Final reconciliation legislation enacted July 4, 2025 (known as H.R. 1or the Act herein) includes several international tax changes with implications for individuals, trusts, privately held businesses, and the business stakeholders. The changes include:

• Renaming global intangible low-taxed income (GILTI) as "net CFC tested income" (NCTI)
• Reducing the IRC Section 250 deduction for NCTI from 50% to 40% and eliminating the benefits associated with tangible assets held by controlled foreign corporations (CFCs) (i.e., the so-called net deemed tangible income return)
• Introducing new expense apportionment rules that exclude interest expense and research and experimental (R&E) expenditure from apportionment to a taxpayer's NCTI and allocates a portion of these expenditures to US-source income for foreign tax credit (FTC) purposes.
• Increasing the allowable percentage of deemed paid foreign tax credits for taxes attributable to NCTI from 80% to 90% and aligning the IRC Section 78 gross-up with this increase
• Disallowing a credit for 10% of foreign income taxes paid, accrued, or deemed paid on distributions of previously taxed income attributable to IRC Section 951A
• Reallocating foreign taxes attributable to base differences to the general basket and clarifying that certain unsubstantiated dividends are treated as passive income rather than NCTI
• Requiring US Shareholders of a CFC to base their pro-rata share of Subpart F and NCTI on their percentage ownership of the CFC throughout the year
• Limiting downward attribution to US persons from foreign shareholders, except for certain structures that have US shareholders and are controlled by foreign persons
• Making permanent IRC Section 954(c)(6)'s look-through rule for certain payments between related CFCs
• Considering income from inventory produced in the US and sold outside the US through a foreign branch to be foreign sourced, while capping the amount of foreign-source income from the sale or exchange of the inventory at 50%
• Introducing a 1% excise tax on certain remittance payments to non-US persons outside the US
• Providing guidance as to potential disguised transfers of partnership interests in exchange for services by a partner

This Alert discusses these changes and what they mean for individuals, privately held businesses and the business stakeholders. For a more detailed discussion of these and other international tax changes, see EY Tax Alert 2025-1510.

Changes to GILTI (now NCTI)

The Act modifies the GILTI regime, impacting US taxpayers, and renames GILTI to "Net CFC Tested Income" (NCTI).

Under prior law, US taxpayers subject to tax on NCTI could deduct the "net deemed tangible income return" in determining their GILTI inclusion, allowing a 10% reduction of the inclusion based on tangible assets held by the CFCs. The Act eliminates this deduction, broadening the tax base and bringing more foreign income into the scope of NCTI.

Prior law also permitted corporate US shareholders to deduct 50% of NCTI under IRC Section 250, resulting in an effective tax rate of 10.5% (based on a 21% corporate tax rate). The rate, however, was scheduled to decrease to 37.5% after 2025.

The Act permanently reduces the IRC Section 250 deduction for NCTI from 50% to 40%, increasing the effective corporate tax rate on this income to 12.6% (and to 14% after taking into account the changes to the IRC Section 78 gross up, discussed later). The impact of foreign tax credits on NCTI will be discussed later. Although these provisions generally apply to US Shareholders, as defined in IRC Section 951(b), that are domestic corporations, the IRC Section 250 deduction also applies to individuals and trusts that make the IRC Section 962 election.¹

The changes are effective for tax years beginning after December 31, 2025.

Implications

For individuals and trusts who are US Shareholders in a CFC, these changes will likely result in higher taxes. Taxpayers whose NCTI had been reduced for the net deemed tangible income return may expect to recognize more NCTI following the Act. If an individual or trust makes the IRC Section 962 election, the reduced 40% IRC Section 250 deduction will directly translate into a higher effective tax rate on their NCTI inclusion. Individuals and trusts with foreign business interests, especially those with significant tangible asset bases in their CFCs, should consider re-evaluating their tax positions and the ongoing viability of the IRC Section 962 election.

Foreign tax credit modifications

The Act introduces several modifications to the existing rules governing a taxpayer's foreign tax credit limitation. Most of the modifications are made to the FTC rules as applied to a taxpayer's NCTI.

NCTI foreign tax credit modifications

The Act limits the deductions that are allocated to foreign-source NCTI for FTC purposes to: the IRC Section 250 deduction, which applies to both NCTI and the corresponding IRC Section 78 gross up amount; certain deductible taxes that are allocable to NCTI inclusions; and any other deductions that are directly allocable to NCTI inclusions. Further, the Act states that deductions for interest expense and R&E expenditures are not allocated to NCTI. Instead, any interest expenses or R&E expenditures that previously would have been allocated to NCTI are now directly allocated to US-source income.

