GILTI High-Tax Exception: 18.9% Threshold, Election, and FTC Trade-Off

The GILTI high tax exception is an election that lets U.S. shareholders of a controlled foreign corporation exclude foreign income from their GILTI inclusion when that income has already been taxed abroad at an effective rate above 18.9%. The exclusion is calculated separately for each “tested unit” of a CFC, applies group-wide once elected, and costs you the foreign tax credits you would otherwise claim on the excluded income. Whether to elect depends on how far above 18.9% your foreign rates run and how much credit capacity you would give up.

The 18.9% Threshold

Income qualifies for exclusion if it bears an effective foreign tax rate greater than 90% of the top U.S. corporate rate. With the corporate rate at 21%, that ceiling works out to an effective foreign rate above 18.9%.¹ The statutory mechanism comes from Section 954(b)(4), which creates the high-tax exception for subpart F income; Section 951A(c)(2)(A)(i)(III) then imports that exception into GILTI by excluding qualifying gross income from tested income.²

The threshold moves only if Congress changes the corporate rate. It has held at 18.9% through 2026. A statutory rate above 18.9% in the foreign jurisdiction does not settle the question, because the test uses the effective rate actually paid. Deductions, incentives, and tax holidays can drop the effective rate well below the nominal one.

Tested Units: Where the Rate Is Measured

The effective rate is measured at the tested-unit level, not across a CFC as a whole. This is the structural feature that trips people up most often. Without it, a shareholder could blend high-taxed income in one operation with low-taxed income in another and manufacture a passing rate on paper.³

The regulations recognize three kinds of tested units:

The CFC itself, treated as a single tested unit for its own operations.
A foreign branch of the CFC that creates a taxable presence where it operates, or that qualifies for preferential treatment under the CFC owner’s local tax law.
A pass-through interest held by the CFC in an entity treated as a tax resident of a foreign country, or treated as a separate entity under the CFC’s local tax law.

Each tested unit gets its own effective-rate calculation. A CFC with a branch in Germany and a disregarded entity in Ireland can have up to three tested units, evaluated separately. If the German branch clears 18.9% and the Irish entity does not, only the German branch’s income is excluded when the election is made.

Computing the Effective Foreign Tax Rate

The formula is not a straight division of taxes by income. The regulations use a gross-up: divide the foreign income taxes paid or accrued on a tested unit’s income by the sum of that income plus those same taxes.³ In symbols: Foreign Taxes ÷ (Tentative Tested Income + Foreign Taxes). Because the denominator includes the taxes themselves, the effective rate always comes out lower than a raw taxes-over-income figure. Skipping the gross-up leads taxpayers to believe a unit qualifies when it does not.

Allocation of the inputs matters. Gross income items are attributed to a tested unit based on that unit’s separate books and records. Deductions are allocated under the rules of Sections 861 through 865. Interest expense deserves particular care. When an upper-tier CFC incurs interest allocable to a lower-tier entity’s income, the deduction generally goes to a residual income category rather than reducing a specific tested unit’s income for the rate calculation. That can inflate the unit’s income figure and pull its effective rate below 18.9%.

Payments between disregarded entities of the same CFC are normally invisible for U.S. tax purposes, but they matter here. Tentative gross tested income of a tested unit is adjusted for disregarded payments between tested units of the same CFC. A royalty from a CFC to its disregarded entity in another country shifts income between units and changes each unit’s effective rate. Missing these adjustments is a common source of computational errors.

Making the Election

Qualifying is only half of it. The exception is not automatic; the controlling domestic shareholders of the CFC must affirmatively elect it, following the procedures in the regulations and IRS instructions.³

Mechanically, the election requires filing the statement described in Treasury Regulation 1.964-1(c)(3)(ii) with the controlling domestic shareholder’s federal income tax return, and giving any required notices to other shareholders. It must be made on a timely filed original return for the U.S. shareholder inclusion year, or on an amended return within the 24-month window described below. The GILTI inclusion is calculated on Form 8992, and the Section 250 deduction on Form 8993.⁴ The election statement travels with the return those forms are attached to.

