OBBBA's GILTI-to-NCTI Rewrite, One Year Later: What Multinational Groups Still Need to Model
In Plain Terms
If you or your business owns a company outside the United States a foreign subsidiary, or a business you personally hold a stake in abroad the U.S. taxes a share of that company's profit every year, even if none of it comes home to you. That regime used to be called GILTI. A year ago, the One Big Beautiful Bill Act ("OBBBA") rebuilt it from the inside and gave it a new name, Net CFC Tested Income (NCTI) and the new version has been the law since the start of this year for anyone on a calendar-year tax schedule.
This isn't just a rename you can ignore. The rate moved, a valuable deduction disappeared, and the credit you get for foreign taxes you've already paid changed too in ways that don't all point the same direction. If you haven't re-run your numbers since the change took effect, they're probably wrong. Below, we translate what changed into plain language first, then go deep on the mechanics for readers who want the full technical picture including tax counsel and CFOs modeling this directly.
The short version:
● The U.S. tax rate on this foreign business income effectively rose slightly, because the deduction that shields it from tax got smaller (50% → 40%).
● A separate benefit that used to shrink the taxable amount for businesses with real physical assets abroad (equipment, property, etc.) was eliminated entirely for asset-heavy businesses, this often outweighs the deduction change above.
● The credit for foreign taxes you've already paid on this income improved (you can now credit 90% of it instead of 80%) but a new, separate rule reduces the credit specifically on money you bring home from past years' foreign earnings, so the improvement isn't as clean as it looks at first glance.
● Under NCTI, corporate taxpayers and individual owners making a Section 962 election deduct 40% from taxable income, resulting in a 12.6% effective U.S. tax rate.
● A related regime for U.S. companies with foreign sales (FDII) and a separate tax aimed at large companies with related-party foreign payments (BEAT) both moved too.
● Regulations are still being finalized - the IRS has flagged more guidance is coming, so some of this may still be refined through 2026.
If any of that applies to you, the section below walks through the actual mechanics.
From GILTI to NCTI: The Core Mechanics
GILTI (Global Intangible Low-Taxed Income the U.S. tax on certain income earned by foreign companies that Americans control) is now Net CFC Tested Income (NCTI). "CFC" stands for Controlled Foreign Corporation a foreign company majority-owned by U.S. persons, which is what triggers this regime in the first place. Beyond the name, three structural changes matter most:
● The deduction dropped from 50% to 40%. Under the old regime, corporate taxpayers deducted 50% of GILTI from taxable income, producing a 10.5% effective rate. Under NCTI, corporate taxpayers and eligible individual shareholders who make a Section 962 election, receive a 40% deduction, producing an effective U.S. tax rate of roughly 12.6%.
● The deemed tangible income return is gone. The old law exempted a 10% return on Qualified Business Asset Investment (QBAI, essentially the tangible depreciable property a foreign company owns, like equipment or real estate) from the taxable base. OBBBA eliminates this exemption entirely for tax years beginning after December 31, 2025, so the taxable amount is no longer reduced by this carve-out. For asset-heavy foreign businesses, this alone can meaningfully increase the amount subject to tax.
● Interest and R&E expense allocation is off the table. Interest expense and research & experimentation expenditures are now explicitly excluded from allocation to the NCTI basket, which changes how the foreign tax credit limitation is calculated (more on that below).
The Foreign Tax Credit Haircut Got Smaller - With a Catch
A "haircut" here just means the portion of foreign tax you paid that the U.S. lets you credit against your U.S. tax bill, versus the portion you lose. The haircut on taxes attributable to this income dropped from 20% to 10%, meaning 90% of foreign taxes paid are now creditable, up from 80% under the old GILTI rules. That's a genuine improvement for businesses paying meaningful tax in the foreign jurisdictions where this income is earned.
The catch: OBBBA layers in a separate, symmetric 10% haircut on foreign taxes tied to distributions of previously taxed earnings in plain terms, when a foreign company pays out past years' already-taxed profits to its U.S. owner, the tax credit on that payout now takes a similar 10% cut. This applies to distributions made after June 28, 2025. Businesses that assumed a clean pass-through on those distributions need to re-check that assumption the credit treatment coming in and going out are no longer mirror images of each other.
Still unsettled: the Treasury/IRS officially issued Notice 2025-77 on December 4, 2025, flagging forthcoming proposed regulations to amend the existing rules governing these distributions. As of this writing, those regulations haven't been finalized. Anyone planning the timing of a distribution from a foreign company should treat this as an open variable, not a settled number.
FDII's Companion Changes
FDII (Foreign-Derived Intangible Income), which is a separate tax break for U.S. companies earning income from foreign sales and services is now technically called Foreign-Derived Deduction Eligible Income (FDDEI) in the statute. While lower than the temporary 37.5% deduction under TCJA, OBBBA averted the scheduled cliff-drop to 21.875% by setting the permanent FDDEI deduction at 33.34% (producing an effective U.S. rate of roughly 14%). The same tangible-asset-related deduction described above is eliminated here too. Interest and R&E expenditures no longer reduce gross income in this computation either. U.S. companies with export-heavy or services-heavy international sales should re-run their FDII benefit under the new mechanics the deduction rate moved, but so did several of the inputs feeding into it.
BEAT: A Smaller Move, Still Worth Modeling
The Base Erosion and Anti-Abuse Tax “BEAT”, (a minimum tax aimed at large companies that reduce their U.S. tax bill through payments to related foreign entities) rate increased from 10% to 10.5% for tax years beginning after December 31, 2025. It's a half-point change, but for companies already close to the BEAT threshold, half a point can be the difference between a rounding error and a real cash liability. OBBBA also permanently preserves favorable treatment of R&D and certain other credits against BEAT liability a provision that had been scheduled to phase out under prior law and would have made BEAT meaningfully more costly for credit-heavy taxpayers.
What This Means in Practice
None of these changes operate in isolation a lower NCTI rate, a smaller foreign tax credit haircut, an eliminated asset-related deduction, and a higher BEAT rate all move the same underlying position at once, in different directions. In practice, that means:
1. Re-run the full model, not just the headline rate. A 40% deduction sounds like a win relative to 50% until you remember the offset that used to shrink the base is gone. The net effect depends on your specific mix of tangible assets, foreign tax rates, and plans for bringing money home.
2. Flag any distributions made after June 28, 2025, for separate review, given the new symmetric haircut and the still-pending regulations under Notice 2025-77.
3. Revisit FDII eligibility calculations, especially for businesses with IP or service exports where the eliminated deduction changes the base.
4. Treat this as a moving target through 2026. Regulatory guidance on several of these mechanics is still in progress. A position modeled today may need to be revisited once Treasury finalizes the rules referenced in Notice 2025-77.
The rename from GILTI to NCTI is the least important thing that happened here. The deduction math, the elimination of the tangible-asset deduction, and the asymmetric-then-symmetric foreign tax credit haircut are the parts that actually move a business owner's effective tax rate and they're worth a full re-model, not a footnote update, whether you're running a multinational finance team or you personally own a company abroad.
This article is intended as general information on recently enacted tax legislation and does not constitute tax or legal advice for any specific situation. Figures reflect the law as enacted and IRS Notice 2025-77 as of July 2026; forthcoming Treasury regulations may refine several of the mechanics discussed above.
