GILTI and net CFC tested income

Historical GILTI framework

GILTI is a current-inclusion rule in section 951A. A U.S. shareholder of a controlled foreign corporation (CFC) includes a share of the CFC's income in gross income each year, whether or not the CFC pays a dividend. For taxable years before 2026, the inclusion was the shareholder's net CFC tested income less a deemed return of 10 percent of its share of the CFCs' qualified business asset investment (QBAI), reduced by specified interest expense.^[9]

The shareholder aggregates tested income and tested losses across all of its CFCs, and the net tested income amount cannot fall below zero. GILTI is separate from Subpart F income and is not limited by a CFC's earnings and profits.^[9]

The regulations apply these rules by reference to the shareholder's inclusion year. A U.S. shareholder that owns CFC stock within the meaning of section 958(a) includes the GILTI amount in gross income for that year.^[6]

Section 951A reporting in IRS instructions

A U.S. shareholder is a U.S. person that owns at least 10 percent of a foreign corporation's voting power or stock value, counting direct, indirect and constructive ownership under section 958. A shareholder outside a consolidated group computes the inclusion on Form 8992 with Schedule A. A consolidated group uses Schedule B and a consolidated Form 8992.^[8]

Domestic partnerships do not complete Form 8992 or Schedule A under the instructions. They report the specified information on Schedules K-2 and K-3 instead.^[8]

For a U.S. individual who owns a foreign company directly or through a trust, the inclusion is current, and the cost does not wait for a dividend. Individuals and other flow-through owners generally do not receive the corporate section 250 deduction or the indirect foreign tax credit. An individual, including a trust or estate that is a 10 percent U.S. shareholder, can elect under section 962 to be taxed as if the investment were held through a domestic C corporation.^[2][4]

A section 962 election has a cost on the back end. In Smith v. Commissioner, 151 T.C. No. 5 (2018), the Tax Court held that actual distributions of section 962 earnings from a CFC in a non-treaty country did not qualify for preferential dividend rates. Any comparison of a foreign holding company with direct ownership for a U.S. owner therefore starts with the current inclusion and then tests the election and the later distributions.^[4]

Later statutory name and calculation

For taxable years beginning after December 31, 2025, the 2025 tax act renamed GILTI as net CFC tested income and removed the terms GILTI and FDII from the Internal Revenue Code. Section 951A now requires each U.S. shareholder of a CFC to include its net CFC tested income, defined as the excess of its aggregate pro rata share of tested income over its aggregate pro rata share of tested losses.^[5][1]

Tested income starts with a CFC's gross income, excludes categories such as Subpart F income and certain related-party dividends, and subtracts allocable deductions, including taxes, under rules similar to the Subpart F rules. A tested loss arises when those deductions exceed the gross income amount.^[1]

The later inclusion rule no longer subtracts a deemed tangible income return, so the QBAI reduction in the historical formula does not appear in the statutory definition. The IRS Form 8992 instructions in the 12/2024 revision still use the term GILTI, so the revision for the tax year being prepared controls the reporting steps.^[1][5][8]

Questions and answers

Related pages

• Topic guides
• How CFC Ownership Can Lead to GILTI Inclusions
• U.S. Reporting Forms for Foreign Entities
• When CFC and PFIC Rules Overlap