Budget Reconciliation Bill signed into law

The House of Representatives passed its initial version of the Act on May 22, 2025 (the “House Bill”), which was meaningfully changed by the revised version of the Act that passed the Senate on July 1, 2025 (the “Senate Bill”). The final version of the Act that was signed into law follows the Senate Bill.

Notably, the Act permanently extends temporary tax cuts previously made under the Tax Cuts and Jobs Act of 2017¹ (“TCJA”) and makes many other significant changes to the Internal Revenue Code of 1986, as amended (the “Code”),² including:

• Temporarily increasing the cap for the deduction for state and local taxes (“SALT”) by individuals to USD40,000 (with small annual increases), subject to phase out for taxpayers with income in excess of USD500,000; however, the Act did not include elements contained in the House Bill or an earlier version of the Senate Bill that would have eliminated or substantially reduced the ability of a partner of a partnership and a shareholder of an S corporation to deduct a portion of its separately stated share of pass-through entity taxes (“PTET”) by the partnership or S corporation;
• Expanding the benefits of the qualified small business stock (“QSBS”) exclusion under section 1202 for any QSBS acquired after the date of enactment of the Act by: (i) permanently increasing the amount of recognized gain that a noncorporate taxpayer may exclude from its gross income under section 1202 from USD10m to USD15m; and (ii) reducing the requisite period that a noncorporate taxpayer is required to hold QSBS in order to benefit from the QSBS exclusion from five years to three years;
• Permanently extending the 100% bonus depreciation provided under section 168(k);
• Permanently amending the definition of “adjusted taxable income” for purposes of the section 163(j) interest expense limitation to calculate such limitation on an EBITDA (rather than EBIT) basis;
• Permanently extending the immediate deductibility of domestic research or experimental expenditures;
• Permanently increasing the rate under the base erosion and anti-abuse tax (“BEAT”) from 10% to 10.5% (and removing any further future increase to the BEAT rate or future changes to eliminate the benefit of certain business credits);
• Increasing the effective rate of U.S. federal income tax on global intangible low-taxed income (“GILTI”)³ for domestic corporations (and U.S. individuals who make a section 962 election) from 10.5% to 12.6% and increasing the effective rate of U.S. federal income tax for domestic corporations on foreign-derived intangible income (“FDII”)⁴ from 13.125% to 14%;
• Removing “deemed tangible income return” (“DTIR”) from the calculation of a domestic corporation’s FDII deduction and removing “net deemed tangible income return” (“NDTIR”) from the calculation of a U.S. shareholder’s GILTI inclusion;
• Modifying how a U.S. shareholder’s pro rata share of the subpart F income and GILTI of a controlled foreign corporation (“CFC”) is computed;
• Modifying how deductions are allocated and apportioned to GILTI basket income for purposes of the foreign tax credit (“FTC”) limitation under section 904;
• Re-inserting the limitation on downward attribution to U.S. persons from non-U.S. persons under section 958(b)(4), while also adding a new section 951B to the Code that will apply the subpart F and GILTI inclusion rules to a “foreign controlled United States shareholder” (FCUSS) of a “foreign controlled foreign corporation” (“FCFC”);
• Permanently extending the “CFC look-through” rule under section 954(c)(6);
• Phasing out or terminating many clean energy credits, including those for electric vehicles, wind, and solar;⁵ and
• Permanently renewing and enhancing the Opportunity Zone (“OZ”) program.

However, in response to an agreement reached between the United States and the other Group of Seven (G7) Countries to exclude U.S.-parented groups from the Pillar Two income inclusion rule (“IIR”) and the undertaxed profits rule (“UTPR”), the Act does not include proposed section 899, which was sometimes referred to as the “revenge tax.”

This client alert summarizes in more detail the key individual, business, and international tax provisions, as well as other significant provisions contained in the Act.⁶

• Individual provisions
• Business tax provisions
• International tax provisions
• Energy tax provisions
• Other provisions

Individual provisions

Changes to individual tax rates (Section 1)

The Act permanently extends the previously temporary lower tax rates and wider income brackets from the TCJA that were originally slated to sunset for taxable years beginning after December 31, 2025, meaning the top marginal individual income tax rate remains 37% rather than reverting to its pre-TCJA rate of 39.6% and the income brackets remain slightly wider than their pre-TCJA counterparts. In addition, the Act provides inflation adjustments up to and including the 12% bracket, which will shift the dollar threshold for those brackets up and increase the amount of income subject to the lower tax rates.

Additionally, the Act permanently increases the individual alternative minimum tax exemption and its phaseout. The Act retains inflation adjustments to the exemption amount as applied from 2018, while resetting inflation adjustments to the phaseout.

Disallowance of miscellaneous itemized deductions (Section 67)

The Act permanently eliminates the deductibility by individuals of all miscellaneous itemized deductions (other than “educator expenses” described in section 62(a)(2)(D), as modified by section 67(g)), which had been temporarily disallowed under the TCJA but were scheduled to return for taxable years beginning after December 31, 2025.⁷ Miscellaneous itemized deductions include work-related travel expenses, liability insurance premiums, home office expenses, non-capitalized investment-related expenses, and certain legal fees. Thus, the only itemized deductions that will be allowed for individuals will be those specifically enumerated in section 67(b) as being expressly excluded from treatment as miscellaneous itemized deductions, including interest deductions under section 163, deductions for certain taxes (including the SALT deduction) under sections 164 and 275, deductions for casualty or theft losses, charitable deductions, the newly designated “educator expenses” deduction described above, and deductions for medical expenses.

Permanent Increase to standard deduction and permanent limitations on itemized deductions (Sections 63, 67, 163, 165, and more)

The Act permanently extends and increases the standard deduction, which was slated to return to pre-TCJA levels for taxable years beginning after December 31, 2025.⁸

Additionally, for taxable years beginning after December 31, 2025, the Act imposes additional limitations on itemization such as, among numerous other limitations, (i) permanently eliminating personal exemptions, which under pre-existing law were scheduled to return for taxable years beginning after December 31, 2025, (ii) terminating all miscellaneous itemized deductions (as discussed above), (iii) permanently limiting the deduction for qualified residence interest (colloquially called the home mortgage interest deduction) to USD750,000 instead of returning it to the pre-TCJA limitation of USD1m, (iv) permanently limiting itemized deductions for personal casualty losses to only those losses resulting from federally declared disasters, and (v) generally reducing the value of each dollar of itemized deductions to USD0.35 for taxpayers in the highest individual income tax bracket.

Changes to SALT deduction limit (Section 164)

The Act increases the cap on SALT deductions from USD10,000 to USD40,000 for taxable years beginning in 2025, USD40,400 for taxable years beginning in 2026, and 101% of the prior year’s deductible amount for taxable years beginning in 2027, 2028, and 2029. Thus, the cap will increase by 1% in each of those taxable years. However, for any taxable year beginning after 2029, the cap on SALT deductions will reset back to USD10,000. A taxpayer’s cap on SALT deductions is subject to a phasedown under which it is reduced by 30% of the amount of such taxpayer’s modified adjusted gross income above a threshold amount (but the cap cannot be reduced below a minimum of USD10,000). The threshold amount is (i) USD500,000 for taxable years beginning in 2025, (ii) USD505,000 for taxable years beginning in 2026, and (iii) 101% of the prior year’s limitation for taxable years beginning in 2027, 2028, and 2029.

Notably, the Act does not include any limitation on taxpayers’ ability to utilize common strategies that have been widely adopted to avoid the cap on SALT deductions; namely, the use of PTET workarounds to the cap on SALT deductions. Earlier drafts of both the Senate Bill and the House Bill heavily targeted those PTET workarounds, but no such provisions survive in the Act. As such, those workarounds should remain viable absent guidance to the contrary.

These changes in the Act are effective for taxable years beginning after December 31, 2024, and will thus apply to the 2025 taxable year.

Commentary:

• Although the increased SALT deduction cap will benefit most individual taxpayers, for many taxpayers a significant portion of the benefit arising as a result of the increased SALT deduction cap will be offset by an increase to the alternative minimum tax (“AMT”) payable by such taxpayers, particularly in light of the Act’s reduction of the AMT exemption phaseout thresholds back to 2018 levels and the accelerated phaseout of the AMT exemption.

Changes to treatment of excess business losses for noncorporate taxpayers (Section 461(l))

The Act makes permanent the disallowance of the deduction for excess business losses of an individual under section 461(l). Unlike previous drafts of the Senate Bill and House Bill, the Act does not require individuals to account for any excess business losses from previous years when determining their excess business losses for a particular taxable year.

Enhancement to QSBS rules (Section 1202)

Under pre-existing law, a taxpayer (other than a corporation) is generally entitled to exclude 100% of an amount of gain that such taxpayer recognizes from the sale or exchange of QSBS⁹ that the taxpayer (i) acquired on or after September 28, 2010¹⁰ and (ii) held for more than five years prior to the sale, provided that the amount of such exclusion is capped at the greater of (A) USD10m or (B) ten times the aggregate adjusted basis of any QSBS sold by the taxpayer during the taxable year (such limitation, the “Per Issuer Limitation”).

The Act significantly expands the availability of the QSBS exclusion with respect to QSBS acquired after the date of enactment of the Act (i.e., July 4, 2025) (the “Applicable Date”). In particular, with respect to QSBS acquired after the Applicable Date, the Act allows a taxpayer who (i) held QSBS at least three years but less than four years prior to the sale to exclude 50% of the recognized gain¹¹ from the sale of the QSBS (with the gain subject to such 50% exclusion being capped at the Per Issuer Limitation), (ii) held QSBS for at least four but less than five years prior to the sale to exclude 75% of the recognized gain¹² from the sale of the QSBS (with the gain subject to such 75% exclusion being capped at the Per Issuer Limitation) and (iii) held QSBS for five years or more prior to the sale to exclude 100% of the recognized gain from the sale of the QSBS (with the gain subject to such 100% exclusion being capped at the Per Issuer Limitation).¹³

In addition, the Per Issuer Limitation for any stock acquired after the Applicable Date is increased to the greater of USD15m or ten times the aggregate adjusted basis of any QSBS sold by the taxpayer during the taxable year (with the increased USD15m Per Issuer Limitation being subject to an inflation adjustment for taxable years beginning after December 31, 2026).

Finally, with respect to any stock issued after the Applicable Date, the limitation on the maximum amount of cash and the tax basis of the assets that can be held by the issuing corporation at all times before and immediately after the issuance of the applicable stock being tested is increased from USD50m to USD75m (with the USD75m threshold being subject to an inflation adjustment for taxable years beginning after December 31, 2026).

Commentary:

• By (i) increasing the amount of the Per Issuer Limitation and reducing the requisite holding period to obtain a partial QSBS exclusion, and (ii) retaining the 20% QBI deduction percentage under pre-existing law,¹⁴ the changes contained in the Act generally make a corporation a more attractive vehicle (relative to a partnership or S corporation) for conducting a “qualified trade or business” (within the meaning of section 1202(e)(3)). These changes could result in even more entities being formed as corporations in order to obtain the enhanced QSBS benefits, continuing the trend of taxpayers forming new businesses through domestic C corporations that started with the TCJA’s reduction of the corporate U.S. federal income tax rate from 35% to 21%.

Estate and gift tax exemption (Section 2010)

The Act makes permanent the increase to the lifetime estate and gift tax credit enacted with the TCJA. With this change, the Act sets the lifetime estate and gift tax exemption at USD30m for individuals who are married filing jointly in taxable years beginning after December 31, 2025 and adjusts the exemption for inflation going forward.

The changes in the Act are effective for estates of decedents dying, and gifts made, after December 31, 2025.

Notable exclusions

Despite continual discussions of removing the beneficial tax treatment to “carried interest”, the Act does not change how carried interest is taxed for U.S. federal income tax purposes.

Business tax provisions

Permanent extension of calculation of adjusted taxable income for business interest deductibility (Section 163(j))

The Act permanently amends, for all taxable years beginning after December 31, 2024, the definition of “adjusted taxable income” (“ATI”) that is used for purposes of calculating the limitation on a taxpayer’s deduction for business interest deduction under section 163(j). Such change excludes from the definition of ATI a taxpayer’s deductions for depreciation, amortization, or depletion.¹⁵

The Act also requires, for taxable years beginning after December 31, 2025, that taxpayers calculate ATI without regard to inclusions under sections 78 (gross-up), 951(a) (subpart F income), 951A (GILTI), and 956 (investment of earnings in United States property).¹⁶ The U.S. Department of the Treasury (“Treasury”) had previously exercised its authority under section 163(j)(8)(A)(vi) to exclude such inclusions from ATI, subject to add-backs of all or a portion of such inclusions in certain cases.

Commentary:

• U.S. taxpayers will need to consider this change to the definition of ATI when determining the ideal amount of interest expense to incur in the United States and at the level of foreign subsidiaries, particularly where a substantial amount of taxable income is being generated through subpart F or GILTI of the foreign subsidiaries.

Finally, for taxable years beginning after December 31, 2025, the Act subjects any interest expense that would otherwise be capitalized under an interest capitalization provision (such as section 263(a) or section 266 (but not section 263(g) (relating to straddles) or section 263A(f) (relating to self-made property))) to the limitation under section 163(j). Under an ordering rule contained in the Act, the limitation on a taxpayer’s deduction for business interest under section 163(j) is first applied to business interest that would otherwise be capitalized and the remainder, if any, is applied to business interest that is otherwise deductible.

Permanent extension of bonus depreciation (Section 168(k))

The Act permanently allows a taxpayer to deduct under section 168(k) 100% of its adjusted basis in any “qualified property” that is acquired¹⁷ by the taxpayer after January 19, 2025.

New temporary special allowance for qualified production property (Section 168(n))

While a generic domestic manufacturing deduction akin to prior section 199 was excluded from the Act, the Act allows a temporary immediate depreciation deduction for a taxpayer’s adjusted tax basis in qualifying domestic production facilities that are used by the taxpayer as an integral part of the production of tangible goods.

Specifically, section 168(n) allows a 100% depreciation deduction for that portion of a taxpayer’s adjusted tax basis in “qualified production property,” which is defined as nonresidential real property (e.g., factories): (i) used by the taxpayer as an integral part of qualified production activities (discussed in more detail below);¹⁸  (ii) located in the United States (or any possession of the United States); (iii) the original use of which commences with the taxpayer; (iv) the construction of which commenced after January 19, 2025 and before January 1, 2029;¹⁹ (v) which is placed in service before January 1, 2031; and (vi) for which the taxpayer has made an election to apply section 168(n).

Qualified production activities are generally manufacturing, production (limited to agricultural production or chemical production), or refining of tangible personal property, but only if the taxpayer’s activity results in a substantial transformation of the property. However, qualified production activities do not include the use of nonresidential real property for offices, administrative services, lodging, parking, sales activities, or other functions unrelated to the production of qualified products. Furthermore, the manufacturing deduction is unavailable for property that is subject to the alternative depreciation system (e.g., tax-exempt use property) or property eligible for a deduction under section 168(k) (discussed above).

If a taxpayer elects to obtain the special depreciation allowance under section 168(n) for “qualifying domestic production facilities,” and any qualified production property for which the taxpayer elected to obtain the special depreciation allowance under section 168(n) (i) ceases to be associated with a qualified production activity within ten years of being placed in service and (ii) is used by the taxpayer in a productive use that is not an integral part of a qualified production activity, then recapture under section 1245 will be required as if such property was disposed of for an amount equal to the greater of the depreciation deduction that was previously claimed under section 168(n) or the property’s fair market value on the date of the deemed disposition.²⁰ The taxpayer will have an adjustment to its basis for the amount of gain recognized as a result.

Commentary:

• Because “nonresidential real property” has a 39-year recovery period and is therefore generally ineligible for the bonus depreciation available under section 168(k), the ability to accelerate the depreciation deduction for qualified production property is a notable addition to the Code. However, unless a taxpayer has sufficient taxable income to fully utilize the special depreciation deduction, such taxpayer may consider whether such an election makes sense given limitations on the ability of a taxpayer to deduct net operating loss carryforwards under section 172 (80% of taxable income) and section 382 (limitation on the ability to utilize certain tax attributes after an ownership change).

Increased dollar limitation for election to expense certain depreciable business assets (Section 179)

The Act permanently increases the maximum amount that a taxpayer is entitled to expense under section 179 from USD1m to USD2.5m. In addition, the Act increases the amount of property that may be placed in service before the phase out begins to apply from USD2.5m to USD4m (which amount will generally be adjusted for inflation for taxable years beginning after December 31, 2025). These changes apply to property placed in service in taxable years beginning after December 31, 2024.

Permanent immediate deductibility of domestic research and experimental expenditures (Section 174A)

The Act permanently allows taxpayers to immediately expense domestic research or experimental expenditures that are incurred in taxable years beginning after December 31, 2024. Foreign research or experimental expenditures are amortizable over a period of 15 years.

Taxpayers may elect to amortize such expenditures incurred in any taxable year ratably over 60 months (five years) or more. However, such an election, including the period for recovery, once made, is binding for expenses incurred in subsequent taxable years unless the taxpayer obtains the approval of the Secretary to change its method of accounting with respect to such expenses (or to recover such expenses over a shorter period).

The Act also allows an “eligible taxpayer” that satisfies the section 448(c) gross receipts test for the taxpayer’s first taxable year beginning after December 31, 2024²¹ to elect to immediately deduct domestic research or experimental expenditures that were incurred by it in taxable years beginning after December 31, 2021.²² Additionally, all taxpayers that incurred domestic research or experimental expenditures in taxable years beginning after December 31, 2021 and before January 1, 2025, may elect to accelerate their remaining deductions for such expenditures over either a one-year period or a two-year period.

Commentary:

• Taxpayers that do not have sufficient taxable income to fully offset their pre-2025 domestic research or experimental expenditures may consider foregoing such elections in order to spread the deduction over multiple taxable years and avoid the limitations on deductibility of net operating loss carryforwards under the Code. On the other hand, corporations that exceeded the USD50m threshold prior to a stock issuance as a result of the capitalization of pre-2025 domestic research or experimental expenditures (or believe that remaining capitalized pre-2025 domestic research or experimental expenditures will cause the USD50m threshold to be exceeded prior to a future stock issuance) should consider making such elections in order to allow such prior or future stock to qualify as QSBS.

Deduction for qualified business income (Section 199A)

The Act makes permanent the deduction for qualified business income (“QBI”) under section 199A, with two notable changes:

First, the Act increases the amount at which the W-2 wage/capital investment limitation and the specified service trade or business limitation completely phase out from USD50,000 (USD100,000 for a joint return) to USD75,000 (USD150,000 for a joint return).

The Act provides for a new minimum deduction of USD400 (subject to an inflation adjustment for taxable years beginning after December 31, 2026) for any taxpayer who has at least USD1,000 of aggregate QBI from all “active qualified trades or businesses” for such taxable year. For this purpose, an “active qualified trade or business” is any qualified trade or business (within the meaning of section 199A(d)) in which the taxpayer materially participates (within the meaning of section 469(h)).²³

These two changes are effective for taxable years beginning after December 31, 2025.

