countries, imposes a 15% country-by-country minimum tax on large multinationals using financial statement income and a smaller asset carve-out.13Congress.gov. The Pillar 2 Global Minimum Tax: Implications for U.S. Tax Policy GILTI’s 12.6% effective rate for 2026 sits below that floor, and its blended approach can leave individual low-tax subsidiaries under-taxed from Pillar Two’s perspective. Other countries may therefore impose top-up taxes on U.S. multinationals that are already paying GILTI, and the mismatch remains unresolved.