The Consistency Rule

The election is not selective. Once made, it applies to every tentative gross tested income item of every CFC in the shareholder’s CFC group. You cannot cherry-pick which CFCs benefit.³ Within each CFC, only the tested units that actually clear 18.9% get their income excluded, but the election itself covers the whole group.

The CFC group is defined using a modified version of the Section 1504(a) affiliated group rules, with a more-than-50% ownership threshold instead of 80% and without excluding foreign corporations. That reach is broad, and the group can pull in entities you had not been treating as related for this purpose.

Revoking or Amending the Election

The election is annual, so a shareholder who elects one year is not locked in for the next. Making a late election or revoking one already in place, however, runs into strict timing rules and must be done on an amended return.³ Three conditions apply:

The amended return must be filed within 24 months of the unextended due date of the original return for the relevant U.S. shareholder inclusion year.
The election or revocation must be completed within a single period of no more than six months inside that 24-month window.
Every U.S. shareholder of the CFC must pay any additional tax caused by the change within a single period of no more than six months inside the same 24-month window.

Miss the 24 months and the path narrows. The remaining option is relief under the general late-election procedures in Treasury Regulation 301.9100-3, which requires reasonable cause for the delay. The IRS does grant such extensions, but the process runs through a private letter ruling request and is neither quick nor cheap.

Foreign Tax Credits: The Trade-Off That Drives the Decision

Electing removes qualifying income from the GILTI calculation entirely. The catch: you cannot claim foreign tax credits on income you have excluded. The taxes paid to the foreign country on that income disappear from the U.S. picture. Had you left the income in GILTI, those foreign taxes would have generated deemed-paid credits that could offset your U.S. liability.

The right call depends on the numbers. When a CFC’s income is taxed abroad well above 18.9%, electing often makes sense because the included income would have generated little or no residual U.S. tax after credits anyway, and exclusion trims the compliance work. When the foreign rate sits only a hair above 18.9%, or when you have excess foreign tax credits that could cross-credit against lower-taxed income in other baskets, the analysis flips. Shareholders with CFCs across jurisdictions at different rates need to model both scenarios across the whole group, because the consistency rule means you cannot optimize one CFC without moving all the others.

2026 Changes That Shift the Calculus

The One Big Beautiful Bill Act, signed in July 2025, rebranded GILTI as “net CFC tested income” (NCTI) for tax years beginning after December 31, 2025. The high tax exception itself survives the rebrand and continues to operate at the 18.9% threshold. Around it, three changes matter for the election decision:

The QBAI cushion is gone. The deemed tangible income return based on qualified business asset investment no longer applies, so asset-heavy CFCs that used to shrink their inclusion through QBAI have lost that reduction, making the exception more relevant for them.
The Section 250 deduction dropped from 50% to 40%, lifting the effective U.S. rate on included NCTI from 10.5% to about 12.6%.¹
The deemed-paid credit haircut fell from 20% to 10%, so 90% of foreign taxes now offset U.S. tax on NCTI instead of the prior 80%.

The combined effect: more foreign tax credits flow through, but more income is also captured. For CFCs in the 14% to 19% foreign-rate range, the improved credit ratio may wipe out residual U.S. tax without any need to elect the exception. For CFCs paying well above 18.9%, the exception is still the cleaner route, because it takes the income out of the computation entirely and avoids tracking credits on income that would produce no U.S. tax anyway.

1
Office of the Law Revision Counsel. 26 USC 951A – Net CFC Tested Income Included in Gross Income of United States Shareholders
2
Federal Register. Guidance Under Section 954(b)(4) Regarding Income Subject to a High Rate of Foreign Tax
3
eCFR. 26 CFR 1.951A-2 – Tested Income and Tested Loss
4
Internal Revenue Service. About Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI)