International Tax Provisions: GILTI, FDII, BEAT, and Subpart F

The international tax provisions of the U.S. Internal Revenue Code are the rules that decide when a U.S. person or company owes tax on income earned across borders, how foreign persons are taxed on U.S.-source income, and how the same dollar is kept from being taxed twice. The framework was rebuilt in 2017 and revised again by the One Big Beautiful Bill Act in 2025, moving the country toward a quasi-territorial system while layering minimum taxes on top of certain foreign earnings. The pieces that matter most in practice are the participation exemption, the controlled foreign corporation regimes (Subpart F and GILTI), the FDII deduction, the BEAT, transfer pricing under Section 482, the foreign tax credit, treaty-based withholding relief, and the foreign account reporting rules that apply to individuals.

The Participation Exemption for Foreign Dividends

Before 2018, U.S. corporations were taxed on their worldwide income, and bringing foreign profits home meant a second layer of tax. Section 245A changed that. A domestic C corporation can now deduct 100% of the foreign-source portion of dividends received from a foreign corporation in which it holds at least a 10% stake.¹ Cash can move from a qualifying foreign subsidiary to a U.S. parent without federal income tax on the distribution itself.

The deduction is only available to domestic C corporations. Real estate investment trusts and regulated investment companies are excluded.² A corporation cannot also claim a foreign tax credit for foreign taxes paid on the exempt dividend, so the benefit is the exemption alone.¹

Controlled Foreign Corporations

Much of the international tax code turns on whether a foreign corporation is a controlled foreign corporation. A foreign corporation is a CFC when U.S. shareholders together own more than 50% of the voting power or total stock value.³ A “U.S. shareholder” for this purpose is any U.S. person owning at least 10% of the foreign corporation’s voting stock or value.

CFC status triggers two separate current-inclusion regimes, Subpart F and GILTI. Both require U.S. shareholders to report and pay tax on categories of foreign earnings in the year the CFC earns them, whether or not the CFC actually distributes cash.

U.S. shareholders of a CFC must file Form 5471 every year. The base penalty for failing to file is $10,000 per foreign corporation per year, with additional $10,000 penalties for each 30-day period the failure continues after the IRS sends a notice, up to $50,000. The IRS can also reduce the shareholder’s available foreign tax credits by 10%, with further reductions for continued noncompliance.⁴

Subpart F Income

Subpart F is the older of the two CFC inclusion regimes. It targets specific categories of income Congress considered easy to route into low-tax jurisdictions. Section 952 defines Subpart F income to include insurance income, foreign base company income (passive investments, sales income routed through a CFC, and certain services income), income from countries subject to international boycotts, and illegal payments such as bribes or kickbacks.⁵

The difference between Subpart F and GILTI is specificity. Subpart F picks off defined categories of mobile income. GILTI is the broader backstop that catches residual foreign income above a formulaic return on tangible assets. Income already picked up under Subpart F is excluded from the GILTI calculation so nothing is double-counted.

Global Intangible Low-Taxed Income (GILTI)

GILTI works as a minimum tax on foreign earnings that exceed a routine return on a CFC’s physical assets. Under Section 951A, each U.S. shareholder of a CFC must include its share of GILTI in gross income for the current year. The name is misleading. GILTI is not limited to intangible income; it sweeps in any CFC income above a 10% return on the CFC’s depreciable tangible property.⁶

The mechanic: the IRS calculates a “deemed tangible income return” of 10% of the CFC’s adjusted basis in qualifying tangible assets. Anything above that is GILTI. For corporate shareholders, Section 250 allows a 40% deduction on GILTI inclusions for tax years beginning after December 31, 2025, down from the 50% deduction that applied through 2025.⁷ At a 21% corporate rate, the 40% deduction produces an effective GILTI rate of roughly 12.6% for 2026, up from the 10.5% rate under the earlier 50% deduction.

Corporations whose CFCs already pay meaningful foreign tax can elect a high-tax exclusion. When the effective foreign tax rate on a CFC’s income exceeds 18.9% (90% of the 21% U.S. corporate rate), that income can be excluded from GILTI entirely. The election has to be applied consistently across all CFCs in the same group and can be made or revoked on an amended return within 24 months.

One trap deserves emphasis: excess foreign tax credits in the GILTI basket cannot be carried back or carried forward to any other tax year.⁸ Overpaying foreign tax on GILTI income buys nothing in later years, so the numbers have to be modeled carefully.