Commentary:

• Notably, unlike the House Bill, the Act does not increase the QBI deduction rate (retaining the 20% deduction under pre-existing law).²⁴
• The Act’s itemized deduction threshold does not impact the determination of a taxpayer’s QBI deduction.

Notable exclusions

While the House Bill proposed to limit the amount that a taxpayer could amortize with respect to: (i) an acquired franchise to engage in professional football, basketball, baseball, hockey, soccer or other professional sport; and (ii) intangible assets that are acquired in connection with such a franchise to an amount equal to 50% of the taxpayer’s adjusted basis in such franchise or other intangible asset, the Act does not limit a taxpayer’s ability to amortize such franchises or other intangible assets.

International tax provisions

Modifications to the deductions for FDII and GILTI (Section 250)

For taxable years beginning after December 31, 2025, the Act permanently sets: (i) the section 250 deduction for FDII at 33.34% (resulting in an effective rate of U.S. federal income tax on FDII of 14%) and (ii) the section 250 deduction for GILTI at 40% (resulting in an effective rate of U.S. federal income tax on GILTI of 12.6%).

As is the case under pre-existing law, it appears the intention is that a domestic corporation (or a U.S. individual who makes a section 962 election) will owe no incremental U.S. federal income tax on GILTI so long as the GILTI-tested income was taxed at an effective non-U.S. income tax rate at least equal to the FDII rate of 14% (taking into account the new 10 Percent Haircut (as defined below) and assuming full credibility of GILTI FTCs (each discussed below)).

Commentary:

• The Act’s permanent GILTI and FDII section 250 deduction rates are higher than the section 250 deduction rates that would have automatically come into effect in 2026 absent the change in law (21.875% for FDII and 37.5% for GILTI, which would have resulted in an effective rate of U.S. federal income tax of 16.406% for FDII and 13.125% for GILTI).
• Together with the other changes to FDII (discussed below), providing for a higher permanent section 250 deduction for FDII and GILTI than would have applied absent the change in law under the Act²⁵ is expected to make the United States a more attractive jurisdiction for holding companies,²⁶ as the 14% rate is lower than the 15% rate imposed under the IIR of Pillar Two (and may become even more advantageous if the UTPR does not apply to U.S.-parented groups).
• Furthermore, this and other changes to FDII (in particular: (i) the deletion of the DTIR concept from the calculation of a taxpayer’s FDII deduction (which resulted in many U.S. taxpayers with significant tangible assets effectively losing the ability to claim the deduction); (ii) the elimination from DEI (as defined below) of any income or gain from the sale or disposition (including the deemed sale or other deemed disposition) of intellectual property (“IP”) or other property of a type that is subject to depreciation, amortization, or depletion; and (iii) the reduction of DEI (as defined below) only by deductions, including taxes, directly related to such income (rather than deductions properly allocable to such income), each discussed in more detail below), may reduce the incentive for U.S. taxpayers to move IP offshore and perhaps even encourage taxpayers that have been waiting for clarity about the future of FDII to repatriate IP to the United States.²⁷

Modifications to determination of FDII and GILTI (Sections 250 and 951A)

The Act modifies the rules for determining the amount of a taxpayer’s FDII and GILTI, with consequences both for determining the amount of CFCs’ income that a U.S. shareholder must include in gross income under the GILTI rules and the amount of the section 250 deduction that a domestic corporation (or, in respect of GILTI, a U.S. individual who makes a section 962 election) may take in respect of FDII and GILTI.

Under pre-existing law, FDII is determined, in the first instance, by computing the amount of a domestic corporation’s deduction eligible income (“DEI”), generally equal to the domestic corporation’s gross income reduced by certain categories of income, including subpart F inclusions and section 956 amounts, GILTI inclusions, financial services income, certain dividends, domestic oil and gas extraction income and foreign branch income, as well as the deductions, including taxes, properly allocable to such income. Thereafter, a domestic corporation’s FDII—the amount on which the section 250 deduction was determined—equaled the amount which bears the same ratio to the deemed intangible income (“DII”) of such corporation as the foreign-derived deduction eligible income (“FDDEI”) bears to the DEI of such corporation. A domestic corporation’s DII equaled the excess of the DEI of such corporation over a DTIR equal to 10% of such corporation’s qualified business asset investment (“QBAI”), generally determined based on the aggregate adjusted tax basis of the corporation’s depreciable, tangible property.

Similarly, under pre-existing law, a U.S. shareholder’s GILTI inclusion in respect of its CFCs was determined based on its net CFC tested income for a taxable year—generally equal to its pro rata share of CFC tested income reduced by its pro rata share of CFC tested losses—reduced by a NDTIR equal to 10% of such shareholder’s pro rata share of its CFCs’ QBAI (subject to a reduction for certain interest expenses).

The Act modifies both the FDII and the GILTI rules in a manner that is generally expected to increase the amounts of FDII and GILTI in any given year. For FDII purposes, the Act modifies amounts that would otherwise be included in DEI in two ways:

• DEI generally would not include any income or gain from the sale or other disposition (including a deemed sale or other deemed disposition or a transaction subject to section 367(d)) of (a) intangible property as defined in section 367(d)(4), and (b) any other property of a type that is subject to depreciation, amortization or depletion by the seller; and
• DEI is reduced only by expenses and deductions (including taxes), other than interest expense and research or experimental expenditures, properly allocable to such income.

The first change applies to transactions (or deemed transactions) occurring after June 16, 2025, while the second change applies to taxable years beginning after December 31, 2025.

In addition, for purposes of both FDII and GILTI, the Act eliminates the DTIR from the calculation of a taxpayer’s FDII deduction and the NDTIR from the calculation of a U.S. shareholder’s GILTI inclusion. As a result, FDII simply equals a domestic corporation’s FDDEI (unreduced by the DTIR), and GILTI simply equals a U.S. shareholder’s net CFC tested income (unreduced by the NDTIR).

Commentary:

• The Act’s changes to the FDII rules will, in some respects, narrow the amount of FDII that qualifies for the section 250 deduction by excluding certain items of income that are currently, in general, viewed as included. Significantly, this includes an exclusion for income or gain from the sale or disposition of IP.
  • Aside from those exclusions, though, the changes to the FDII rules generally appear to be taxpayer favorable by limiting the amount of deductions taken against FDII and eliminating the reduction to FDII caused by the DTIR—the latter change appearing to address an unintended consequence under the TCJA of discouraging capital investment in the United States.
  • As discussed above, together with the effective 14% rate of U.S. federal income tax on FDII income (which is lower than the 16.406% rate of tax that would apply to FDII under pre-existing law for taxable years beginning after December 31, 2025), these changes are expected to make the United States a more attractive jurisdiction for holding companies, reduce the incentive for U.S. taxpayers to move IP offshore and perhaps even encourage taxpayers that have been waiting for clarity about the future of FDII to repatriate IP to the United States.
• The Act’s changes to the GILTI rules appear to be intended to cure an unintended consequence under the TCJA of encouraging taxpayers to make capital investments outside the United States that would increase the amount of their NDTIR.
  • In that regard, while the changes to (i) make a 40% section 250 deduction for GILTI permanent and (ii) correct distortions under the FTC rules with respect to the GILTI basket (as discussed in more detail below) may provide some relief, the change to eliminate the NDTIR benefit is expected to increase the amount of GILTI inclusions (at least in the short term).
  • Working in tandem with the taxpayer-favorable changes to the FDII regime, these changes may incentivize investment in tangible property in the United States and provide even more incentive for U.S. taxpayers to repatriate IP to the United States.

Modifications to pro rata share rules (Section 951)

The Act introduces significant changes to the rules governing the determination of a U.S. shareholder’s pro rata share of a CFC’s subpart F income and GILTI.

Under pre-existing law, a U.S. shareholder is required to include in gross income its pro rata share of a CFC’s subpart F income for the year, but only if the U.S. shareholder owns stock on the last day the corporation is a CFC during its U.S. taxable year. When calculating the pro rata share, a U.S. shareholder’s subpart F inclusion is determined by the portion of the CFC’s subpart F income that would have been allocated to that shareholder. This amount is reduced for any part of the year when the foreign corporation was not classified as a CFC, as well as for dividends paid to other persons on the shares owned by the U.S. shareholder, but only to the extent that the subpart F income is attributable to those shares and to periods when the U.S. shareholder did not own them. The same approach is used when determining a U.S. shareholder’s GILTI inclusion.

The Act makes significant changes to the pro rata share rules for CFC inclusions, aiming to better align tax liability with periods of actual ownership and to address perceived gaps under pre-existing law. The Act requires every U.S. shareholder who owns, directly or indirectly under section 958(a), stock in a CFC on any day during a U.S. taxable year of the CFC (a “CFC Year”) to include in gross income its pro rata share of the CFC’s subpart F income for such CFC Year. However, a U.S. shareholder would continue to have a section 956 inclusion with respect to a foreign corporation only if the shareholder owned, directly or indirectly, stock in the corporation on the last day of its taxable year when it qualified as a CFC.

Under the Act, a shareholder’s pro rata share is determined based on the portion of subpart F income attributable to the stock owned, directly or indirectly under section 958(a), by the shareholder during periods when (i) the shareholder was a U.S. shareholder, (ii) the corporation was a CFC, and (iii) the shareholder owned, directly or indirectly under section 958(a), such stock. Any amount that the U.S. shareholder is required to include in gross income with respect to a CFC Year is included in the shareholder’s gross income for the taxable year that includes the last day of the CFC Year during which the shareholder owned, directly or indirectly under section 958(a), stock in the CFC that gives rise to the inclusion. The Act further grants regulatory authority to Treasury to issue guidance necessary to carry out the purposes of the new provision, including regulations that require, or permit an election for, taxpayers to close the CFC Year upon a direct or indirect disposition of the CFC stock. The Act coordinates these changes with the rules for GILTI inclusions, updating the timing and calculation references to align with the new pro rata share rules.

