New Tax Act Changes Numerous International Tax Provisions

President Donald Trump on July 4, 2025, signed into law a reconciliation tax bill, commonly known as the “One Big Beautiful Bill Act.” The act makes substantial changes to U.S. international tax provisions, including provisions affecting global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), the base erosion anti-abuse tax (BEAT), and other important provisions. The changes are discussed below.

GILTI

The act renames GILTI as “net CFC tested income” (NCTI). Additionally, the act increases the effective tax rate on NCTI while making both favorable and unfavorable changes to the underlying calculation effective for tax years beginning after 2025. 

QBAI Return

The act removes the net deemed tangible income return from the NCTI calculation. Under prior law, tested income was generally reduced by 10% of a CFC’s qualified business asset investment (QBAI). QBAI is generally the adjusted basis of a CFC’s depreciable tangible property that is used in its trade or business. Under the act, a U.S. shareholder is required to include a CFC’s tested income without any reduction for QBAI. 

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

Section 250 Deduction

The act decreases the Section 250 deduction for NCTI from 50% to 40%. This change results in an increase in the effective tax rate on NCTI from 10.5% to 12.6% (without incorporating the effect of the FTC haircut). Prior to the enactment of the act, the Section 250 deduction for NCTI was slated to decrease to 37.5% (effective tax rate 13.125%) for tax years beginning after December 31, 2025. 

The reduction in the Section 250 deduction for NCTI to 40% is effective for taxable years beginning after December 31, 2025.

Expense Apportionment to NCTI

The act changes the allocation of expenses to NCTI for foreign tax credit (FTC) purposes so it includes only the Section 250 deduction on income and deductions that are “directly allocable” to such income. Importantly, the act specifically precludes the allocation of interest expense and research and experimental (R&E) expenditures to NCTI for FTC purposes. Any interest or R&E expenditures that would have been allocated or apportioned to NCTI is allocated or apportioned to U.S.-source income. Prior to the enactment of the act, interest expense and R&E expenditures (though less important) could significantly hamper a U.S. shareholder’s ability to use FTCs to reduce its GILTI liability. 

These provisions are applicable for taxable years beginning after December 31, 2025.

Foreign Tax Credit Haircut

The act reduces the FTC haircut for NCTI from 20% to 10%. Under prior law, U.S. corporations could claim a deemed-paid FTC for up to 80% of the foreign income taxes attributable to a CFC’s tested income. The act increases the potential to claim a deemed paid FTC to 90% of the foreign income taxes attributable to a CFC’s tested income. This results in an equivalent top effective rate of 14% (up from the current 13.125%). This provision applies to taxable years beginning after December 31, 2025.

The act also decreases the foreign tax credit haircut from 20% to 10% on distributions of both NCTI and GILTI previously taxed earnings and profits (PTEP). This provision applies to distributions of Section 951A PTEP that was included in a U.S. shareholder’s gross income after June 28, 2025. 

FDII

The act renames the FDII provisions as “foreign-derived deduction-eligible income” (FDDEI). Additionally, the act increases the effective tax rate on FDDEI while making both favorable and unfavorable changes to the underlying calculation, effective for tax years beginning after 2025. 

QBAI Return

The act repeals the reduction in FDDEI for the deemed return on QBAI. Under prior law, deemed intangible income was generally reduced by 10% of a corporation’s QBAI. Repeal is effective for taxable years beginning after December 31, 2025.

Section 250 Deduction

The Section 250 deduction for FDDEI is permanently reduced from 37.5% to 33.34%. This change results in an increase in the effective tax rate on FDDEI from 13.125% to 14%. Prior to the enactment of the act, the Section 250 deduction for FDDEI was slated to decrease to 21.875% (effective tax rate 16.4%) for tax years beginning after December 31, 2025.

The reduction in the Section 250 deduction for FDDEI to 33.34% is effective for taxable years beginning after December 31, 2025.

Expense Apportionment to DEI

The act changes the allocation of expenses to deduction-eligible income (DEI) for FDDEI purposes to exclude interest expense and R&E expenditures from being allocated to DEI. This provision is applicable to taxable years beginning after December 31, 2025.

Disposition of Certain Property and FDDEI

The act introduces a new provision that excludes income or gain from the disposition of intangible property under Section 367(d)(4) and property subject to depreciation, amortization, or depletion from the DEI calculation. 

This provision applies to dispositions that occur after June 16, 2025.

BEAT

The act increases the BEAT rate from 10% to 10.5%. Prior to the enactment of the act, the BEAT rate was slated to increase to 12.5%. The act also makes permanent the favorable treatment of research credits and a portion of Section 38 credits for BEAT purposes that would have expired for taxable years beginning after December 31, 2025. 

The changes to the BEAT are effective for taxable years beginning after December 31, 2025.

CFC Look-Through Rule

The act made the CFC look-through exception under Section 954(c)(6) permanent. This exception excludes certain payments (dividends, interest, rents, and royalties) that are received or accrued by a CFC from a related CFC from being treated as foreign personal holding company income under the Subpart F rules. The CFC look-through exception applies if the applicable payment is attributable or properly allocable to income of the related person that is neither Subpart F income nor effectively connected income of a U.S trade or business. 

Sourcing of Income from Sales of Certain Inventory

The act provides a new sourcing rule for certain sales by foreign branches of inventory produced in the U.S. For FTC purposes, if a foreign branch of a U.S. person sells inventory that is produced in the U.S., such income is treated as foreign-source income, capped at 50%, likely attributable to the  branch category. 

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

Downward Attribution and Section 951B

The bill reinstates Section 958(b)(4) which, prior to the Tax Cuts and Jobs Act (TCJA), prohibited the downward attribution of stock ownership from a foreign person to a U.S. person for purposes of determining CFC and U.S. shareholder status. The repeal of Section 958(b)(4) under the TCJA resulted in many foreign corporations becoming CFCs and created filing obligations for constructive U.S. shareholders. 

In combination with the reinstatement of Section 958(b)(4), the act introduces Section 951B. Section 951B extends the CFC inclusion rules to foreign controlled U.S. shareholders (FCUSSH) of foreign controlled CFCs (FCCFC). Under this new rule, a FCUSSH is generally required to include NCTI or Subpart F income of an FCCFC only if it owns a direct or indirect interest, under Section 958(a), in the FCCFC. 

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

CFC Pro Rata Share Rules

The act provides new pro rata share rules that require a U.S. shareholder of a CFC to include its pro rata share of Subpart F income or NCTI if it owned stock in the CFC at any time during the foreign corporation’s taxable year in which it was a CFC. This provision removes the requirement that the U.S. shareholder own stock of the CFC on the last day on which the foreign corporation was a CFC in order to have an inclusion. The act provides Treasury with authority to issue regulations allowing taxpayers to make a closing of the taxable year election if there is a disposition of a CFC.

The change in the pro rata share rules applies for CFC taxable years beginning after December 31, 2025.

Section 899

Earlier versions of the act proposed in the House and the Senate included Section 899, which would have imposed retaliatory taxes on residents of countries that impose “unfair foreign taxes.” This provision was removed from the final version of the bill that was signed into law as a result of an agreement between the U.S. and G-7 countries to exempt the U.S. from certain OECD Pillar Two taxes. The G-7 released a statement saying they are committed to work toward an agreement that would create a side-by-side system to fully exclude U.S.-parented groups from the UTPR and the IIR, while ensuring that risks to a level playing field and base erosion are addressed. The parties also agreed to work toward compliance simplification and consider treating nonrefundable tax credits like refundable tax credits.