August 20, 2025

The One Big Beautiful Bill Act (OBBBA) makes significant updates to the U.S. international tax rules. These changes build on key elements of the 2017 Tax Cuts and Jobs Act (TCJA) while introducing new provisions related to downward attribution for controlled foreign corporations (CFCs).

Unless otherwise noted, the changes discussed below are generally effective for taxable years beginning after December 31, 2025. 

Controlled Foreign Corporation (CFC) Provisions

Global Intangible Low-Taxed Income (GILTI) Renamed and Revised

GILTI was introduced in the 2017 TCJA to require U.S. shareholders of CFCs to include certain foreign earnings in U.S. taxable income, regardless of distribution. The computation of GILTI excludes a 10% return on net tangible assets used in the CFC’s foreign business. Current rules allow a 50% corporate deduction and an 80% indirect foreign tax credit, generally resulting in no U.S. tax if the CFC’s effective foreign tax rate is at least 13.125%. Individuals can achieve similar treatment with a Section 962 election, though dividends are taxed upon repatriation.

Under the OBBBA, the following changes are made to the GILTI regime related to a CFC’s tax year beginning after December 31, 2025:

• GILTI is renamed Net CFC Tested Income (NCTI) to better reflect the broader scope of income captured.
• The Section 250 deduction decreases from 50% to 40%, raising the effective corporate tax rate from 10.5% to 12.6% without foreign tax credits.
• The 10% Qualified Business Asset Investment (QBAI) exclusion is eliminated.
• The limitation on indirect foreign tax credits increases from 80% to 90%, available only to C corporations (or individuals making a Section 962 election).
• Only directly allocable expenses, such as the 40% Section 250 deduction and certain taxes, reduce foreign-source NCTI. Interest and R&E expenses are not allocable.
• Updated Section 163(j) interest limitation rules apply to certain CFCs, with ATI adding back depreciation, amortization, and depletion for tax years beginning after December 31, 2024.

Impact: A U.S. corporation will generally owe no U.S. tax on NCTI if the CFC pays at least 14% foreign tax. The reduced allocation of expenses may increase the allowable foreign tax credit limitation.

Pro Rata Share Allocation Rule Expanded

U.S. shareholders must now include subpart F and NCTI income if they held CFC stock at any time during the tax year, not just on the last day of the CFC’s year-end. This change is particularly important in years where there is a direct or indirect change in CFC ownership. Coordination between the parties may be necessary for items that materially impact the computation of subpart F and NCTI. The new rule may also influence due diligence and negotiations in M&A transactions, including purchase price adjustments, post-close actions, and the structuring of tax indemnities.

Downward Attribution Rule Changes

Before the OBBBA, TCJA’s repeal of the “downward attribution” limitation allowed CFC stock held by a foreign parent to be attributed to its U.S. subsidiary, significantly expanding the number of entities classified as CFCs, often without any direct or indirect U.S. shareholder. Many viewed this as exceeding the original intent of the TCJA.

The OBBBA reverses this repeal, preventing attribution of foreign corporation stock to a U.S. person through a foreign parent. At the same time, it adds new Section 951B, introducing foreign controlled U.S. shareholder (FCUS) rules. To be considered a FCUS, a U.S. person must be attributed more than 50% ownership of a foreign corporation (compared to the 10% threshold for a regular U.S. shareholder). FCUS entities with direct or indirect interests in a foreign controlled foreign corporation (FCFC) must include subpart F and NCTI income in a manner similar to CFC owners. Treasury also has authority to issue regulations aligning FCUS and FCFC treatment with other sections of the Code, including when an FCFC is also a passive foreign investment company.

These changes may significantly impact foreign-controlled multinational groups, particularly where U.S. subsidiaries hold direct or indirect interests in FCFCs, making a thorough review of ownership structures and compliance obligations essential.

Repeal of 1-Month Deferral Election

CFCs can no longer elect a tax year beginning one month earlier than the majority U.S. shareholder’s tax year. Calendar-year majority shareholders with CFCs on a November 30 year-end will have a 13-month inclusion in 2025 as they align to a December 31 year-end.

Section 954(c)(6) Look-Through Rule Made Permanent

The rule excluding certain related-party payments from subpart F income is now permanent. Section 954(c)(6) generally provides relief from subpart F income related to dividends, interest, rents, and royalties received or accrued by a CFC from another CFC.  

Foreign-Derived Intangible Income (FDII) Changes

Foreign‑Derived Intangible Income (FDII) is a federal income tax incentive introduced by TCJA designed to encourage US corporations to export goods and services to foreign customers.

FDII is renamed Foreign-Derived Deduction Eligible Income (FDDEI) and undergoes these changes:

• Deduction reduced from 37.5% to 33.34%, increasing the effective tax rate from 13.125% to 14%.
• The 10% return on net tangible depreciable assets (QBAI) is no longer considered in computing FDDEI.
• Interest and R&E expenses no longer allocated against deduction-eligible income.
• Certain intangible property income excluded for dispositions after June 16, 2025.

Additional International Provisions

• Inventory Sourcing Rule: Up to 50% of income from U.S.-produced inventory sold for foreign use may be treated as foreign-source if connected to a foreign office or fixed place of business.
• Base Erosion and Anti-Abuse Tax (BEAT): Rate increased from 10% to 10.5%.
• 1% Excise Tax on Certain Outbound Remittance Transfers: Applies to cash and similar physical instrument transfers from the U.S. to foreign jurisdictions. The law includes anti-avoidance measures and specific anti-conduit provisions, along with compliance obligations for remittance providers.
  • Excludes transfers funded from an account with a U.S. financial institution or from a U.S.-issued debit or credit card.
  • Requires remittance providers to collect and remit the tax to the IRS quarterly; if the tax is not collected at the time of transfer, the provider is secondarily liable for payment.
  • Applies regardless of the sender’s citizenship or immigration status (U.S. citizens, residents, and nonresidents may be subject unless an exception applies).
  • Expected to increase costs for individuals and families relying on cash remittances to support relatives abroad.

Key Takeaways

The OBBBA introduces a broad set of changes affecting U.S. taxpayers with foreign operations, CFC ownership, or cross-border transactions. The new NCTI regime, downward attribution rules, and excise tax on outbound cash transfers could significantly impact tax planning and compliance.

If you have questions about how these changes may impact your tax situation, please reach out to your HCVT service provider.