These modifications are effective for taxable years of foreign corporations beginning after December 31, 2025.

The Act also includes a transition rule under the pre-existing pro rata share rules for the last CFC Year that begins prior to January 1, 2026, under which, except to the extent otherwise provided by Treasury, the following CFC dividends will not reduce the subpart F or GILTI inclusion of a U.S. shareholder under section 951(a)(2)(B) where both conditions are satisfied: (i) the dividend was paid (or deemed paid): (A) on or before June 28, 2025 during the CFC Year that includes such date and the U.S. shareholder did not own, directly or indirectly under section 958(a), the stock of such CFC during the portion of such CFC Year on or before June 28, 2025; or (B) after June 28, 2025 and before such CFC’s first CFC Year beginning after December 31, 2025; and (ii) such dividend does not increase the taxable income of a U.S. person that is subject to U.S. federal income tax (including by reason of a dividends-received deduction, an exclusion from gross income, or an exclusion from subpart F income).

Commentary:

• The Act’s modifications to the pro rata share rules for CFC income inclusions represent a fundamental shift in how subpart F income and GILTI are allocated among U.S. shareholders, especially in the context of M&A transactions. By tying inclusions to actual periods of ownership and CFC status, the new rules better align tax outcomes with economic ownership, but they also introduce new complexities for deal structuring, due diligence, and compliance.
• Under the Act, in M&A transactions where CFC stock changes hands between two U.S. shareholders that directly or indirectly (within the meaning of section 958(a)) own the stock of the CFC during the CFC Year, both the seller and the buyer are required to include a portion of the CFC’s subpart F income and GILTI in their taxable income, based on their respective periods of ownership. This is a departure from the existing rules, under which only the U.S. shareholder that directly or indirectly owned the stock on the last day of the CFC Year would include the entire year’s income, in some cases allowing a U.S. shareholder that owns a CFC for nearly the entire year to dispose of the CFC stock before the end of the CFC Year without being subject to any income inclusions, provided that the CFC does not lose its status as a CFC as a result of the transaction.²⁸
  • Historically, taxpayers have relied on certain elections (such as a section 338(g) election, check-the-box elections or the closing-of-the-books election under section 1.245A-5(e) of the Treasury regulations) to close the CFC Year and ensure that the seller, not the buyer, picks up the income for the pre-sale period. However, these elections are not always available—particularly in reorganization transactions—leaving parties exposed to potential mismatches and the need for complex covenants or indemnities.
  • Under the modifications to the pro rata share rules in the Act, such elections may no longer be necessary to achieve alignment between economic ownership and tax liability, as the new rules automatically allocate subpart F income and GILTI based on actual periods of ownership and, upon Treasury’s exercise of its regulatory authority, should require, or allow, taxpayers to close the taxable year of a CFC upon a direct or indirect disposition of its stock.
  • It will be important for the regulations to ensure consistency in the application of these rules. For example, if a closing-of-the-books is required or permitted, all relevant parties should be bound by it, and the allocation of income should be clear and administrable. The rules should avoid situations where, for example, one party applies a proration approach and another applies a closing-of-the-books approach, as this could lead to double inclusions or gaps.
    • The model under section 1.706-4 of the Treasury regulations or section 1.1502-76 of the Treasury regulations, each of which allows taxpayers to use either an interim closing method or a proration method to allocate items arising in a taxable year and address the treatment of extraordinary items, would serve as a good starting place for the Treasury regulations implementing the revised pro rata share rules for purposes of subpart F and GILTI inclusions.
  • Even if a closing-of-the-books is mandated or allowed pursuant to an election, M&A agreements would still need to address the allocation of CFC inclusions, the process for making the election itself (if electable rather than mandated) and the process for sharing information in order to compute the parties’ respective subpart F and GILTI inclusions (along with any related FTCs). In particular, the parties will need to agree on whether a closing-of-the-books election will be made (if electable rather than mandated) and, if not, how to protect both the buyer and the seller from post- and pre-closing actions that could increase their respective income inclusions with respect to the CFC’s taxable year. In the absence of a closing-of-the-books, reverse indemnities or other protections may be necessary to ensure that the seller is not unfairly exposed to subpart F or GILTI inclusions that are attributable to the buyer’s period of ownership, and vice versa.
• The new rules will be particularly relevant in transactions involving tiered CFC structures, and careful tracking and documentation of ownership periods will be required to ensure proper allocation of income and compliance.
• Finally, the new transition rule will have particular relevance for current U.S. buyers of CFCs (i.e., buyers acquiring CFCs in the CFC’s last CFC Year beginning prior to January 1, 2026). Whereas, under pre-existing law, a U.S. buyer of a CFC with a CFC Year that does not end on the date of the acquisition would normally be able to reduce its subpart F and GILTI inclusions for the end of such CFC Year by all or a portion of any dividends paid (or deemed paid) to the seller(s) of the applicable CFC in such year, unless otherwise provided by Treasury, the transition rule may cause such dividends to be ignored for purposes of determining the U.S. buyer’s subpart F and GILTI inclusions, where both: (i) the dividends were paid (or deemed paid): (A) prior to June 28, 2025 and the U.S. buyer did not own, directly or indirectly under section 958(a), stock in such CFC prior to June 28, 2025; or (B) between June 28, 2025 and the first CFC Year beginning after December 31, 2025; and (ii) such dividends do not increase the taxable income of a U.S. person subject to U.S. federal income tax.
  • A U.S. person that acquires the stock of a CFC on or after June 28, 2025 will need to ensure that any pre-closing tax accruals for the sellers’ share of such CFC’s pre-closing subpart F or GILTI inclusions take into account the disallowance of the reduction under section 951(a)(2)(B) for dividends paid (or deemed paid) prior to the closing of the acquisition.

Modifications to the allocation and apportionment of deductions to the GILTI basket for FTC purposes (Section 904(b)(5))

The Act provides new rules that modify the allocation and apportionment of deductions to the GILTI basket for purposes of determining the FTC limitation under section 904.

Under pre-existing law, to determine a taxpayer’s FTC limitation in a particular basket (including the GILTI basket under section 904(d)(1)(A)), the taxpayer is required to allocate not only the deductions that are “definitely related” to a particular category of income but also deductions that are not definitely related to any particular category of income, such as a portion of the taxpayer’s interest, stewardship, and research/experimental expenses, based on certain ratios.

For purposes of determining the FTC limitation in the GILTI basket, the Act provides that only three types of deductions are allocated to the GILTI basket: (i) the section 250 deduction specifically related to GILTI; (ii) the deduction for state and local taxes imposed on GILTI; and (iii) any other deduction that is directly allocable to GILTI income. The Act also expressly prevents any amount of interest or research and experimental expenditures from being allocated to the GILTI basket and provides that all other deductions that were previously allocated and apportioned to the GILTI basket under pre-existing law are allocated solely to U.S.-source income.

These changes are effective for taxable years beginning after December 31, 2025.

Commentary:

• The allocation of deductions other than the section 250 deduction to the GILTI basket has been the subject of significant commentary since the TCJA was enacted, as such allocation often results in a distortion in which GILTI income that has already been taxed at a rate in excess of 13.125% in a non-U.S. jurisdiction could still be subject to incremental U.S. taxes in the hands of a domestic corporation (or a U.S. individual who makes a section 962 election) under the GILTI regime.²⁹
• With the changes described above, and the decrease to the “haircut” on GILTI FTCs discussed below, it appears more likely that GILTI inclusions will not be subject to incremental U.S. taxes in the hands of a domestic corporation (or a U.S. individual who makes a section 962 election) so long as the effective non-U.S. tax rate imposed on a CFC’s tested income is at least as high as the effective U.S. federal income tax rate imposed on FDII (14% under the Act).
• Furthermore, it is expected that this change may result in fewer corporate taxpayers (or U.S. individual taxpayers if a section 962 election is made) electing to apply the GILTI high-tax exclusion under section 1.951A-2(c)(7) of the Treasury regulations.

Modifications to the determination of GILTI FTCs (Section 960(d)(1))

In response to the changes to the percentage deductions under section 250 for GILTI and FDII (reducing such deduction from 50% to 40% (in the case of GILTI) and 37.5% to 33.34% (in the case of FDII)), the Act modifies the percentage of non-U.S. income taxes paid or accrued by a CFC that are attributable to GILTI tested income that a domestic corporation (or a U.S. individual who makes a section 962 election) may claim as a credit against their U.S. tax liability.

Under pre-existing law, a domestic corporation (or a U.S. individual who makes a section 962 election) is allowed to claim only 80% of non-U.S. income taxes paid or accrued by a CFC that are attributable to GILTI tested income as a credit against their U.S. tax liability (the “20 Percent Haircut”).

Considering the current 50% section 250 deduction for GILTI and 37.5% section 250 deduction for FDII, the 20 Percent Haircut was intended to ensure that no incremental U.S. federal income tax is owed on GILTI so long as it was already taxed at an effective non-U.S. tax rate of at least 13.125% (consistent with the 13.125% effective U.S. federal income tax rate imposed on FDII).³⁰ Because the Act moves the section 250 deduction for GILTI and the section 250 deduction for FDII closer together, it also raises the amount of non-U.S. income taxes paid or accrued by a CFC that are attributable to GILTI tested income that may be claimed as a credit against U.S. federal income taxes from 80% to 90% (the “10 Percent Haircut”) in order to ensure that no incremental U.S. federal income tax is owed on GILTI by a domestic corporation (or a U.S. individual who makes a section 962 election) so long as it was already taxed at an effective non-U.S. tax rate of at least 14% (consistent with the 14% effective U.S. federal income tax rate imposed on FDII under the Act).³¹ The Act also applies the 10 Percent Haircut for FTCs claimed in respect of non-U.S. income taxes paid or accrued (or deemed paid or accrued under section 960(b)(1)) with respect to distributions of previously taxed earnings and profits (“PTEP”) that are excluded from gross income under section 959(a) by reason of a prior GILTI inclusion.