This amendment will apply to tax years beginning after December 31, 2025.

Implications

These changes are generally favorable for taxpayers with excess FTCs in the NCTI basket. By limiting the allocation of deductions to NCTI, a taxpayer's net taxable income in the IRC Section 951A category may increase, thereby enabling the utilization of additional FTCs to offset US tax.

Modifications to deemed paid credit for taxes attributable to NCTI

Prior law deemed a corporate US Shareholder to have paid foreign income taxes equal to 80% of the aggregate tested foreign income taxes paid or accrued by a CFC.² Under the Act, the percentage of foreign taxes deemed paid increases from 80% to 90%. Although deemed paid credits are generally allowable for corporate US shareholders, this change is also relevant for individuals and trusts that make an IRC Section 962 election. Similarly, the IRC Section 78 gross-up has been adjusted to equal 90% of taxes paid to align with the revised amount of taxes deemed paid.³ Under prior law, the IRC Section 78 gross-up was not subject to this adjustment.

Finally, IRC Section 960(d) has been amended to add new paragraph (d)(4), which denies credits under IRC Section 901 for 10% of any foreign income taxes paid, accrued, or deemed paid on previously taxed earnings and profits (PTEP), which are earnings and profits that are excluded from gross income due to a prior inclusion under IRC Sections 951(a) or 951A(a). This effectively imposes a new 10% haircut on taxes attached to PTEP that the CFC distributes to its US shareholder.⁴

The increase in the deemed-paid allowance to 90% is effective for (i) foreign corporations' tax years beginning after December 31, 2025, and (ii) US Shareholder's tax years in which or with which the foreign corporations' tax years end.

The modification for the 10% haircut on distribution of NCTI-related PTEP applies to foreign taxes paid or accrued after June 28, 2025.

Implications

The combination of the reduced 40% IRC Section 250 deduction and the 90% FTC limitation results in an effective corporate tax rate of approximately 14% on NCTI. The increase applies to individuals and trusts that make an IRC Section 962 election. Although the increased NCTI FTC limitation allows taxpayers to use more credits to offset NCTI income, this benefit is partially reduced by the new 10% haircut under IRC Section 960(d), which limits credits for certain PTEP-related foreign taxes.

Further consideration may be warranted in the context of an IRC Section 962 election, particularly concerning the application of the 10% haircut to PTEP-related taxes. Under an IRC Section 962 election, when a US Shareholder includes the earnings and profits (E&P) of a foreign corporation in gross income as NCTI and the foreign corporation later distributes that PTEP, the distribution is included in the shareholder's gross income to the extent it exceeds the amount of US tax previously paid on the NCTI inclusion (i.e., the taxable PTEP). That is, unlike a domestic corporation, a taxpayer who makes an IRC Section 962 election may have pools of both nontaxable PTEP and taxable PTEP. Taxpayers should consider how the 10% haircut to foreign taxes paid on PTEP distributions applies to distributions of taxable PTEP resulting from IRC Section 962 election.

FTC technical corrections

The final regulations make various technical corrections to the FTC provisions enacted under the TCJA.

Under prior law, foreign taxes attributable to a base difference were allocated to the branch basket. A base difference generally arises when an item is treated as income for tax purposes in a foreign jurisdiction but is not recognized as income for US tax purposes. IRC Section 904(d)(2)(H)(i) was amended to allocate foreign taxes attributable to a base difference to the general basket.

Under prior law, non-substantiated dividends from noncontrolled 10%-owned foreign corporations were allocable to the NCTI basket for foreign tax credit purposes. IRC Section 904(d)(4)(c)(ii) was amended to allocate these dividends to the passive basket rather than NCTI basket.

These technical corrections apply to tax years beginning after December 31, 2025.

Implications

The corrections help ensure that foreign taxes attributable to base differences and certain non-substantiated dividends align with FTC basket that best matches the underlying income.

Modification to Subpart F and NCTI pro-rata-share rule

US shareholders of CFCs historically included Subpart F and NCTI of a CFC based on their pro-rata share of CFC stock held as of the last day of the CFC's tax year (Last Relevant Day). The Act now requires inclusion throughout the year on a pro-rata basis based on the US shareholder's Subpart F income and NCTI "attributed to" ownership during the CFC's tax year. This change affects US shareholders that dispose of their CFC interests on a day other than the last day of the CFC's tax year as well as US shareholders with other changes in ownership during the year.

The Act is unclear as to whether the pro-rata inclusion is based on the CFC's income as of the change-in-ownership date, or whether the inclusion is based on a pro-rata share of the CFC's total, annual taxable income, including income earned after a change in ownership. The Act authorizes Treasury to promulgate regulations, including regulations that would allow a taxpayer to elect to close a CFC's tax year upon a direct or indirect transfer of the CFC's stock.