Foreign-Derived Intangible Income (FDII)

FDII is the mirror image of GILTI. Where GILTI taxes foreign-held returns above a routine amount, FDII gives a reduced effective rate on income earned in the U.S. from serving foreign customers. Section 250 provides the incentive as a deduction.⁷

The calculation runs the same way as GILTI in reverse. The corporation identifies a “deemed tangible income return” equal to 10% of its domestic depreciable tangible assets.⁹ Income above that threshold is “deduction eligible income,” and the portion attributable to foreign sales, leases, or services to non-U.S. persons qualifies as FDII. To claim the benefit, the corporation has to establish foreign use of the property sold or that the service recipient was located outside the United States.¹⁰

For tax years beginning after 2025, the FDII deduction rate is 33.34%, down from 37.5%.⁷ At the 21% corporate rate, that yields an effective tax rate around 14% on FDII, compared with roughly 13.125% before. The gap against the 21% headline rate narrowed but did not close.

Base Erosion and Anti-Abuse Tax (BEAT)

The BEAT solves a different problem. Rather than taxing foreign income of U.S.-owned subsidiaries, it stops large corporations from stripping profits out of the U.S. tax base through deductible payments to foreign affiliates. Royalties, interest, and management fees paid to related foreign parties can otherwise erode the domestic base even though the income stays inside the same corporate group.¹¹

The BEAT reaches only large corporations. An “applicable taxpayer” must have average annual gross receipts of at least $500 million over the three preceding tax years and must meet a base erosion percentage test measuring the share of total deductions that go to foreign related parties.¹¹

Once inside, the corporation calculates “modified taxable income” by adding back the base-eroding deductions. Its BEAT liability is the excess, if any, of 10.5% of modified taxable income over regular tax liability. Banks and securities dealers face a rate one percentage point higher.¹² The One Big Beautiful Bill Act made the 10.5% rate permanent for tax years beginning after 2025, replacing an earlier schedule that would have moved to 12.5%.

Transfer Pricing Under Section 482

Section 482 lets the IRS adjust income, deductions, and credits between commonly controlled entities to reflect what unrelated parties would agree to at arm’s length.¹³ Intercompany prices for goods, services, and intellectual property licenses determine where profit lands, so this is where cross-border planning most often lives or dies.

The arm’s length standard requires that related-party pricing produce results consistent with what uncontrolled parties would reach under the same circumstances.¹³ If the IRS finds, for example, that a U.S. subsidiary is paying an inflated royalty to a foreign parent, it can reallocate income back to the U.S. entity and assess more tax. The regulations prescribe several approved pricing methods, and taxpayers are expected to use whichever one gives the most reliable arm’s length result.

Contemporaneous documentation matters. To avoid the valuation-misstatement penalty under Section 6662(e), a taxpayer must maintain documentation showing that the transfer pricing method it chose was the most reliable measure of an arm’s length result, and that documentation must exist at the time the return is filed.¹⁴

The Foreign Tax Credit

The foreign tax credit is the main tool for preventing double taxation. Under Section 901, taxpayers who pay income taxes to a foreign government get a dollar-for-dollar credit against U.S. tax on that income.¹⁵ The credit is available to both individuals and corporations, and corporate CFC shareholders generally claim it on a deemed-paid basis under Section 960.

The credit is capped. Section 904 limits the credit in each income category to the share of U.S. tax attributable to foreign-source income in that category. The formula is U.S. tax before credits multiplied by the ratio of foreign-source taxable income in the category to worldwide taxable income. That stops a taxpayer from using high foreign tax paid in one country to wipe out U.S. tax on income from a low-tax country.

Income Baskets

The limitation is calculated separately for each foreign tax credit “basket.” The four most commonly encountered are general category income, passive category income, foreign branch category income, and the Section 951A (GILTI) category.¹⁶ Separate baskets keep high-tax foreign manufacturing income from being blended with low-tax royalty income to create extra credit capacity.

Carrybacks and Carryforwards

When foreign taxes paid in a year exceed the credit limit, excess credits in most baskets can be carried back one year or forward up to ten. The GILTI basket is the outlier: no carryback or carryforward is permitted.⁸ Unused GILTI credits are simply lost.

Treaty Withholding on U.S.-Source Payments

The United States has a network of bilateral tax treaties that modify the default rules for residents of treaty partner countries. The most visible effect is on withholding. Without a treaty, the default U.S. withholding rate on dividends, interest, and royalties paid to foreign persons is 30%. Treaty rates are lower. Among major trading partners, treaty withholding on general dividends typically drops to 15%, with a reduced 5% rate for corporate shareholders meeting ownership thresholds. Interest rates run from 0% for countries such as Canada, the United Kingdom, and Germany to 15% for others.¹⁷

To claim treaty benefits, a foreign recipient files Form W-8BEN with the U.S. withholding agent. The form requires certification of residency in a treaty country, a foreign tax identification number, and confirmation that any limitation-on-benefits provision in the treaty is met.¹⁸ Without a valid form, the payor withholds at the full 30% and the recipient has to seek a refund from the IRS.