This change is generally effective for taxable years of foreign corporations beginning after December 31, 2025, and for the corresponding taxable years of U.S. shareholders. However, the change to apply the 10 Percent Haircut for FTCs claimed in respect of non-U.S. income taxes paid or accrued (or deemed paid or accrued under section 960(b)(1)) with respect to distributions of GILTI PTEP applies to a distribution of GILTI PTEP attributable to a GILTI inclusion after June 28, 2025.

Modifications to FTC sourcing rules for certain income from the sale of inventory produced in the United States (Section 904(b)(6))

The Act modifies the sourcing rules for income derived from the sale of inventory produced in the United States, solely for purposes of determining the FTC limitation.

Under pre-existing law, income from the sale or exchange of inventory produced by a taxpayer in the United States is generally treated as U.S.-source income, based solely on where the production activities occur, even if all activities necessary to complete the sale were conducted through a non-U.S. office of the taxpayer.

The Act introduces an exception to the general place-of-production sourcing rule solely for FTC limitation purposes. Under the exception, if a U.S. person maintains an office or other fixed place of business outside of the United States, then the portion of the income which (i) is from the sale or exchange outside of the United States of inventory property (A) which is produced in the United States, (B) which is for use outside of the United States, or (C) to which the third sentence of section 863(b) applies (inventory property produced (in whole or in part) by the taxpayer within and sold or exchanged without the United States), and (ii) is attributable to such office or other fixed place of business, is treated as non-U.S. source income (but not in excess of 50% of the total taxable income from such sale or exchange).

The change is effective for taxable years beginning after December 31, 2025.

Commentary:

• As with other issues addressed in the FTC changes in the Act, the pre-existing sourcing rules for income derived from the sale of inventory produced in the United States could create distortions in determining a taxpayer’s non-U.S. source income for FTC limitation purposes since inventory sold abroad could be treated by a non-U.S. jurisdiction as sourced to such jurisdiction and subject to non-U.S. income taxes (including under sourcing rules that are generally consistent with U.S. tax norms).
• The exception to the general place-of-production sourcing rule is expected to increase the likelihood that a U.S. taxpayer that engages in the U.S. production of inventory property and sells such property abroad through a local office or other fixed place of business is able to benefit from a greater portion of the FTCs that such taxpayer has in the same FTC basket as the income from such sales.

Modifications to the BEAT (Section 59A)

The BEAT is designed to prevent large multinational corporations from eroding the U.S. tax base through deductible payments to foreign affiliates. Under pre-existing law, the BEAT imposed an additional tax to the extent 10% of an applicable taxpayer’s “modified taxable income” (very generally, taxable income without regard to deductions for payments or accruals to foreign related parties, subject to certain exceptions) exceeds its regular tax liability reduced by a portion, but not all, of the income tax credits allowed against the taxpayer’s tax liability. Generally, a taxpayer (other than a regulated investment company (RIC), real estate investment trust (a “REIT”) or an S corporation) is subject to the BEAT if: (i) the taxpayer and its aggregate group have average annual gross receipts of at least USD500m over the prior three years; and (ii) the taxpayer’s base erosion percentage (i.e., the ratio of certain deductible payments to foreign related parties over total allowable deductions) is at least 3% (or 2% for certain banks and securities dealers).

The Act permanently increases the BEAT rate from 10% to 10.5% for most taxpayers and 11.5% for certain banks and security dealers. Under pre-existing law, the BEAT rate was scheduled to increase to 12.5% and 13.5%, respectively, for taxable years beginning after December 31, 2025. The Act does not include any changes to either the base erosion percentage threshold or the gross receipts threshold.

The Act also repeals a provision contained in pre-existing law that would have reduced, for taxable years beginning after December 31, 2025, a taxpayer’s regular tax liability by all income tax credits allowed against the taxpayer’s regular income tax liability for purposes of computing such taxpayer’s base erosion minimum tax amount, rather than the excess of all such allowed income tax credits over the sum of: (i) the credit allowed under section 38 that is attributable to the research credit under section 41(a); and (ii) the portion of the “applicable section 38 credits”³² that do not exceed the product of 80% and the lesser of (1) the amount of the applicable section 38 credits and (2) the base erosion minimum tax amount (computed without regard to the reduction to the allowed income tax credits described in this clause (ii)).

The amendments made by the Act to the BEAT apply to taxable years beginning after December 31, 2025.

Commentary:

• The amendments made by the Act to the BEAT are generally more favorable than the proposed changes contained in the original version of the Senate Bill, which would have, among other changes (i) increased the BEAT rate to 14% for all taxpayers, compared to the Act’s rates of 10.5% for most taxpayers and 11.5% for certain banks and security dealers, (ii) lowered the base erosion percentage threshold to 2%, whereas the Act retains the 3% threshold, and (iii) broadened the definition of base erosion payments, including certain capitalized interest expenses. On the other hand, the Act does not include an exemption from the BEAT for high-taxed payments, which was present in the original version of the Senate Bill and would have provided meaningful relief for taxpayers making payments to affiliates in high-tax jurisdictions.
• It is also notable that the Act does not include an exemption—long-awaited by taxpayers—for payments to foreign related persons that are taxed under the subpart F rules.

Permanent extension of look-thru rule for related CFC dividends, interest and royalties (Section 954(c)(6))

The Act permanently extends the look-through rule applicable to certain items of income received by CFCs provided under section 954(c)(6),³³ a provision that, under pre-existing law, was scheduled to expire for taxable years beginning after December 31, 2025.

The look-through rule of section 954(c)(6) generally excludes from a CFC’s “foreign personal holding company income” the dividends, interest, rents, and royalties it receives from a related CFC. This rule applies only to the extent that these payments are attributable or properly allocable to active income of the related payor CFC that is neither subpart F income nor income that is effectively connected with the conduct of a U.S. trade or business.

Commentary:

• The permanent extension of the look-through rule under section 954(c)(6) is good news for taxpayers, as it prevents active earnings that are redeployed from one CFC to another within the group from being treated as passive income for subpart F purposes.
• If the provision had expired at the end of 2025, as scheduled under pre-existing law, taxpayers would have needed to evaluate certain technical positions taken on related-party dividends and consider structural changes to exclude or limit related-party CFC dividend payments from their structure.

Repeal of election for one-month deferral in the determination of the taxable year of SFCs (Section 898(c))

The Act repeals the one-month deferral election under section 898(c)(2) with respect to taxable years of specified foreign corporations (“SFCs”) beginning after November 30, 2025.

An SFC—i.e., a CFC that is more than 50% owned (by vote or value), directly, indirectly or constructively, by a U.S. shareholder—is required to adopt the taxable year of its majority U.S. shareholder. However, under section 898(c)(2), prior to being repealed by the Act, an SFC could elect to adopt a taxable year that began one month earlier than the majority U.S. shareholder’s taxable year. For example, an SFC whose majority U.S. shareholder is a calendar year taxpayer could make the one-month deferral election to use a taxable year ending November 30. This election provided taxpayers with additional time to gather the necessary information to determine the relevant items of the foreign corporation for U.S. tax reporting purposes.

The Act eliminates this election, requiring all SFCs to use the same taxable year as their majority U.S. shareholder for their taxable years beginning after November 30, 2025. A transition rule requires that an SFC’s first taxable year beginning after November 30, 2025 ends at the same time as the first required year ending after that date. In this case, the Act also provides that Treasury shall issue regulations for allocating foreign taxes that are paid or accrued in such first taxable year and the succeeding taxable year between such taxable years.

Commentary:

• For calendar-year taxpayers with SFCs using a November 30 year-end under the election, the repeal of the one-month deferral election and transition rule create a short tax period from December 1, 2025, through December 31, 2025, and then require the SFC to become a calendar year taxpayer for 2026 and onward.
• The repeal of the one-month deferral election under section 898(c)(2) may have a significant impact on companies that have made this election for their SFCs. Since foreign income taxes typically accrue on December 31 if the SFC is a calendar year taxpayer under local law, these SFCs may, in some cases, report a tested loss under the GILTI regime, as they will recognize only one month of pre-tax earnings or tested income but 12 months of foreign income taxes in the short-period return beginning on December 1, 2025 and ending on December 31, 2025. Due to the interaction between the GILTI tested loss rules and the inability to claim a foreign tax credit for taxes paid or accrued by a tested loss CFC, this transition could prevent the U.S. shareholder from claiming an FTC for foreign taxes incurred by that SFC during its 2025 foreign taxable year. Likely because of this cliff effect, the Act mandates that Treasury issue regulations providing for the allocation of foreign taxes between the SFC’s short taxable year and the succeeding taxable year.

Restoration of limitation on downward attribution of stock ownership in applying constructive ownership rules (Sections 958(b)(4) and 951B)

The Act reinstates section 958(b)(4), which, before the TCJA, prevented “downward attribution” of stock ownership from a foreign person to a U.S. person for purposes of determining whether a U.S. person is a U.S. shareholder and whether a foreign corporation is a CFC.

