If you do business internationally or invest in foreign companies, the One Big Beautiful Bill Act (OBBBA) includes several provisions that may impact the U.S. tax landscape for you. The changes are broad in scope. Some of the vocabulary has changed, some formulas have shifted, and there are changes that will affect which taxpayers are subject to the rules.

GILTI by Another Name

GILTI (Global Intangible Low-Taxed Income), the foreign income inclusion regime introduced by the Tax Cuts and Jobs Act (“TCJA”), now has a new name: Net CFC Tested Income (NCTI). But it’s more than just a rebranding, there are some important substantive changes as well:

• Smaller Section 250 deduction – Previously, U.S. companies could deduct 50% of their GILTI income; under the new rules the NCTI deduction is 40%.
• Better foreign tax credit treatment – The so-called “haircut” on foreign taxes is reduced from 20% to 10%, meaning taxpayers could now potentially credit 90% of foreign taxes paid by the foreign companies they own.
• Elimination of QBAI – The 10% deemed return on Qualified Business Asset Investment (DTIR) is gone.
• Effective tax rate slightly higher – The net result of these changes is an effective tax rate on certain foreign income of about 14%, up from 13.125% under the old rules.

Who Counts as a U.S. Shareholder?

The rules for determining who is a “U.S. shareholder” of a foreign corporation have also changed.

• Prohibition on Downward Attribution reinstated – Prior to the TCJA, U.S. tax law prevented “downward attribution” from a foreign owner to a U.S. person in certain cases. That prohibition was removed in 2017, triggering new reporting obligations for some U.S. taxpayers. The OBBBA reinstated the limitation, potentially reducing the filing obligations for certain taxpayers.
• But… there’s a new twist – The OBBBA introduces a new code section, IRC 951B, that creates the concepts of “foreign controlled U.S. shareholders” and “foreign controlled foreign corporations.” Even if a taxpayer does not fit the traditional definition of a “U.S. shareholder,” certain ownership structures could now trigger income inclusions in certain situations where a foreign parent has both U.S. and foreign subsidiaries.
• Expanded scope for “inclusion shareholders” – Under the OBBBA, any 10% U.S. shareholder that owns shares in a CFC at any point during the taxable year will be required to include its pro rata share of the CFC’s GILTI and subpart F income. Under the current law, such an inclusion is only required for shareholders who owned stock on the last day of the CFC’s tax year.

FDII Gets a New Name and New Rules

FDII (Foreign-Derived Intangible Income) is now FDDEI – Foreign-Derived Deduction Eligible Income. Key changes include:

• Elimination of the QBAI benefit – Just like with NCTI, the 10% deemed return on QBAI is eliminated by the OBBBA.
• Less expense allocation – Interest and R&D expenses are no longer allocated to FDDEI.
• Narrower scope – Gains from selling certain intangibles (covered by section 367(d)) will no longer count toward FDDEI.

Other Notable International Tax Updates

• BEAT rate – The Base Erosion and Anti-Abuse Tax rate rises from 10% to 10.5%. (The rate was originally scheduled to jump to 12.5% under the TCJA.)
• CFC look-through rule made permanent – the CFC look-through rule under IRC Section 954(c)(6) has been made permanent.
• Change related to staggered tax years for foreign corps – Foreign corporations can no longer elect a tax year that starts one month earlier than their majority U.S. shareholder’s year.

Bottom line: These updates are designed to slightly increase the U.S. tax on foreign income, while also simplifying (and in some cases tightening) who is subject to the relevant rules. If you own or invest in foreign companies, it’s important to review your structures to see how these changes may affect your tax bill.

The new law contains numerous other business-related tax provisions. Contact our global tax services team to discuss strategies for navigating the OBBBA changes.