What Is GILTI/NCTI? A Plain English Guide for CPAs and Business Owners

Since the Tax Cuts and Jobs Act of 2017, U.S. shareholders of controlled foreign corporations (CFCs) have faced a complex tax regime originally called GILTI — Global Intangible Low-Taxed Income. For tax years beginning after December 31, 2025, the One Big Beautiful Bill Act (OBBBA) officially renamed this regime to Net CFC Tested Income (NCTI) and made several significant changes to how it works. Despite the name change, the core concept remains the same — a minimum U.S. tax on CFC income that exceeds a certain threshold. For many U.S. businesses with foreign operations, it remains one of the most significant and costly international tax provisions they face.

This guide explains what GILTI/NCTI is, how it is calculated under the current 2026 rules, who it applies to, and what planning strategies are available to reduce or eliminate its impact.

2026 Legislative Note: The OBBBA made several important changes effective for tax years beginning after December 31, 2025: (1) GILTI is renamed to Net CFC Tested Income (NCTI); (2) the §250 deduction rate is reduced from 50% to 40%, raising the effective corporate rate from 10.5% to 12.6%; (3) the QBAI tangible property exclusion is eliminated — all net CFC tested income is now potentially subject to the regime; and (4) the foreign tax credit cap is raised from 80% to 90%. These are material changes for CFC owners and their advisors.

What Is GILTI / NCTI?

GILTI — now officially renamed Net CFC Tested Income (NCTI) for tax years beginning after December 31, 2025 — is a minimum tax on the income of controlled foreign corporations (CFCs) owned by U.S. shareholders. It was originally enacted as part of the Tax Cuts and Jobs Act (TCJA) under §951A of the Internal Revenue Code and became effective for tax years beginning after December 31, 2017. The One Big Beautiful Bill Act (OBBBA) renamed the regime and updated several key mechanics starting in 2026.

For simplicity, this article uses "GILTI/NCTI" when referring to the regime generally, and notes the specific 2026 rule changes where they apply.

The policy intent behind GILTI was to discourage U.S. companies from shifting profits to low-tax foreign jurisdictions by parking intangible assets — like patents, trademarks, and software — offshore. In practice, GILTI always cast a wider net, applying to virtually all CFC income above a threshold. Under the 2026 OBBBA changes, the net is cast even wider — the QBAI tangible asset exclusion has been eliminated, meaning all net CFC tested income is now potentially subject to the regime.

Who Does GILTI Apply To?

GILTI applies to U.S. shareholders of CFCs. You are a U.S. shareholder if you own — directly, indirectly, or constructively — 10% or more of the total combined voting power or total value of all classes of stock of a foreign corporation.

A foreign corporation is a CFC if U.S. shareholders together own more than 50% of the voting power or value.

GILTI applies to:

• U.S. individuals who own CFCs
• U.S. C corporations that own CFCs
• U.S. S corporations that own CFCs
• U.S. partnerships with CFC investments
• U.S. trusts and estates with CFC interests

The tax treatment differs significantly depending on whether the U.S. shareholder is a corporation or an individual — a distinction that drives many planning decisions.

How Is GILTI/NCTI Calculated?

The calculation involves several defined terms. The 2026 OBBBA changes simplified one major step — the QBAI exclusion — while changing the deduction rates. Here is how it works for tax years beginning after December 31, 2025:

Step 1: Calculate Net CFC Tested Income

Start with the gross tested income of each CFC — broadly, all income of the CFC other than:

• Effectively connected income (ECI)
• Subpart F income
• Income excluded under the high-tax exclusion (if elected)
• Dividends from related persons
• Foreign oil and gas extraction income (FOGEI)

Subtract allocable deductions to arrive at tested income (or tested loss) for each CFC.

Aggregate the tested income and tested losses across all CFCs to arrive at net CFC tested income.

Step 2: QBAI Exclusion — Eliminated for 2026

Under prior law (through 2025): A 10% deemed return on the CFC's tangible assets (QBAI) was subtracted from net CFC tested income, reducing the taxable amount. Under 2026 OBBBA rules: The QBAI exclusion is eliminated. The entire net CFC tested income is now potentially subject to the NCTI regime. This is a significant change that increases the taxable base for capital-intensive businesses that previously benefited from the QBAI exclusion. GILTI/NCTI = Net CFC Tested Income (no QBAI reduction)

Step 3: Apply the §250 Deduction

Under prior law (through 2025): U.S. C corporations received a 50% §250 deduction, resulting in a 10.5% effective rate (50% × 21%). Under 2026 OBBBA rules: The §250 deduction is reduced to 40%, resulting in an effective corporate rate of 12.6% (60% × 21%) — before foreign tax credits. Individuals without a §962 election still do not get the §250 deduction — NCTI is taxed at ordinary income rates of up to 37%.