Under pre-existing law, following the repeal of section 958(b)(4) by the TCJA, stock owned by a foreign person could be attributed downward to a U.S. corporation, partnership, estate, or trust, which could cause such U.S. entity to be treated as owning stock in foreign corporations owned by the foreign person for purposes of determining U.S. shareholder and CFC status. As a result of the repeal of section 958(b)(4) by the TCJA, the number of foreign corporations treated as CFCs increased significantly, often including unexpected circumstances such as widely held fund structures in which a foreign partner’s interest in a U.S. corporation or partnership outside of the fund may cause foreign corporations under the fund to unexpectedly be treated as CFCs.

The reinstatement of section 958(b)(4) is effective for taxable years of foreign corporations beginning after December 31, 2025.

Commentary:

• The repeal of section 958(b)(4) has led to complex compliance burdens and, in some cases, unintended U.S. tax consequences, including increased reporting requirements, potential double taxation and, in some instances, no U.S. tax being imposed with respect to subpart F or GILTI inclusions. Based on the legislative history to the TCJA, this was not the intended result of the repeal of section 958(b)(4). Instead, such repeal was intended to target specific “de-control” transactions where a foreign corporation, previously controlled by a foreign-parented U.S. subsidiary, ceased to qualify as a CFC due to a dilutive investment by the foreign parent (e.g., as a result of the foreign parent contributing property to the foreign subsidiary in exchange for a 51% ownership interest).
• The Act provides that the reinstatement of section 958(b)(4) shall not be construed to create any inference with respect to the proper application of the law with respect to taxable years beginning before January 1, 2026. Therefore, provisions of the Code that depend on a foreign corporation’s status as a CFC in a prior taxable year would appear to continue to be relevant following the effective date of the reinstatement of section 958(b)(4), even if the foreign corporation ceases to be a CFC as a result of the reinstatement of section 958(b)(4). For example, section 1248 and the provisions of the Treasury regulations promulgated under section 367(b) that apply to a “section 1248 shareholder” would appear to continue to apply to a U.S. shareholder of a foreign corporation that is treated as a CFC as a result of downward attribution for a period of five years after the effective date of the reinsertion of section 958(b)(4).

The Act also adds new section 951B to address the policy concerns behind the original repeal of section 958(b)(4) by tailoring the application of downward attribution to the “de-control” transactions that concerned Congress when it initially repealed section 958(b)(4) under the TCJA.

Section 951B applies the CFC regime to an FCUSS of an FCFC. Under this new rule, an FCUSS is a U.S. person who owns more than 50% (by vote or value) of an FCFC, applying the constructive ownership rules in section 958(b) without regard to the reinsertion of the repeal on downward attribution under section 958(b)(4). This means that ownership interests attributed downward from foreign persons are considered when determining whether a U.S. person qualifies as an FCUSS. In the same way, a foreign corporation that does not otherwise meet the definition of a CFC is treated as an FCFC if it is more than 50% owned (by vote or value) by one or more FCUSSs, again applying the constructive ownership rules of section 958(b) without regard to the reinsertion of section 958(b)(4) (i.e., the downward attribution rules also apply in determining the FCFC status of a foreign corporation). Generally, an FCUSS of an FCFC is subject to the same CFC inclusion rules that apply to U.S. shareholders of CFCs. The Act also grants Treasury authority to issue regulations to treat FCUSSs and FCFCs as U.S. shareholders and CFCs, respectively, for other Code purposes, including reporting requirements and determining the treatment of FCFCs that are passive foreign investment companies (each, a “PFIC”).

These modifications are effective for taxable years of foreign corporations beginning after December 31, 2025.

Commentary:

• The example below illustrates the scope of the new section 951B: Assume a foreign parent (FP) wholly owns a U.S. subsidiary (USS), which in turn owns 10% of a foreign subsidiary (FS), and FP owns the other 90% of FS. Under section 958(b)(4), as restored by the Act, USS would not be treated as owning FP’s 90% interest in FS, so FS would not be a CFC. However, under section 951B, section 958(b)(4) would not apply in determining whether USS qualifies as an FCUSS and FS qualifies as an FCFC of USS. Because USS is more than 50% owned by FP, FP’s 90% interest in FS is attributed downward to USS under section 318(a)(3)(C). Thus, when combining USS’s direct 10% interest in FS with the 90% interest attributed to it from FP, USS is deemed to own 100% (i.e., more than 50%) of FS and, consequently, (i) USS is treated as an FCUSS of FS and (ii) FS qualifies as an FCFC of USS. As a result, USS is subject to subpart F and GILTI inclusions with respect to its share of FS’s income, as if FS were a CFC.
• Generally, an FCUSS of an FCFC should be treated the same as a U.S. shareholder of a CFC for purposes of the CFC inclusion rules. As a result, an FCUSS should only be subject to income inclusion under the subpart F or GILTI regimes under section 951B if, and to the extent that, it owns stock in an FCFC either directly or indirectly within the meaning of section 958(a).
• Existing reporting requirements that are triggered by being a U.S. shareholder or a CFC do not appear to automatically extend to an FCUSS of an FCFC, unless these entities would independently satisfy the definitions of a U.S. shareholder and a CFC, respectively. However, given the broad regulatory authority granted under the new section 951B, including to issue regulations to address new reporting requirements, it is reasonable to expect that Treasury would establish new information reporting requirements for FCUSSs that are required to include FCFC income under section 951B.
• It is unclear how the new section 951B will interact with the PFIC rules as the Act does not specifically address this issue. Instead, it authorizes Treasury to issue regulations that would clarify how FCFCs that also qualify as PFICs should be treated. In the absence of additional guidance, the existing CFC overlap rule under the PFIC provisions—which generally prevents the PFIC rules from applying to a U.S. shareholder of a foreign corporation that is both a CFC and a PFIC—does not appear to extend to an FCUSS of an FCFC that is also a PFIC. As a result, an FCUSS could potentially be subject to both the PFIC and subpart F/GILTI tax regimes with respect to the same FCFC/PFIC, a result that seems inconsistent with the intended purpose of the overlap rule.
• Additionally, as a result of the repeal of section 958(b)(4), more U.S. persons are expected to be subject to the PFIC regime as they would no longer qualify as U.S. shareholders of a CFC/PFIC and, thus, be able to benefit from the CFC overlap rule. Conversely, with the reinstatement of section 958(b)(4) under the Act, fewer foreign corporations will qualify as CFCs and, thus, be required to use the adjusted basis method, rather than the fair market value method, for purposes of the PFIC asset test.
• Taxpayers impacted by the repeal of section 958(b)(4)—i.e., that qualified as U.S. shareholders of a CFC solely because of downward attribution—should carefully review their organizational structures to assess whether they may become subject to new section 951B.

Energy tax provisions

Imposition of prohibited foreign entity rules (Sections 45U, 45X, 45Y, 45Z and 48E)

The Act applies sweeping “prohibited foreign entity” rules to most major credits under section 45U, section 45X, section 45Y, section 45Z, and section 48E. These rules evoke the Department of Energy’s guidance as to when an entity is owned by, controlled by, or subject to the jurisdiction or direction of a covered nation is evoked by these rules, but these rules do not actually incorporate this standard or guidance.

A “prohibited foreign entity” is either a “specified foreign entity” or a “foreign-influenced entity.”

The categories of specified foreign entities are:

• Foreign entity of concern (FEOC): These include certain foreign entities of concern, excluding an entity controlled by, or subject to the jurisdiction of, a covered nation. They include a foreign entity that is designated as a foreign terrorist organization by the Secretary of State and a foreign entity that is determined by the Secretary of Commerce, in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States.
• Certain Chinese military companies operating in the United States: These entities include an entity that is directly or indirectly owned, controlled, or beneficially owned by, or in an official or unofficial capacity acting as an agent of or on behalf of, the People’s Liberation Army or any other organization subordinate to the Central Military Commission of the Chinese Communist Party.
• Certain other Chinese entities: These entities include entities on a list of entities in the Xinjiang Uyghur Autonomous Region that mine, produce, or manufacture wholly or in part any goods, wares, articles and merchandise with forced labor.³⁴
• Certain specific entities: These entities include (i) Contemporary Amperex Technology Company, Limited (CATL), (ii) BYD Company, Limited, (iii) Envision Energy, Limited, (iv) EVE Energy Company, Limited, (v) Gotion High-tech Company, Limited, (vi) Hithium Energy Storage Technology Company, Limited, and (vii) any successor to an entity specified in clauses (i) through (vi).
• Foreign-controlled entities: These entities are: (i) the government (including any government below the national level) of a covered nation (i.e., North Korea, China, Russia, or Iran); (ii) an agency or instrumentality of such a government; (iii) a citizen or national of a covered nation that is not also an individual and citizen, national, or lawful permanent resident of the United States; (iv) an entity or qualified business unit (e.g., branch) incorporated or organized under the laws of, or having its principal place of business in, a covered nation; or (v) an entity (including subsidiary entities) “controlled” by one of the foregoing entities. “Control” is, applying certain constructive ownership rules, more than 50% ownership (by vote or value in the case of a corporation, of capital or profits in the case of a partnership, or of the beneficial interests for all other entities).

Two sets of rules govern whether an entity is a foreign-influenced entity: (i) rules evaluating the level of influence through executive control or through equity or debt ownership (ownership rules); and (ii) rules evaluating the level of influence through the entity’s contracts and other arrangements (payment rules).