Implications

US shareholders of CFCs that may be considering a mid-year sale or other change in ownership of a CFC will have to wait for further guidance from the Treasury Department to determine whether post-sale CFC income is included in a disposing US shareholder's pro rata share of Subpart F and tested income.

Permanent look-through rule for FPHCI between related CFCs

The Act made permanent the otherwise temporary look-through rule under IRC Section 954(c)(6), which prevents dividends, interest, rents, and royalties paid by a related CFC from being treated as foreign personal holding company income (FPHCI), to the extent this income is not otherwise attributable to the payor CFC's FPHCI or to its ECI. The provision applies for foreign corporations' tax years beginning after December 31, 2025, and to US Shareholders' tax years in which or within which the foreign corporations' tax years end.

Implications

This taxpayer-friendly extension of the IRC Section 954(c)(6) look-through rule means that US Shareholders of a CFC can continue to exclude certain passive income paid to the CFC by a related CFC from Subpart F income. Congress provided long-sought certainty by making the provision permanent.

Downward attribution

Before its repeal in 2017 by the TCJA, IRC Section 958(b)(4) prevented downward attribution of stock ownership from foreign persons to US persons. Specifically, the provision prohibited US entities from being treated as constructive owners of foreign corporation stock owned by foreign shareholders for purposes of determining whether the foreign corporation is a CFC. By repealing IRC Section 958(b)(4), the TCJA subjected US entities to downward attribution from foreign owners, greatly expanding the reach of the CFC rules.

The Act reinstated IRC Section 958(b)(4) to once again prohibit downward attribution from foreign persons to US entities for purposes of determining US Shareholder and CFC status. However, the impact of the reinstated downward attribution limitation is tempered by introduction of new IRC Section 951B, which carves out an exception to the general prohibition under IRC Section 958(b)(4). IRC Section 951B allows downward attribution in limited cases applicable to a "foreign controlled US shareholder" (FCUSS) of a "foreign controlled foreign corporation" (FCFC) as if the FCUSS were a US Shareholder and the FCFC were a CFC, for purposes of applying the Subpart F and NCTI inclusion rules.

Specifically, IRC Section 951B introduces a definition framework to specifically target "out-from-under" strategies that were the aim of the TCJA's initial repeal of IRC Section 958(b)(4). To achieve its objective, IRC Section 951B defines a FCUSS as any US person who would be considered a US Shareholder of a foreign corporation if:

1) Downward attribution applied regardless of reinstated IRC Section 958(b)(4)

2) The definition of "US Shareholder" under IRC Section 951(b) was modified to require ownership of more than 50% of the foreign corporation, rather than the typical 10% or more threshold

Additionally, an FCFC is defined as a foreign corporation that is not otherwise a CFC under existing rules, but that would be considered a CFC if IRC Section 957(a) was applied using the concept of FCUSS in replacing the traditional US Shareholder term, and if downward attribution was applied to attribute ownership from a foreign person to the US person. In such circumstances, the foreign corporation may be deemed a FCFC without regard to IRC Section 958(b)(4) and the related FCUSS may have Subpart F income or NCTI amount.

In addition, the Act generally authorizes Treasury to issue regulations that would treat a FCUSS as a US shareholder and an FCFC as a CFC within the meaning of IRC Section 957, for purposes of provisions outside of Subpart F and NCTI, such as reporting requirements or coordination with the passive foreign investment company (PFIC) rules.

IRC Section 951B applies to foreign corporations' tax years beginning after December 31, 2025, and to the tax years of US persons in which or with which those foreign corporations' tax years end.

Implications

Although the reinstatement of IRC Section 958(b)(4) limits the broad reach of downward attribution, new IRC Section 951B introduces complexity for certain ownership structures, particularly in cross-border or foreign-owned structures.

Although a foreign corporation may still be classified as an FCFC due to downward attribution under IRC Section 951B, it is possible that no FCUSS's Subpart F income or NCTI would be subject to tax. To be taxed on its Subpart F income and NCTI, an FCUSS must own an IRC Section 958(a) direct or indirect interest in the FCFC. Downward attribution under IRC Section 958(b)(4) is considered constructive ownership, not direct or indirect ownership. Effectively, in some structures, the FCUSS that causes the foreign corporation to be a FCFC could be a constructive owner only. It remains unclear whether this may still trigger Form 5471 reporting obligations and expose US entities to compliance requirements. Additionally, US entities, such as partnerships, with mixed ownership (foreign and domestic) may inadvertently trigger attribution-based FCFC status, affecting US partners who lack economic control or visibility into the foreign parent's holdings. As such, structures involving foreign ownership of US pass-through entities may need to assess the residual FCFC exposure under IRC Section 951B.

