Taxes & Entities

GILTI, FDII, and Subpart F

Work out which slice of a controlled foreign subsidiary's profit is taxed to the US parent this year, at what effective rate, and how much foreign tax credit survives the haircut.

  • Expert
  • 13 min total
  • 12 chapters

What decision this helps you make: Where to locate income, IP and functions across a multinational group once you know what actually gets picked up currently and what does not.

What this topic is

Three overlapping US regimes tax cross-border income. Subpart F picks up mobile, passive and related-party income of controlled foreign corporations immediately. GILTI, restyled as net CFC tested income by the 2025 legislation, sweeps up nearly everything Subpart F leaves behind, at a reduced rate. FDII, restyled as foreign-derived deduction eligible income, is the mirror-image carrot: a reduced US rate on export income earned by a domestic corporation.

Why it matters

Together these regimes determine the marginal tax cost of every decision about where a multinational puts its intellectual property, its manufacturing, its distribution entities and its debt. Get the break-even foreign tax rate wrong and you will structure toward a jurisdiction that saves nothing; get the credit mechanics wrong and you will pay tax twice on the same profit. The 2025 legislation reset the deduction percentages, removed the tangible-asset carve-out, and changed the foreign tax credit haircut, so a model built on pre-2026 assumptions is now wrong in three separate places.

Who should learn it

Tax directors and CFOs of US-parented multinationals, international tax practitioners, and corporate development teams pricing cross-border structures.

What you will understand

  • How Subpart F, the GILTI/NCTI regime and FDII/FDDEI fit together and which one catches a given item of income
  • How the inclusion is computed, and how the deduction and foreign tax credit haircut set the break-even foreign rate
  • What the 2025 changes did to the rates, the tangible-asset return, the credit haircut and expense allocation
  • How the high-tax exceptions work, and where the regime now collides with the global minimum tax

Prerequisites

Common misconception

"GILTI is a global minimum tax of about 10.5%, so any jurisdiction taxing above that is safe." Two errors in one sentence. The relevant number was never the inclusion rate. It was the break-even foreign rate after the foreign tax credit haircut, historically 13.125% and, after the 2025 changes, around 14%. And the credit is computed on a blended basis across a separate limitation category with expense allocation against it, so a group can sit well above the break-even rate on paper and still have residual US tax because allocated expenses have eaten the limitation.