At a Glance
Beginning after December 31, 2025, Global Intangible Low-Taxed Income (GILTI) becomes Net CFC Tested Income (NCTI). The updated rules may subject more controlled foreign corporation (CFC) income to current U.S. taxation by eliminating the qualified business asset investment exclusion and modifying the available Section 250 deduction and foreign tax credit treatment.
These changes may be particularly important for U.S. shareholders with interests in foreign corporations.
Key Takeaways
- GILTI is renamed Net CFC Tested Income, or NCTI, beginning after December 31, 2025.
- The Section 250 deduction for C corporations is reduced from 50% to 40%.
- The foreign tax credit disallowance is reduced from 20% to 10%.
- Interest and research and experimental deductions are no longer allocated for NCTI purposes.
- The qualified business asset investment exclusion is eliminated, which may cause more offshore income to be subject to U.S. taxation.
Who Is Affected
These changes may affect:
- U.S. shareholders who own at least 10% of a controlled foreign corporation
- C corporations with ownership interests in controlled foreign corporations
- Individuals with interests in foreign corporations
- Taxpayers using a Section 962 election
- Taxpayers considering a C corporation holding company for foreign entities
The rules may be particularly relevant to taxpayers with foreign subsidiaries and offshore income that could be subject to current U.S. taxation.
Eligibility and Key Requirements
Eligibility Requirements
NCTI applies to U.S. shareholders who own at least 10% of a controlled foreign corporation.
Under the prior GILTI rules, U.S. shareholders were required to include their share of controlled foreign corporation income that exceeded a deemed return on the corporation’s tangible assets.
C corporations may be eligible for the Section 250 deduction and foreign tax credit treatment described in the article. Individuals are not eligible for the Section 250 deduction or foreign tax credit under these rules.
Limits, Thresholds, and Phaseouts
For NCTI purposes:
- The Section 250 deduction is 40%, reduced from 50% under the prior rules.
- The foreign tax credit disallowance is 10%, reduced from 20%.
- A CFC taxed at 14% locally will not have additional U.S. taxation under the updated rules.
The article does not identify additional dollar thresholds, income limitations, or phaseouts.
Exclusions and Special Rules
The updated NCTI rules include the following changes:
- Interest and research and experimental deductions are not allocated for NCTI purposes.
- The qualified business asset investment exclusion is eliminated.
- More CFC income may be subject to the NCTI provisions because the exclusion for qualified business asset investment is no longer available.
Individuals generally are not eligible for the Section 250 deduction or foreign tax credit under these rules. However, an individual may consider:
- Making a Section 962 election to be treated as a corporation for tax purposes
- Using a C corporation holding company for foreign entities to potentially benefit from the Section 250 deduction
Documentation and Reporting
The article does not identify specific reporting requirements. Taxpayers should retain records supporting:
- Ownership interests in controlled foreign corporations
- The percentage of ownership held by U.S. shareholders
- CFC income and foreign taxes paid or accrued
- The foreign jurisdiction’s local tax rate
- Interest and research and experimental deductions
- Any Section 962 election
- Calculations of NCTI, Section 250 deductions, and foreign tax credits
Effective Dates
The NCTI rules apply after December 31, 2025.
Beginning after that date, GILTI is renamed NCTI, and the revised Section 250 deduction, foreign tax credit treatment, expense-allocation rules, and elimination of the qualified business asset investment exclusion apply.
Planning Considerations
Taxpayers with foreign subsidiaries should review their entity classification, ownership structure, and foreign jurisdictions to evaluate the potential impact of the NCTI rules.
Because the qualified business asset investment exclusion is eliminated, taxpayers should assess whether additional CFC income may become subject to current U.S. taxation. Taxpayers should also evaluate the local tax rate imposed on foreign operations, as the article indicates that no additional U.S. taxation applies when a CFC is taxed locally at 14%.
Individuals with foreign corporation interests may want to assess whether a Section 962 election or a C corporation holding-company structure could improve the availability of the Section 250 deduction.
Additional planning considerations include:
- Repatriation planning to reduce the overall effective tax rate on foreign subsidiary income
- Transfer-pricing review to help manage the worldwide effective tax rate
- Reviewing available elections and entity structures to minimize current taxation
Example
An individual owns an interest in a controlled foreign corporation. Beginning after December 31, 2025, the corporation’s income is evaluated under the NCTI rules rather than the prior GILTI rules.
Because the qualified business asset investment exclusion is eliminated, more of the corporation’s offshore income may be subject to current U.S. taxation. The individual may consider a Section 962 election to be treated as a corporation for tax purposes and potentially access the Section 250 deduction.
Next Steps
- Review ownership interests in controlled foreign corporations and related entity structures.
- Analyze the potential effect of NCTI on foreign subsidiary income and current U.S. taxation.
- Evaluate available elections, including a potential Section 962 election for individuals.
- Review foreign tax rates, repatriation strategies, and transfer-pricing arrangements.
For additional information about NCTI and its potential effect on your foreign operations and international tax position, contact your RKL advisor.
Frequently Asked Questions
Who is affected by NCTI?
NCTI may affect U.S. shareholders who own at least 10% of a controlled foreign corporation, as well as C corporations and individuals with foreign corporation interests.
When do the NCTI rules apply?
The NCTI rules apply after December 31, 2025.
What happened to GILTI?
GILTI is renamed Net CFC Tested Income, or NCTI.
What is the Section 250 deduction under the new rules?
For NCTI, the Section 250 deduction is 40%, reduced from 50% under the prior GILTI rules.
Can individuals claim the Section 250 deduction or foreign tax credit?
Individuals are not eligible for the Section 250 deduction or foreign tax credit under these rules. However, they may consider a Section 962 election or a C corporation holding company for foreign entities.
How does the elimination of the qualified business asset investment exclusion affect taxpayers?
The elimination of the exclusion may cause more controlled foreign corporation income to be subject to NCTI and current U.S. taxation.
