Key US International Tax Provisions of the “One Big Beautiful Bill” Act

On July 4, 2025, President Donald J. Trump signed the “One Big Beautiful Bill” Act (OBBBA) into law.

The OBBBA modifies and permanently extends many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that were scheduled to expire at the end of 2025. The OBBBA also contains some key international tax changes, as outlined below.

Key Takeaways

• Key international tax modifications (effective 2026) include the renaming of GILTI to Net CFC Tested Income (NCTI) with the repeal of QBAI and a reduced IRC Sec. 250 deduction, the renaming of FDII to Foreign Derived Deduction Eligible Income (FDDEI) with a lower deduction rate, and an increase in the BEAT rate.
• The OBBBA also reinstates IRC Sec. 958(b)(4) to simplify CFC determinations while adding anti-abuse rules, permanently extends the CFC look-through rule, and allows for full deduction of domestic R&E expenses.
• These changes require immediate and thorough tax planning for US taxpayers to align business objectives with the new international tax landscape.

Net CFC Tested Income (Formerly GILTI)

IRC Sec. 951A, currently known as Global Intangible Low Taxed Income (GILTI), will be renamed as Net CFC Tested Income (NCTI) effective for tax years beginning on or after January 1, 2026. The OBBBA eliminated a provision that allowed US taxpayers to exclude deemed return on tangible assets, known as Qualified Business Asset Income (QBAI), which was originally enacted under the TCJA. Due to the repeal of the QBAI component, a US shareholder’s inclusion will generally increase, in some cases dramatically, if they have tangible assets in their CFCs.

US taxpayers with CFCs that have Tested Income will no longer be able to exempt the Net Deemed Tangible Income Return (DTIR) (e.g., 10% of QBAI) to reduce their IRC Sec. 951A inclusion. For instance, this may adversely impact US taxpayers who have CFCs with specified tangible property that was depreciable under IRC Sec. 167 and significantly increase their IRC Sec. 951A inclusion as a result. Furthermore, the IRC Sec. 250 deduction against NCTI (formerly GILTI) will be reduced from 50% to 40%, further increasing the IRC Sec. 951A inclusion.

One bright spot is the increase in the deemed paid foreign tax credit against NCTI from 80% to 90%. These changes will be permanent and effective for tax years beginning after December 31, 2025.

Foreign Derived Deduction Eligible Income (Formerly FDII)

Foreign Derived Intangible Income (FDII) under IRC Sec. 250 will be renamed as Foreign Derived Deduction Eligible Income (FDDEI). The deduction will be reduced permanently from 37.5% of FDII to 33.34% of FDDEI, resulting in an effective tax rate on FDDEI of approximately 14% for corporate US taxpayers (up from 13.125%, but below the scheduled increase to 16.4%). Under the OBBBA, Deduction Eligible Income (DEI) will exclude the actual or deemed transfer of IP to foreign persons under IRC Sec. 367(d). This was designed for US corporations to keep their IP onshore.

Gross DEI would be reduced by all deductions properly allocable hereto, except for interest and Research and Experimental (R&E) expenditures. This would increase DEI, thereby increasing the deduction related to FDDEI. Furthermore, the repeal of DTIR would be beneficial in the FDDEI computation as it would increase the amount of the eligible deduction for US corporate taxpayers. These changes will be permanent and effective for tax years beginning after December 31, 2025.

Reinstatement of IRC Sec. 958(b)(4) and Introduction of New IRC Sec. 951B

The OBBBA provides some much sought-after relief by reinstating IRC Sec. 958(b)(4), effective for taxable years beginning after December 31, 2025. This section was previously repealed as part of TCJA. This repeal allowed for downward attribution of stock from US persons in determining CFC status. This resulted in onerous reporting for many US taxpayers whose compliance burden will now be reduced. For instance, for a foreign parent that wholly owns a brother-sister foreign and US subsidiaries, this would trigger downward attribution to deem the foreign subsidiary a CFC under the TCJA rules. That downward attribution rule will now be nullified in determining CFC status, thereby deeming the foreign subsidiary to no longer be considered a CFC under the OBBBA change.

In conjunction with the relief provided by the reinstatement of IRC Sec. 958(b)(4), the OBBBA also creates IRC Sec. 951B as an anti-abuse provision to make sure that there is a balanced restoration of limitations on downward attribution of stock ownership in applying constructive ownership rules. Although relief is provided to unrelated US shareholders of CFCs from reporting and inclusion, related US shareholders of foreign controlled groups may still be subject to both reporting and Subpart F and NCTI inclusion rules. IRC Sec. 951B does this by introducing new terms such as foreign-controlled US shareholders (FCUS) and foreign controlled foreign corporations (FCFC).

