What is GILTI Tax?

How it works

GILTI was added by the Tax Cuts and Jobs Act of 2017 to capture earnings from intangible assets shifted offshore. The mechanism reaches US shareholders (10%+ owners) of controlled foreign corporations and taxes them annually on a GILTI inclusion equal to the CFC's net tested income minus a routine return (10%) on the CFC's qualified business asset investment (QBAI).

In short:

GILTI inclusion = Net CFC tested income − (10% × QBAI)

The inclusion is taxed to the US shareholder at their marginal rate, similar to a Subpart F inclusion. Two key softeners:

• Section 250 deduction (C-corporation shareholders only): 50% of the GILTI inclusion is deductible — bringing the effective rate to ~10.5% (50% × 21% federal CIT).
• Foreign tax credit (GILTI basket, 80% haircut): foreign tax paid by the CFC on tested income is creditable at 80% in the GILTI basket. Combined with the §250 deduction, this is designed to allow zero US residual tax when the CFC's effective foreign rate exceeds approximately 13.125%.

Individual US shareholders of CFCs without a §962 election face the much harsher straight-marginal-rate treatment with no §250 deduction — often 37% federal on the GILTI inclusion. The §962 election lets individuals elect corporate-style treatment for GILTI purposes (with the §250 deduction available) but creates dividend-tax mechanics on later distributions.

OBBBA renaming and reform (July 2025)

Per PwC US Significant Developments, the One Big Beautiful Bill Act (4 July 2025) renamed and reshaped GILTI:

• GILTI is now Net CFC Tested Income (NCTI) under OBBBA terminology.
• Effective tax rate is more favourable than what GILTI would have been at end-2025 without legislation.
• CFC tax years, attribution rules, and pro-rata-share rules modified.

Most practitioners still use "GILTI" colloquially for some time, but technical filings under OBBBA refer to NCTI. The substance is similar but the math changed — recheck calculations with 2025-aware advisors.

High-tax exclusion (HTE)

US shareholders may elect annually to exclude items of tested income subject to a foreign effective tax rate of at least 18.9% (90% × 21% US CIT rate). Election is all-or-nothing per CFC and is irrevocable for 60 months. Useful when the CFC operates in a high-tax country (Germany, France, UK Corporation Tax) — the exclusion takes the high-taxed income out of GILTI / NCTI entirely.

Examples

• US founder owns 100% of a Cayman SaaS company earning $1M of tested income, $50k QBAI. GILTI inclusion = $1M − ($50k × 10%) = $995k. Cayman: 0% corporate tax → no FTC. Founder's marginal rate (assuming top bracket) = 37% federal → ~$368k US tax due in the year, even with zero cash distributed.
• US C-corp owns 100% of a French SAS earning €5M tested income, €1M QBAI. GILTI inclusion = €5M − (€1M × 10%) = €4.9M. France: 25% CIT = €1.25M paid. After §250 (50% deduction) and 80% FTC haircut, US residual tax often near zero — France's 25% rate exceeds the 13.125% break-even.

Common mistakes

• Forgetting GILTI / NCTI applies to individuals. Many founders assume "I have a small company" means GILTI doesn't matter. It does — and individual US shareholders are most exposed.
• Skipping the §962 election when individual rates would be punitive. The election is annual and reversible — model it both ways before defaulting to straight-individual treatment.
• Conflating Subpart F and GILTI. Subpart F applies first (passive income), GILTI / NCTI applies second (everything else CFC-tested). Both can apply in the same year.
• Ignoring Pillar Two interaction. Pillar Two Top-up taxes (IIR / UTPR / QDMTT) can stack on top of GILTI / NCTI for in-scope groups (€750M+ revenue). The recent OBBBA + Pillar Two side-by-side safe harbour for US multinationals (per PwC US significant developments) reshapes this interaction — get current advice.