GILTI and Net CFC Tested Income: How the U.S. Taxes CFC Profits

Before 2018, a foreign corporation owned by Americans could earn active business profit abroad and owe U.S. tax on it only when the cash came home. The 2017 tax law ended that with GILTI, a regime that pulls most CFC operating profit onto U.S. shareholders’ returns the year it is earned. The 2025 tax law kept the machine and retuned it: for tax years beginning in 2026 the regime is called net CFC tested income (NCTI), the search-engine-famous acronym survives mostly out of habit, and the dials moved in ways that matter for planning. If you are not sure whether your foreign company is a CFC in the first place, start with the CFC ownership rules ; this guide assumes the label already applies.

How the Inclusion Works

Each year, a CFC computes its tested income: gross income minus allocable deductions, excluding a few categories that are taxed under other rules (Subpart F income, effectively connected income, and income carved out by the high-tax exclusion). Each 10% U.S. shareholder then includes their pro rata share in their own taxable income, netting tested losses from other CFCs they own against tested income. The result lands on the return via Form 5471’s Schedule I-1 and Form 8992, whether or not a dollar was distributed.

Under the pre-2026 rules, shareholders first subtracted a deemed 10% return on the CFC’s tangible assets (QBAI). That exemption is gone for tax years beginning in 2026. The regime now reaches essentially all tested income, which pulls asset-heavy businesses (foreign factories, hotels, equipment operations) fully into the net for the first time.

Because the income was already taxed to the shareholder, it becomes previously taxed earnings and profits (PTEP), and the later cash distribution comes out without a second federal income tax, provided the Schedule J and P records prove it.

The Corporate Math

For domestic C corporations (and individuals who elect into corporate treatment, below), two relief valves apply for 2026:

• The Section 250 deduction: 40% of the inclusion, leaving 60% taxed at the 21% corporate rate, an effective 12.6% federal rate before credits
• The foreign tax credit: 90% of the foreign income taxes attributable to the inclusion (up from 80%)

Run together, foreign taxes at roughly 14% or higher now generally wipe out the U.S. tax on NCTI for corporate-style taxpayers (12.6% divided by the 90% allowance). Most real economies tax corporate profit above that line, which is the quiet good news of the 2026 changes: for operating companies in ordinary-tax countries, the regime is increasingly a compliance exercise rather than a cash cost. The bad news is concentrated on low-tax jurisdictions and on anyone who cannot use the corporate math.

The Individual Problem

An individual U.S. shareholder gets none of that by default. The inclusion is ordinary income at rates up to 37%, with no Section 250 deduction and no credit for the corporation’s foreign taxes (personal foreign tax credits under Form 1116 cover taxes you paid, not taxes your corporation paid). A founder whose foreign company earns $200,000 and pays 25% tax abroad can still owe full U.S. ordinary rates on the inclusion. Two elections rescue most of these cases:

The Section 962 election. An individual can elect, year by year, to be taxed on CFC inclusions as if a domestic corporation received them: 21% rate, the 40% deduction, and the 90% deemed-paid foreign tax credit. The price is a second, usually modest, layer of tax when the CFC actually distributes the earnings (only the portion sheltered by the election’s low tax is taxed again). For CFCs paying meaningful foreign tax, Section 962 routinely turns a five-figure annual U.S. bill into approximately zero, at the cost of some genuinely intricate PTEP bookkeeping.

The high-tax exclusion (HTE). An annual election excludes from tested income any CFC income taxed abroad at an effective rate above 90% of the U.S. corporate rate, currently about 18.9%. For a company in Colombia, Mexico, Israel, Germany, or the UK, the HTE can switch the regime off entirely. The trade: excluded income brings no foreign tax credits with it, and the election has consistency rules across related CFCs, so it is a calculation, not a reflex.

The third path is structural: for an owner-operated business abroad, a check-the-box election that makes the company a disregarded entity ends the CFC analysis altogether, trading it for flow-through taxation, Form 8858 , and for expat owners, direct access to the foreign earned income exclusion or foreign tax credit on what becomes their own business income. Which door is best depends on rates, distributions, self-employment tax, and exit plans, and the answer genuinely differs client to client.

NCTI, Subpart F, and What Still Escapes

The regime sits alongside its older sibling. Subpart F still taxes the historically abusable categories (passive investment income, certain related-party sales and services income) at ordinary rates with no special deduction, before the NCTI computation even starts. What escapes both is short: income excluded by the HTE, distributions of PTEP, and not much else. The old strategy of deferring active foreign profit inside a corporation is gone; what remains is choosing, deliberately, which regime and which elections tax it best.

Common Situations We See

• The U.S. founder with a foreign startup: wholly owned CFC, low foreign tax in early years, NCTI on every profitable dollar. Usually a Section 962 or check-the-box conversation, ideally at formation.
• The immigrant entrepreneur: becomes a U.S. resident owning an established foreign company; the regime attaches at residency. The best planning happens before the move .
• The U.S. family in a foreign business: attribution makes the company a CFC; the HTE often resolves the economics while Form 5471 compliance remains.
• The expat consultant with a local company: frequently better off disregarding the entity and using the individual expat toolkit than running a one-person CFC.

When to Seek Help

NCTI is not a form you fill in; it is an annual computation with elections layered on top, and the elections are where the money is. If you own 10% or more of a foreign corporation, get the regime modeled once: default treatment versus Section 962 versus HTE versus restructuring, with your real foreign tax rate and distribution plans in the math. Our international tax practice runs exactly this analysis, and the outcome usually changes the answer by more than the fee.

Last updated: 2026