The Tax Cut and Jobs Act (TCJA) has brought significant changes to the U.S. taxation of foreign income. For decades, the income of certain foreign subsidiaries was only taxed in the U.S. upon repatriation of the income to the U.S. entity. The TCJA changed this deferral regime to a system in which a portion of such income is subject to immediate taxation in the U.S. under the following rules:
- Global Intangible Low-Taxed Income (GILTI) – which is an additional tax to businesses with low-taxed income held in Controlled Foreign Corporations.
- Foreign Derived Intangible Income (FDII) – which is income from all export transactions.
The good news is that U.S. corporations are entitled to a deduction for part a portion of their GILTI and FDII income taxable income. Specifically, the deduction is equal to:
- 37.5% of the taxable FDII through tax years beginning before January 1, 2026 (and 21.875% thereafter), plus;
- 50% of the taxable GILTI through tax year beginning before January 1, 2026 (and 37.5% thereafter).
As a result of this deduction, the effective tax rate for GILTI and FDII drops from an already-reduced tax rate of 21% (from TCJA) to a rate of 13.125% or lower on this foreign income.
It is important to note that the deduction is available only to C corporations; therefore, S corporations, partnerships, REITs and other taxpayers do not qualify. Non-C corporate taxpayers with significant foreign taxable income should consider the impact of this deduction in evaluating the most tax-beneficial structure for their operations.
If you would like more information on how your company can potentially take advantage of this deduction, please call a member of our international team at (513) 241-8313.