Foreign Account Reporting for Individuals

Two reporting regimes sit alongside the substantive income rules and apply directly to individuals as well as entities. They exist independently: filing one does not satisfy the other.

FBAR (FinCEN Form 114)

Any U.S. person, including citizens, residents, corporations, partnerships, and trusts, must file a Report of Foreign Bank and Financial Accounts when the combined value of all foreign financial accounts exceeds $10,000 at any point during the calendar year.¹⁹ The threshold is aggregate. Three accounts of $4,000 apiece cross it if they peak on the same day.

The FBAR is filed electronically with the Financial Crimes Enforcement Network, not the IRS, and it is separate from the income tax return. The deadline is April 15 with an automatic extension to October 15; no request is required.²⁰ Whether the accounts generate taxable income does not affect the filing obligation.¹⁹

Penalties are harsh relative to the simplicity of the form. A non-willful violation can draw a penalty of up to $10,000 per account per year. A willful violation can draw up to 50% of the highest account balance during the year or $100,000, whichever is greater. Both figures adjust for inflation and can accumulate quickly across accounts and years.

FATCA (Form 8938)

The Foreign Account Tax Compliance Act added a parallel reporting duty filed directly with the IRS as part of the income tax return. Form 8938 covers a broader range of assets than the FBAR, including foreign stocks, interests in foreign entities, and financial instruments issued by foreign institutions, not just bank accounts.

The filing thresholds turn on filing status and residence. Unmarried taxpayers living in the United States must file when specified foreign financial assets exceed $50,000 on the last day of the tax year or $75,000 at any time during the year. Joint filers living domestically face thresholds of $100,000 and $150,000. Taxpayers living abroad have much higher thresholds; married couples filing jointly and living abroad trigger the requirement at $400,000 on the last day of the year or $600,000 at any point.

The penalty for failing to file Form 8938 is $10,000, with up to $50,000 more for continued noncompliance after the IRS sends a notice. Any underpayment of tax attributable to undisclosed foreign financial assets is subject to an enhanced accuracy-related penalty of 40%, and criminal penalties can apply.²¹ Filing an FBAR does not satisfy Form 8938, and filing Form 8938 does not satisfy the FBAR. Taxpayers with meaningful foreign holdings often need both.

1
Office of the Law Revision Counsel. 26 U.S. Code 245A – Deduction for Foreign Source-Portion of Dividends Received by Domestic Corporations From Specified 10-Percent Owned Foreign Corporations
2
Internal Revenue Service. Section 245A Dividends Received Deduction Overview
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Office of the Law Revision Counsel. 26 U.S. Code 957 – Controlled Foreign Corporations; United States Shareholders
4
Internal Revenue Service. Instructions for Form 5471
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Office of the Law Revision Counsel. 26 USC 952 – Subpart F Income Defined
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Office of the Law Revision Counsel. 26 U.S.C. 951A – Global Intangible Low-Taxed Income Included in Gross Income of United States Shareholders
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Office of the Law Revision Counsel. 26 USC 250 – Foreign-Derived Deduction Eligible Income and Net CFC Tested Income
8
Internal Revenue Service. Tax Cuts and Jobs Act: A Comparison for Large Businesses and International Taxpayers
9
Bloomberg Tax. I.R.C. 250 – Foreign-Derived Intangible Income and Net CFC Tested Income
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Office of the Law Revision Counsel. 26 U.S. Code 250 – Foreign-Derived Deduction Eligible Income and Net CFC Tested Income
11
Joint Committee on Taxation. Overview of the Base Erosion and Anti-Abuse Tax
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Office of the Law Revision Counsel. 26 USC 59A – Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts
13
Internal Revenue Service. Transfer Pricing
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Internal Revenue Service. Transfer Pricing Documentation Best Practices Frequently Asked Questions
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Office of the Law Revision Counsel. 26 U.S. Code 901 – Taxes of Foreign Countries and of Possessions of United States
16
Internal Revenue Service. Foreign Tax Credit – Categorization of Income and Taxes Into Proper Basket
17
Internal Revenue Service. Tax Rates on Income Other Than Personal Service Income Under Chapter 3
18
Internal Revenue Service. Instructions for Form W-8BEN
19
Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR)
20
Financial Crimes Enforcement Network. Due Date for FBARs
21
Internal Revenue Service. FATCA Information for Individuals