While the reinstatement of the downward limitation is likely to be welcomed by privately held businesses, the compliance burden is not fully eliminated, and the introduction of new IRC Section 951B adds further analytical complexity. Foreign-owned structures with domestic entities need to be reassessed to determine the impact of the revised rules, and forthcoming guidance or additional regulations should be monitored to better understand compliance implications and coordination with other anti-deferral regimes.

Sourcing rules for inventory sales attributable to foreign branches

The Act introduced changes to the sourcing rules for income derived from the sale of inventory that is produced in the United States and sold outside the United States, particularly when such sales are attributable to a foreign branch. These modifications primarily aim to refine the calculation of the FTC limitation, potentially decreasing US tax liabilities for US-based manufacturers engaged in such cross-border activities by allowing more income to be foreign source and providing additional potential utilization of foreign tax credits.

Under the TCJA's modification to IRC Section 863(b)(2), income from the sale of inventory produced within the US and sold outside the US was sourced to the location of production activities, meaning it was treated entirely as US-source income. This often resulted in reduced net foreign-source income for US FTC purposes, potentially restricting how much foreign tax could be credited against US tax liability, especially if significant foreign taxes were paid on foreign sales activity.

The Act introduces a new provision that specifically addresses this scenario. Solely for purposes of the IRC Section 904 foreign tax credit limitation, the new law allows a portion of the income from a sale outside the US of inventory produced in the US to be treated as foreign-source income when the sale is attributable to the seller's foreign office or other fixed place of business. This is a targeted change, intended to better align the source of income with the location of economic activity (i.e., sales function) for FTC limitation purposes. However, the amount of sales income treated as foreign source is limited to 50% of the taxable income from the sale of US-manufactured products. This means that at least 50% of the income will remain US source for FTC limitation purposes, even with a foreign branch materially participating in the sale. The existing IRC Section 863(b)(2) rules will continue to apply for non-FTC purposes, meaning the primary sourcing of income from production and sale of inventory generally remains with the location of production activities.

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

Implications

These changes primarily affect companies that operate through foreign branches and engage in US manufacturing of export products. These companies may now see a greater portion of their inventory sales income treated as foreign source for FTC limitation purposes, potentially allowing them to utilize a larger amount of their foreign tax credits. This could lead to a reduction in their overall effective US tax rate. However, a 50% cap means that the relief is not absolute, and companies with highly profitable foreign sales operations will still find a significant portion of that income treated as US source for FTC purposes.

Individuals and trusts with interests in US pass-through-entity manufacturers that conduct foreign sales will feel the impact through their distributive share of the entity's income and foreign tax credits. Overall, the change aims to provide some relief for US businesses facing double taxation on foreign-earned income.

Other relevant provisions

The Act creates a new IRC Section 4475, which imposes a 1% excise tax on certain remittance transfers from persons in the US (whether US citizens, residents or nonresident aliens) to non-US citizens or nonresident aliens who are located outside the US. While the rule includes several exceptions, such as when transfers are made from US-issued (non-prepaid) credit and debit cards and most US financial institutions, the remittance tax might surprise those who routinely or occasionally transfer money to family or friends overseas. In addition, the compliance burden on financial institutions ("remittance transfer providers") to verify the identity of the recipient or collect the excise tax might make certain institutions unwilling to facilitate US-to-foreign transfers. For additional information on the IRC Section 4475 excise tax, see EY Tax Alerts 2025-1116 and 2025-1108.

The Act modifies IRC Section 707(a)(2) to remove the need for Treasury to make that section operative. Section 707(a)(2) provides rules on certain transactions between partnerships and their partners acting in a non-partner capacity and can apply to foreign partners and foreign partnerships. For additional information on IRC Section 707(a)(2), see EY Tax Alert 2025-1548.

Removed from final version — proposed IRC Section 899

Proposed IRC Section 899, introduced in the House's version of the Act, was removed from the final legislation by the Senate. The provision would have imposed an additional withholding tax on certain US-source income of foreign individuals and entities where the individual, entity or owner/controller/beneficiary of the entity resided in a country that imposed, in the Treasury Department's view, "discriminatory foreign taxes".

Proponents reportedly considered the provision a response to the OECD's Pillar 2 project, digital services taxes, and diverted profits taxes, while critics believed it would lead to significant decreases in foreign direct investment into the US. The measure was dropped from the final legislation following an agreement between the US and the G7. See Tax Alert 2025-1406.