• Ownership rules: Subject to an exception for publicly traded entities, an entity is a foreign-influenced entity if, during the taxable year, (i) a specified foreign entity can directly appoint a covered officer (e.g., a board member or member of the c-suite) of such entity; (ii) a single specified foreign entity owns, directly or constructively, at least 25% of such entity; (iii) one or more specified foreign entities own, directly or constructively, at least 40% of the entity; or (iv) at least 15% of all the debt of such entity has been issued to one or more specified foreign entities.
• Payment rules: An entity is a foreign-influenced entity if, during the previous taxable year, such entity made a payment to a specified foreign entity pursuant to a contract, agreement, or other arrangement which entitles the specified foreign entity (or other entity related to such specified foreign entity) to exercise “effective control” over (i) any qualified facility or energy storage technology of the taxpayer (or a related person thereto) or (ii) any eligible component produced by (including any applicable critical mineral extracted, processed, or recycled by) the taxpayer or person related thereto. The payment rules are extensive and describe a number of contractual rights that lead to effective control over an entity, qualified facility, energy storage technology, or eligible component.

Imposes material assistance entity rules to most major credits (Sections 45X, 45Y, and 48E)

The Act provides that properties qualifying for most of the major credits cannot so qualify if they include “material assistance” from a prohibited foreign entity. Generally, these rules apply for properties the construction of which begins after December 31, 2025, or eligible components sold beginning in taxable years beginning after July 4, 2025. These rules evoke the current domestic content guidance and require that a certain percentage of the direct costs of the relevant property not derive from materials from a prohibited foreign entity.

Property includes “material assistance” from a prohibited foreign entity if its “material assistance cost ratio” is less than an annually escalating “threshold percentage,” which applies to properties the construction of which begins, or eligible components sold, in such year. For purposes of sections 45Y and 48E, the material assistance cost ratio is the quotient (expressed as a percentage) of (i)(A) the total direct costs to the taxpayer attributable to all manufactured products (including components) which are incorporated into the qualified facility or energy storage technology upon completion of construction, minus (B) the total direct costs of the taxpayer attributable to all such manufactured products (including components) incorporated in the qualified facility or energy storage technology that are mined, produced, or manufactured by a prohibited foreign entity, over (ii) the amount in clause (i)(A). For section 45X, the amounts in the equation are the total direct material costs incurred by the taxpayer for the production of the eligible component, less the total direct material costs that are paid or incurred by the taxpayer for the production of such eligible component that are mined, produced, or manufactured by a prohibited foreign entity. The statute of limitations is extended to six years and the accuracy-related penalty threshold is lowered for failure to comply with the material assistance requirements.

Modifications to clean energy production credit and clean electricity investment credit (Sections 45Y and 48E)

The Act begins to phase out the section 45Y and section 48E credits in 2034, imposes requirements with respect to prohibited foreign entities, and contains special restrictions for wind and solar, among other modifications.

There is also a special ten-year recapture rule, a denial for certain residential facilities that are leased, an update to the energy community bonus for advanced nuclear facilities, and an update to the greenhouse gas emissions computation provision. The Act also fixes the domestic content glitch in section 48E.

• Phase out: Currently, section 45Y and section 48E credits begin phasing out for facilities and energy storage technology that begin construction during the later of two years after (i) 2032 and (ii) the year in which greenhouse gas emissions hit a certain rate. The Act causes section 45Y and section 48E credits to begin phasing out for facilities which begin construction two years after 2032, except in the case of wind and solar facilities. The Act phases certain wind and solar facilities (but not storage) out for facilities which (i) begin construction after 12 months after July 4, 2025 and (ii) are placed in service after December 31, 2027.
• Material assistance from a prohibited foreign entity: This requirement generally applies to qualified facilities, interconnection properties, and energy storage technology for which construction begins after December 31, 2025.
• Prohibited foreign entity: These rules preclude a prohibited foreign entity from recognizing the credit, beginning in any taxable year beginning after the date of enactment. A foreign-influenced entity that is such by virtue of the payment rules is prohibited only insofar as the determination relates to a qualified facility or energy storage technology.

Modifications to advanced manufacturing production credit (Section 45X)

Section 45X is limited and phases out early, and includes prohibited foreign entity restrictions.

The Act modifies the so-called “stacking rule”, introduces a credit for metallurgical coal, and modifies the definition of “battery module”.

Disqualification of energy property, the construction of which begins after December 31, 2024 as five-year property for depreciation purposes (Section 48)

The Act strikes the provision classifying property “described in section 48(a)(3),” which is the list of types of energy property qualifying for the investment tax credit under section 48 as five-year property (except that section 168 expands the provision for solar property in § 48(a)(3)(A)(i) to include wind property). This provision applies retroactively to property the construction of which begins after December 31, 2024.

Imminent expiration of the electric vehicle credits (Sections 30D, 45W, 30C, and 25E)

The Act expires electric vehicle credits under section 30D, section 45W, section 30C, and section 25E.

Other provisions

Modification of excise tax on investment income of certain private colleges and universities (Section 4968)

The Act increases the excise tax on the net investment income of certain private colleges and universities, replacing the existing uniform 1.4% rate with rates on a sliding scale from 1.4% to 8% based on the institution’s “student adjusted endowment” such that the higher rates apply to institutions that have larger endowments as measured on a per student basis. The student adjusted endowment is calculated by dividing the aggregate fair market value of the institution’s assets (other than those used directly in carrying out the institution’s exempt purpose) by the number of students. For example, an institution with assets of USD50bn and students numbering 20,000 would have a student adjusted endowment of over USD2m and thus be subject to 8% tax on its investment income.

The excise tax applies to private higher educational institutions only if they have at least 3,000 tuition-paying students, more than half of whom are located in the United States, and have a student adjusted endowment of at least USD500,000. State colleges and universities remain exempt from the excise tax. The exemption for qualified religious institutions was dropped from the Act pursuant to a ruling of the Senate’s parliamentarian.

Under the Act’s three-tier rate structure, applicable educational institutions are faced with a 1.4% tax if their student adjusted endowment is between USD500,000 and USD750,000, a 4% tax if their student adjusted endowment is between USD750,001 and USD2m, and an 8% tax if their student adjusted endowment exceeds USD2m.

The Act changes the definition of net investment income to include interest received with respect to student loans made by the institution (and certain of its affiliates), and certain federally subsidized royalty income. For these purposes, “federally subsidized royalty income” includes income where any Federal funds were used in the research, development or creation of the relevant intellectual property.

The Secretary is directed to prescribe regulations to prevent the avoidance of the excise tax through the restructuring of endowment funds or other arrangements designed to reduce or eliminate the value of assets or income subject to this tax. Covered institutions are also subject to increased reporting requirements with respect to the size of their student bodies.

These changes are effective for taxable years beginning after December 31, 2025.

Tax on net investment income of certain private foundations (Section 4940(a))

While the House Bill proposed to replace the 1.39% tax on the net investment income of certain private foundations with a tiered system—imposing a 1.39% rate on foundations with assets under USD50m, 2.78% on those with assets between USD50m and USD250m, 5% on those with assets between USD250m and USD5bn, and 10% on those with assets of at least USD5bn—the Act does not include such change.

Permanent renewal and enhancement of opportunity zones (Sections 1400Z-1 and 1400Z-2)

The TCJA introduced the qualified opportunity zone program as a temporary measure to attract investment in, and encourage entrepreneurs to start up, businesses located in economically distressed communities on or before December 31, 2026, by (i) allowing investors to defer, and to some extent eliminate, capital gains from the sale or exchange of property to unrelated persons by investing corresponding amounts in such businesses through qualified opportunity funds (“QOFs”), and (ii) exempting from income tax these investors’ gains from the direct or indirect disposition, after a ten year minimum holding period, of investments in such businesses. Market observers have estimated that the amounts invested in QOFs total between USD40bn and USD150bn.

The Act establishes a permanent, decennial process for designating OZs, beginning July 1, 2026, and recurring every ten years thereafter. The Act also (i) narrows the definition of the low-income communities eligible to be designated as OZs, (ii) modifies the tax incentives for investments in QOFs, and (iii) imposes new annual reporting requirements. Effective December 31, 2026, the prior rule that deemed all low-income communities of Puerto Rico as qualified opportunity zones is removed.

The zones eligible to be designated as OZs are census tracts that either (i) have a poverty rate of at least 20% and a median family income at or below 125% of the area median or (ii) have a median family income below 70% of the area median. Contiguous tracts are no longer eligible to be designated under this new definition.

The next round of new OZ designations generally will take effect on January 1, 2027, and future rounds of OZ designations generally will take effect every ten years thereafter.

The Act changes the timing of the recognition of the investors’ deferred gain by providing that the recognition date is the earlier of the date the investment in the QOF is sold or exchanged and the date that is five years after the date the investment in the QOF was made.

The Act provides additional incentives to invest in rural areas, including by providing that if an investor holds an investment in a QOF for at least five years, their basis in such investment is increased by 10%, or by 30% if the investment is in a rural qualified opportunity fund (“RQOF”), and that such increase is treated as occurring before the date on which the investor’s deferred gain with respect to such investment is recognized.

While the Act enhances incentives for RQOFs, it defines “rural area” more restrictively than the House Bill, excluding cities or towns with populations over 50,000 and urbanized areas that are contiguous and adjacent to such cities and towns.

The Act makes a clarification regarding the elimination of gain upon an exit from a QOF, or the QOF’s direct or indirect exit from a business, after the requisite ten-year holding period by providing that (i) in the case of an investment sold before the date that is 30 years after the date of the investment in the QOF, the basis is stepped up to the then-current fair market value, and (ii) in the case of investments sold 30 years or more after the date of the investment in the QOF, the basis is stepped up to the fair market value on the date that is 30 years after the date of the investment in the QOF.

The Act modifies certain rules applicable in determining whether a QOF holds sufficient property treated as qualified OZ property.

The above changes to the special rules for capital gains of investors generally take effect for amounts invested in QOFs after December 31, 2026.