Step 4: Apply the Foreign Tax Credit (§960(d))

Under prior law (through 2025): The FTC cap was 80% of foreign taxes paid by the CFC. Under 2026 OBBBA rules: The FTC cap is raised to 90%, meaning corporations and §962 individuals can use 90% of foreign taxes paid by the CFC against their NCTI liability.

The crossover rate — the foreign tax rate at which the FTC fully offsets U.S. NCTI tax — rises modestly from approximately 13.125% under prior law to approximately 14% under the 2026 rules.

GILTI/NCTI for Individuals vs. Corporations (2026 Rules)

The tax treatment differs significantly between corporate and individual U.S. shareholders:

This disparity means individual CFC owners without a §962 election still face dramatically higher NCTI exposure than corporate shareholders. The §962 election — which allows individuals to be taxed at corporate rates — becomes even more important under the 2026 rules.

The GILTI High-Tax Exclusion (HTE)

One of the most important GILTI planning tools is the High-Tax Exclusion (HTE) under §954(b)(4), as extended to GILTI by final regulations issued in 2020.

Under the HTE election, a CFC's income can be excluded from the GILTI/NCTI calculation if it was subject to foreign income tax at an effective rate exceeding 90% of the U.S. corporate rate — currently 18.9% (90% × 21%). This threshold remains unchanged under the 2026 OBBBA rules.

Key features of the HTE election:

• It is made annually and applies on a tested unit basis (generally the CFC itself or a branch of the CFC)
• It is an all-or-nothing election per tested unit — you cannot partially exclude income
• It must be made consistently — the election applies to all CFCs in the controlled group
• The election reduces GILTI inclusions but also reduces available foreign tax credits

The HTE is particularly valuable for CFCs operating in high-tax jurisdictions (e.g., Germany, France, UK, Japan) where the effective foreign tax rate already exceeds the 18.9% threshold.

The §962 Election — An Option for Individuals

Individuals who own CFCs directly can make a §962 election to be taxed on their Subpart F and GILTI inclusions as if they were a domestic corporation. This allows the individual to:

• Access the §250 deduction (reducing GILTI by 40% under 2026 rules)
• Claim the §960 foreign tax credit against GILTI

The §962 election must be made annually on the individual's tax return. It is complex and requires careful analysis — the benefit at the inclusion stage may be offset by additional tax when the CFC eventually distributes earnings that were previously taxed under §962.

TaxPalette's §962 Election tool helps you model the net tax savings from a §962 election, including the §960 foreign tax credit analysis and the net benefit calculation.

Key GILTI Planning Strategies

1. GILTI High-Tax Exclusion

If the CFC operates in a jurisdiction with an effective tax rate above 18.9%, consider making the HTE election to exclude that income from the GILTI calculation entirely.

2. §962 Election for Individuals

Individual CFC owners should model the §962 election each year to determine whether the net benefit — access to §250 deduction and §960 FTC — outweighs the complexity and potential downstream tax on distributions.

3. QBAI Planning — Eliminated for 2026

Under prior law, increasing the CFC's investment in tangible depreciable property reduced GILTI via the QBAI exclusion. This planning lever no longer exists under the 2026 OBBBA rules. Capital-intensive businesses that previously benefited from QBAI will see a larger NCTI base.

4. Check-the-Box Elections

Reorganizing foreign entity structures using check-the-box elections can reduce or eliminate Subpart F and GILTI by creating disregarded entities that are treated as branches rather than separate corporations.

5. Entity Structure Review

For individual shareholders with significant GILTI exposure, restructuring ownership through a U.S. C corporation may provide access to the §250 deduction and more favorable FTC treatment.

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TaxPalette's §962 Election Tool calculates your net tax savings from making the election, including the §960 deemed-paid FTC analysis — updated for 2026 OBBBA rules. Our E&P Tracker and PTEP Tracker maintain multi-year CFC calculations updated for the 90% FTC cap on NCTI PTEP distributions. Available to Pro subscribers.