Base Erosion and Anti-Abuse Tax (BEAT)

Under the OBBBA, the IRC Sec. 59A Base Erosion and Anti-Abuse Tax (BEAT) rate will increase to 10.5%, effective for taxable years beginning after December 31, 2025. BEAT applies to large corporate taxpayers (other than S corporations, REITs, and RICs) that have average annual gross receipts of $500 million or more over the three preceding tax years and a base erosion percentage of 3% or higher (2% or higher for banks and registered securities dealers). The base erosion percentage is the total “base erosion payments” (deductible payments made to foreign related parties) divided by total allowable deductions of the taxpayer for the taxable year.

Foreign Tax Credit

In addition to the favorable change increasing the IRC Sec. 960 deemed paid foreign taxes against NCTI from 80% to 90% which is effective for taxable years beginning after December 31, 2025, there are some other modifications to be aware of as they relate to Foreign Tax Credits (FTC). The OBBBA limits the allocation and apportionment of certain deductions (including all interest expense and R&E expenditures) to NCTI for Section 904 FTC limitation purposes. Also, the disallowance on the FTC of 10% of foreign taxes related to distributions of IRC Sec. 951A Previously Taxed Earnings and Profits (PTEP) made on or after June 28, 2025.

Sourcing Certain Income from the Sale of Inventory Produced in the US 

The OBBBA allows for up to 50% of the income from the sale of inventory to be treated as foreign sourced for IRC Sec. 904 Foreign Tax Credit limitation purposes (e.g., foreign branch basket), depending on how much income is attributable to a foreign office or fixed place of business.

Permanent Extension of CFC Look-Thru Rule

The CFC look-through rule, which was due to expire at the end of December 31, 2025, has been permanently extended under the OBBBA. Under IRC Sec. 954(c)(6), the CFC look-thru rule provides relief by exempting certain CFC to CFC payments that would otherwise be considered Subpart F income (e.g., Foreign Personal Holding Company Income), such as dividends, interest, rents, royalties, etc. This is welcome news for US taxpayers with CFCs, providing them with the ability to plan long-term.

Modifications to Pro Rata Share Rules

Pursuant to the OBBBA, a US shareholder that owns stock (under IRC Sec. 958(a)) in a CFC on any day during the tax year shall include in its income the pro rata share of that CFC’s IRC Sec. 951 subpart F income effective for taxable years beginning after December 31, 2025. This makes sure the inclusion of Subpart F income based on a US shareholder’s stock ownership during the CFC’s income-generating period, not solely based on the last day of the CFC year, as was the rule pre-OBBBA. The rule would also conform to NCTI inclusion under IRC Sec. 951A.

Repeal of 1-Month Deferral in Determination of Tax Year of Specified Foreign Corporations

The OBBBA repeals the one-month deferral election under IRC Sec. 898 for a Specified Foreign Corporation’s (SFC) first tax year beginning after November 30, 2025, and provides transition rules to align taxable years with the required year. After this change, SFCs’ year-end must conform to their majority US shareholder’s year-end.

IRC Sec. 163(j)

The OBBBA restores the favorable EBITDA calculation to arrive at Adjusted Taxable Income (ATI) for purposes of determining the business interest expense deduction for tax years beginning after December 31, 2024. Currently, US taxpayers are only allowed to deduct up to 30% of ATI of business interest expense based on the EBIT on a stand-alone CFC basis, assuming no CFC Group Election is made.

The addition of depreciation, amortization, and depletion back into the computation would expand the deduction for many US taxpayers of CFCs with business interest expense who are limited. The final bill also excludes NCTI and Subpart F from ATI for purposes of computing the 30% interest expense deduction limitation.

IRC Sec. 174

The OBBBA provides much-needed relief to US taxpayers who have domestic research and experimental (R&E) expenditures by allowing them to deduct such expenses in full on their US tax returns. However, this relief is not extended to foreign R&E expenditures, which are still required to be amortized and capitalized over 15 years. This is designed to keep R&E onshore in the US but can be seen as a major blow to US companies conducting R&E overseas.

Takeaways and Next Steps

With the OBBBA modifying many of the international tax provisions in the tax code, US taxpayers now have much-needed certainty that will allow them to properly align their business objectives with upcoming changes in tax law.

Taxpayers should engage a trusted tax advisor to help them understand and model out these changes as part of their overall tax planning and business strategy. Proper planning is essential to navigate the complexities of the new tax landscape and its impact on US international taxation.

Contact our international tax team today to see how we can assist you.