Lastly, on reporting and penalties, the Act imposes new annual reporting requirements for QOFs and qualified opportunity zone businesses. Penalties apply to failures to file, including increased penalties for QOFs having gross assets in excess of USD10m.

The Act appropriates USD15m to the U.S. Internal Revenue Service to prepare and publish an annual report on the QOF program, such amounts to remain available until September 2028.

Changes to percentage of REIT assets that consist of stock of taxable REIT subsidiaries (Section 856(c)(4)(B)(ii))

The Act increases the allowable percentage of assets that a REIT may hold in the securities of taxable REIT subsidiaries from 20% to 25%; 25% was the limit in place prior to 2018.

This change is effective for taxable years beginning after December 31, 2025.

Commentary:

• This change could potentially add flexibility to REIT structures, allowing for a broader range of businesses to be held by REITs.

Footnotes

1. Pub. L. No. 115-97.
2. Unless otherwise indicated, all “section” references contained herein are to sections of the Code.
3. Under the Act, GILTI is referred to as “net CFC tested income” to reflect changes to remove the reduction to GILTI inclusions for net deemed tangible income return (discussed below). However, for purposes of this client alert, we continue to use the term GILTI to refer to “net CFC tested income” for ease of reference.
4. Under the Act, FDII is referred to as “foreign-derived deduction eligible income” to reflect changes to remove the reduction to FDII for deemed tangible income return (discussed below). However, for purposes of this client alert, we continue to use the term FDII to refer to “foreign-derived deduction eligible income” for ease of reference.
5. A more detailed overview of the changes to the clean energy credits will be contained in a separate publication.
6. A more detailed discussion of the changes related to employee compensation and benefits contained in the Act, including changes to section 162(m), health plans and reimbursements, will be set forth in a separate publication that will be prepared by our Global Employment and Compensation team.
7. These include, for example, an individual’s ability to deduct their investment costs under section 212. However, miscellaneous itemized deductions are only allowed to the extent they exceeded 2% of a taxpayer’s adjusted gross income.
8. For taxable years beginning after December 31, 2025, the standard deduction is expected to be USD15,750 for a single filer, USD23,625 for a head of household and USD31,500 for married individuals filing jointly and adjusted for inflation thereafter.
9. Stock will generally qualify as QSBS where: (i) such stock is received by the taxpayer at original issuance in exchange for cash, property or services; (ii) the issuing corporation was a domestic C-corporation at the time such stock was issued; (iii) at all times before, and immediately after the issuance of such stock, the amount of cash plus the tax basis of the issuing corporation’s assets did not exceed USD50m; and (iv) at least 80% of the issuing corporation’s assets were used in the active conduct of one or more qualified trades or businesses during substantially all of the taxpayer’s holding period in such stock.
10. A (i) 50% exclusion is available for QSBS acquired before February 18, 2009 and (ii) 75% exclusion is available for QSBS acquired on or after February 18, 2009 and before September 28, 2010.
11. Under section 1(h)(4), the 50% portion of the gain that is not excluded under section 1202(a) due to the percentage limitation (up to, but not in excess of, the Per Issuer Limitation) is taxed at a 28% U.S. federal income tax rate (instead of the maximum 20% long-term capital gains rate), resulting in an effective U.S. federal income tax rate of 14% on the taxpayer’s recognized gain from the sale of the QSBS (up to the amount of the Per Issuer Limitation). Furthermore, the gain that is not excluded under section 1202(a) due to the percentage limitation (in addition to any recognized gain above the Per Issuer Limitation) is subject to the 3.8% net investment income tax under section 1411 (the NIIT).
12. Under section 1(h)(4), the 25% portion of the gain that is not excluded under section 1202(a) due to the percentage limitation (up to, but not in excess of, the Per Issuer Limitation) is taxed at a 28% U.S. federal income tax rate (instead of the maximum 20% long-term capital gains rate), resulting in an effective U.S. federal income tax rate of 7% on the taxpayer’s recognized gain from the sale of the QSBS (up to the amount of the Per Issuer Limitation). Furthermore, the gain that is not excluded under section 1202(a) due to the percentage limitation (in addition to any recognized gain above the Per Issuer Limitation) is subject to the NIIT.
13. As is the case under pre-existing law, the excluded gain is not an alternative minimum tax (AMT) preference item and would not be subject to the NIIT.
14. See the discussion under “Business Tax Provisions”, below.
15. For taxable years beginning before January 1, 2022, ATI was computed without regard to deductions for amortization, depreciation, and depletion. See section 163(j)(8)(A)(v).
16. This change appears to be made, at least in part, in response to the changes to how interest expense is allocated and apportioned to GILTI basket income for purposes of the FTC limitation under section 904, which is discussed in more detail below.
17. For purposes of determining the acquisition date of property, property is generally treated as acquired on the date on which a written binding contract is entered into for such acquisition.
18. In the case of a taxpayer that is a lessor, use of property by a lessee as an integral part of qualified production activities is not considered to be use by the taxpayer.
19. The requirements in clauses (iii) and (iv) will be treated as satisfied if (A) a taxpayer acquires property after January 19, 2025 and before January 1, 2029 (for this purpose, property is treated as acquired not later than the date on which the taxpayer enters into a written binding contract for such acquisition), (B) such property was not used by the taxpayer at any time prior to such acquisition, (C) such property was not used in qualified production activity by any person at any time during the period beginning on January 1, 2021 and ending on May 12, 2025 and (D) the acquisition of such property meets the requirements of section 179(d)(2)(A), (B), (C) and (3).
20. The Act directs Treasury to issue regulations or other guidance addressing the application of this recapture rule where the property is transferred in a partial or fully tax-deferred transaction and the transferee ceases to use the property in a use that is an integral part of a qualified production activity. Taxpayers disposing of property for which a deduction has been claimed under section 168(n) in non-recognition transactions should consider obtaining representations, covenants and indemnities from the transferee regarding the post-transfer use of the property.
21. Under section 448(c), a taxpayer must have average annual gross receipts for the three taxable year period ending with the taxable year which precedes such taxable year not exceeding USD25m.
22. The election must be made by July 4, 2026 (the date that is one year following the date of enactment of the Act).
23. Under section 469(h)(1), a taxpayer materially participates in an activity where its involvement in the operations of the activity is on a basis which is regular, continuous and substantial. Under temporary Treasury regulations, section 1.467-5T(a) provides additional guidance as to when a taxpayer is treated as materially participating in a business for a particular taxable year.
24. Accordingly, under the Act, the top marginal rate of U.S. federal income tax imposed on income that is eligible for the QBI deduction is reduced from 37% to 29.6% (compared to 28.49% under the House Bill, which proposed a 23% deduction).
25. As discussed above, under pre-existing law, for taxable years beginning after December 31, 2025, the effective rate of U.S. federal income tax imposed on FDII was scheduled to increase to 16.406% and the effective U.S. federal income tax rate imposed on GILTI was scheduled to increase to 13.125%.
26. This is particularly the case for newly-formed holding companies where shareholders can benefit from the QSBS exclusion (as enhanced by the changes under the Act that are discussed above).
27. However, taxpayers will also need to consider the possibility that the FDII deduction is modified or eliminated by future legislation.
28. Indeed, as a result of the repeal of the prohibition on downward attribution under section 958(b)(4), following the enactment of the TCJA, it was not uncommon for a U.S. shareholder to be able to sell the stock of a CFC to a foreign-parented group with one or more U.S. subsidiaries and avoid recognizing any subpart F or GILTI inclusions for its period of ownership.
29. This result under pre-existing law was inconsistent with the statement in the Conference Committee report accompanying the TCJA, which stated “[s]ince only a portion (80 percent) of foreign tax credits are allowed to offset U.S. tax on GILTI, the minimum foreign tax rate, with respect to GILTI, at which no U.S. residual tax is owed by a domestic corporation is 13.125 percent.... Therefore, as foreign tax rates on GILTI range between zero percent and 13.125 percent, the total combined foreign and U.S. tax rate on GILTI ranges between 10.5 percent and 13.125 percent. At foreign tax rates greater than or equal to 13.125 percent, there is no residual U.S. tax owed on GILTI, so that the combined foreign and U.S. tax rate on GILTI equals the foreign tax rate”. H.R. Rep. No. 115-466, at 626-27 (Conf. Rep.).
30. For example, with the current U.S. corporate tax rate of 21%, a 10.5% effective U.S. federal income tax rate applies to GILTI (i.e., 50% of 21%), and a 13.125% effective U.S. federal income tax rate applies to FDII (i.e., 62.5% of 21%). If GILTI tested income were subject to a non-U.S. effective income tax rate of 13.125%, with the 20 Percent Haircut and assuming no FTC limitation issues created by expense allocation and apportionment, no incremental U.S. federal income tax should be due (i.e., the U.S. federal income tax liability is determined at a 10.5% effective tax rate but, by reducing the 13.125% non-U.S. tax rate by the 20 Percent Haircut to 10.5%, the taxpayer should be able to exactly offset the GILTI liability with FTCs).
31. The product of 14% and 90% is 12.6%, which is the effective rate of U.S. federal income tax imposed on GILTI under the Act.
32. Applicable section 38 credits are defined as: (i) the low-income housing credit under section 42(a); (ii) the renewable electricity production credit under section 45(a); and (iii) the portion of the investment credit under section 46 that is allocable to the energy credit under section 48.
33. Section 954(c)(6) was first enacted as a temporary provision in 2005 and has been extended several times, most recently in 2020. However, it is scheduled to expire for taxable years of foreign corporations beginning on or after January 1, 2026.
34. The full list of entities that mine, produce, or manufacture goods, wares, articles and merchandise with forced labor is available here.