Global Intangible Low-Taxed Income (GILTI)

Global Intangible Low-Taxed Income (GILTI) is a comprehensive tax rule designed to prevent tax avoidance. This rule requires U.S. shareholders of to pay current U.S. taxes on their share of the CFC's GILTI income each year. This taxation occurs regardless of whether the foreign corporation actually distributes any money to its shareholders.

GILTI works alongside existing rules, but it targets different types of foreign income. The of 2017 created GILTI to address situations where U.S. companies were shifting profits to low-tax foreign countries to avoid U.S. taxation. Starting in 2026, Congress will rename this regime "" (NCTI) and modify how it operates.

GILTI operates as one component of a comprehensive international tax system that includes multiple anti-deferral mechanisms. Congress designed GILTI to target foreign income that falls outside traditional Subpart F categories, creating broader coverage of foreign-source income.

The GILTI regime works alongside other international tax provisions, including the (BEAT) and (FDII) provisions. Together, these rules create a coordinated approach to taxing intangible income that companies earn through international operations.

Foreign tax credits can offset some GILTI liability, but current law limits these credits to 80 percent of foreign taxes paid. This limitation means that even if a foreign country imposes taxes on the same income, U.S. shareholders may still owe additional U.S. tax. However, this limitation improves beginning in 2026, when foreign tax credits can offset up to 90 percent of foreign taxes paid. This change reduces the minimum foreign tax rate needed to eliminate U.S. tax liability entirely.

The GILTI calculation determines how much foreign income gets taxed in the United States. The process works by comparing a CFC's net tested income to a threshold amount that represents a normal return on the company's physical assets.

Net tested income includes most of the CFC's income, except for certain types already covered by Subpart F rules. The threshold represents what the IRS considers a reasonable return on —physical property like buildings, equipment, and machinery that cannot be easily moved between countries for tax purposes.

Under current law through 2025, the threshold equals 10 percent of the CFC's . This means the first 10 percent return on tangible assets escapes GILTI taxation, but income above this level becomes subject to U.S. tax. The rule targets income from —things like patents, trademarks, and business processes—because these can be transferred between countries more easily for tax planning.

However, starting in 2026 under the NCTI regime, this tangible asset deduction disappears entirely. This change means all CFC returns will potentially face U.S. taxation, regardless of how much they invest in physical assets.

U.S. corporations that own shares in CFCs can claim a deduction that reduces their tax burden on GILTI income. This deduction helps prevent the same income from being taxed twice—once by the foreign country and again by the United States.

However, not all entities qualify for this deduction. Regulated investment companies, (REITs), and cannot claim it. Individual shareholders normally cannot access this deduction either, but they can make a to be treated like a corporation for GILTI purposes.

The currently allows corporations to deduct 50 percent of their GILTI inclusion. This reduces the effective corporate tax rate on GILTI income to 10.5 percent instead of the full 21 percent corporate rate. However, this benefit decreases in 2026, when the deduction drops to 40 percent and the effective rate increases to 12.6 percent.

GILTI rules become more complex when domestic investment funds operate as partnerships, which is common in hedge fund structures. The key issue involves determining which partners must include GILTI income in their taxable income.

According to final , GILTI inclusion rules apply only to U.S. beneficial owners who directly or indirectly hold at least 10 percent of the voting power or value in the CFC. The regulations use a "look-through" approach for partnerships, meaning the IRS examines each partner's ultimate ownership percentage in the foreign corporation.

This look-through rule ensures that GILTI inclusions flow to the appropriate ultimate owners who meet the U.S. shareholder threshold requirements. Partners who own less than 10 percent of the CFC generally avoid GILTI inclusions, even if the partnership as a whole meets the threshold.

The tax system includes mechanisms to prevent double taxation when CFCs eventually distribute their earnings to U.S. shareholders. These mechanisms involve adjustments to the shareholders' "basis"—essentially their investment cost in the CFC stock.

When U.S. shareholders include GILTI amounts in their , they generally increase their basis in the CFC stock by the included amount. This step-up in basis prevents the same income from being taxed again when the CFC later distributes those earnings.

The reverse occurs when shareholders receive actual distributions from the CFC for amounts previously included as GILTI income. They reduce their basis in the CFC stock by the distribution amount, ensuring that previously taxed income avoids additional taxation upon distribution.