OBBB Act: FDII, GILTI and Controlled Foreign Corporation Rules

December 11, 2025

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law. While the Act includes many provisions, this summary focuses on the international and foreign-related rules, and how they modify or replace the framework introduced by the Tax Cuts and Jobs Act (TCJA).

From GILTI to NCTI – A New Inclusion Base

Under TCJA, U.S. shareholders of controlled foreign corporations (CFCs) had to include GILTI (Global Intangible Low-Taxed Income) in their U.S. taxable income each year. A CFC is essentially a foreign company that is more than 50% owned (by vote or value) by U.S. shareholders, including indirect and constructive ownership. The GILTI calculation was complex. It required computing each CFC’s “tested income,” measuring certain tangible asset amounts (QBAI and NDTIR), and then combining everything into a single GILTI inclusion amount for the U.S. shareholder.

For tax years beginning after December 31, 2025, the OBBBA replaces this system. The concepts of GILTI, Net Deemed Tangible Income Return (NDTIR) and Qualified Business Asset Investment (QBAI) are removed from the formula and replaced with Net CFC Tested Income (NCTI). NCTI is simply the U.S. shareholder’s share of the tested income of CFCs that have income, minus the shareholder’s share of the tested losses of CFCs that have losses. In other words, the new regime moves from a complex “intangible income” formula to a more straightforward “total profits minus total losses across foreign subsidiaries” approach.

Section 250 – From FDII & GILTI to FDDEI & NCTI

Under TCJA, Section 250 allowed U.S. corporations (and in some cases U.S. individuals with CFC income) to take a special deduction for two types of income:

• FDII (Foreign-Derived Intangible Income), and

• GILTI.

For tax years beginning before 2026, the deduction was 37.5% of FDII and 50% of GILTI (including certain amounts treated as dividends), with scheduled reductions after 2025. The goal was to lower the effective U.S. tax rate on income earned from foreign customers and foreign subsidiaries, and to encourage companies to keep intellectual property and related profits in the U.S.

Under the OBBBA, for tax years beginning after December 31, 2025, this system is redesigned. FDII is replaced by Foreign-Derived Deduction Eligible Income (FDDEI), and Section 250 now provides a 33.34% deduction for FDDEI and a 40% deduction for Net CFC Tested Income (NCTI) for domestic corporations, on a permanent basis. At the same time, the definition of Deduction Eligible Income (DEI) is revised, and Deemed Tangible Income Return (DTIR) is eliminated, so the old DTIR/QBAI mechanics drop out of the calculation. Practically, companies still receive a “tax rate discount” on export-type income and certain CFC income, but now under new labels and fixed, permanent percentages rather than TCJA’s scheduled step-downs.

CFC Rules – Look-Through and Ownership

Under TCJA, a temporary “look-through” rule allowed certain payments between related CFCs—such as dividends, interest, rents, and royalties—to avoid being treated as passive income (FPHCI) if they came from active, non-Subpart F, non-U.S.-trade-or-business earnings. In simpler terms, this rule prevented normal cash movements within a foreign group from being taxed immediately in the U.S. The look-through rule, however, was scheduled to expire after 2025.

The OBBBA makes this look-through rule permanent, giving long-term certainty for internal CFC financing and cash management. It also restores limits on downward attribution, so fewer foreign entities are treated as CFCs just because of ownership lower in the structure. In addition, it adjusts the pro rata share rules, which may change how Subpart F and NCTI amounts are allocated among U.S. shareholders. Taken together, these changes make it easier to continue reinvesting active foreign earnings within a group of CFCs, while requiring multinational groups to revisit their ownership charts and inclusion calculations to see who picks up which amounts in the U.S.

BEAT – Base Erosion and Anti-Abuse Tax

Under TCJA, the Base Erosion and Anti-Abuse Tax (BEAT) is a special tax aimed at large corporations that make substantial deductible payments (like royalties, interest, or service fees) to foreign related parties, which can erode the U.S. tax base. It generally applies to corporations (other than RICs, REITs, and S corps) with average annual gross receipts over $500 million for the prior three years and a base erosion percentage of at least 3% (or 2% for groups with a bank or registered securities dealer). The BEAT rate started at 10% under TCJA and was scheduled to increase to 12.5% for tax years beginning after 2025, and over time the rules would have reduced the benefit of tax credits by lowering regular tax liability for BEAT purposes.

The OBBBA adjusts this trajectory. For tax years beginning after 2025, the BEAT rate is permanently set at 10.5% instead of rising to 12.5%, and companies are allowed to keep using tax credits when calculating their BEAT liability, rather than facing a growing “credit squeeze.” In short, BEAT still serves as an extra layer of tax protection against excessive payments to foreign affiliates, but under the OBBBA it is less harsh than what TCJA had programmed.

Tax Year of Specified Foreign Corporations

Under TCJA, a specified foreign corporation (SFC) generally had to adopt the tax year of its majority U.S. shareholder but could elect a one-month deferral, using a year that begins one month earlier. The OBBBA repeals this one-month deferral election, requiring SFCs that use it to conform to the majority U.S. shareholder’s year for tax years beginning after November 30, 2025. This change simplifies coordination between U.S. and foreign reporting calendars but may create transition-year complexities as foreign entities realign their year-ends.

Foreign Tax Credit (FTC) – Deductions and Sourcing

The basic foreign tax credit structure remains aimed at preventing double taxation while avoiding the use of foreign taxes to shelter U.S.-source income. Under the OBBBA, the GILTI/NCTI basket becomes tighter: deductions allocated to that basket are limited to the NCTI deduction plus any directly allocable deductions. At the same time, the OBBBA introduces a beneficial inventory sourcing rule, allowing up to 50 percent of income from U.S.-produced inventory sold abroad to be treated as foreign-source income based on the contribution of a foreign office or fixed place of business.

Deemed Paid Foreign Tax Credit – Higher Percentage, Narrower Scope

Under TCJA, a U.S. corporation that had GILTI income from its CFCs could claim a deemed paid foreign tax credit (FTC) equal to 80% of its share of the foreign income taxes paid by those CFCs. This gave partial, but not full, relief from double taxation.

Under the OBBBA, for years after 2025, that deemed paid FTC rate increases to 90% for taxes related to net CFC tested income, so companies get more relief upfront when that income is first included in U.S. taxable income. However, the OBBBA also disallows foreign tax credits when those same earnings are later paid out as distributions of previously taxed net CFC tested income, meaning there is no additional FTC available at the repatriation stage. In other words, the system is more generous at the time of inclusion, but it is one-time only—there is no second credit when cash is later brought back to the U.S.

Summary

The OBBBA refines the international tax system introduced under TCJA. GILTI is replaced by NCTI, which nets CFC profits and losses. Section 250 now offers permanent deductions for FDDEI and NCTI at fixed rates. The CFC look-through rule is made permanent, while ownership and attribution rules are narrowed. BEAT remains but with a 10.5% permanent rate and ongoing access to credits. FTC rules tighten for NCTI but provide new benefits for U.S. manufacturers with foreign sales. Finally, the deemed paid FTC increases from 80% to 90% at inclusion, but with no additional credit on later distributions.