The GILTI tax, short for Global Intangible Low-Taxed Income, is a U.S. federal tax that requires American shareholders of controlled foreign corporations to include certain foreign earnings in their taxable income every year, whether or not the money is distributed. For 2026, domestic C corporations pay an effective federal rate of 12.6% on GILTI after the Section 250 deduction, while individual shareholders who make no special election can owe up to 37%. The tax was created by the Tax Cuts and Jobs Act of 2017 and lives in Section 951A of the Internal Revenue Code.
How GILTI Actually Works
The name is misleading. GILTI isn’t limited to royalties, patents, or licensing fees. The rule works on a presumption: if a controlled foreign corporation earns more than a 10% return on its physical business assets abroad, the excess is treated as if it came from hard-to-value intangibles like intellectual property or goodwill, and that excess is taxed to the U.S. shareholder in the current year.1Internal Revenue Service. Concepts of Global Intangible Low-Taxed Income Under IRC 951A
Before GILTI, a U.S. multinational could place its intellectual property in a low-tax country, let a foreign subsidiary collect the profits attributable to it, and defer U.S. tax indefinitely simply by not repatriating the cash. GILTI shuts that door by imposing a minimum tax on those earnings annually.
Who the Tax Reaches
GILTI applies to every “U.S. shareholder” of a “controlled foreign corporation,” and both terms sweep in more people than most readers expect.
A U.S. shareholder is any U.S. person who owns at least 10% of the voting power or value of a foreign corporation’s stock. “U.S. person” covers individuals, domestic corporations, domestic partnerships, trusts, and estates.2Legal Information Institute. 26 USC 951(b) – United States Shareholder A controlled foreign corporation, or CFC, is any foreign corporation where U.S. shareholders together own more than 50% of the voting power or value on any day during the tax year.3eCFR. 26 CFR 1.957-1 – Definition of Controlled Foreign Corporation
The Downward Attribution Trap
The TCJA repealed a rule that had kept stock ownership from being attributed downward from a foreign parent to its U.S. subsidiaries or investors. Without that shield, a U.S. person holding a 10% stake in a foreign parent company can be treated as owning the parent’s other subsidiaries, which can turn those subsidiaries into CFCs for U.S. tax purposes. The IRS provided narrow relief in Revenue Procedure 2019-40 where the foreign parent has no 10% U.S. owner, but outside that safe harbor the filing obligations and penalties apply in full, even to shareholders who never directly owned the foreign subsidiary.
How the Inclusion Is Calculated
The calculation sounds complicated but reduces to one idea. Take your share of each CFC’s foreign earnings (minus certain excluded categories), subtract a 10% deemed return on the CFC’s tangible business assets, and the leftover is your GILTI inclusion.
In formula terms, your inclusion equals your pro rata share of net CFC tested income minus your net deemed tangible income return, which is 10% of your pro rata share of qualified business asset investment (QBAI), reduced by certain interest expenses.1Internal Revenue Service. Concepts of Global Intangible Low-Taxed Income Under IRC 951A
QBAI is roughly the average adjusted basis of depreciable tangible property a CFC uses in its trade or business to produce tested income. A CFC heavy on factories, equipment, or real estate generates a larger QBAI figure, which shrinks the GILTI inclusion. An asset-light CFC running on software, services, or IP produces little QBAI, so most of its earnings land in GILTI.
What Counts as Tested Income
Tested income is the CFC’s gross income after stripping out several categories that are already taxed under other rules or excluded by statute:4Office of the Law Revision Counsel. 26 USC 951A – Global Intangible Low-Taxed Income
- Income effectively connected with a U.S. trade or business
- Subpart F income, which is calculated first and takes priority over GILTI
- Income excluded under the high-tax exclusion
- Dividends from related foreign corporations
- Foreign oil and gas extraction income
If a CFC’s deductions exceed its gross tested income, the result is a tested loss. Tested losses from one CFC reduce tested income from your other CFCs because GILTI is computed on an aggregate basis across all your CFCs. Tested losses cannot be carried forward, however, so a bad year’s loss is only useful against a good year’s income in the same year.
The High-Tax Exclusion
If a CFC’s income is already taxed by a foreign country at an effective rate above 18.9% (90% of the 21% maximum U.S. corporate rate), you can elect to exclude that income from your GILTI calculation entirely.5Office of the Law Revision Counsel. 26 USC 951A – Net CFC Tested Income Included in Gross Income of United States Shareholders The election is annual and all-or-nothing: it applies to every CFC item that clears the threshold, with no cherry-picking. The tradeoff is that excluded income can’t generate foreign tax credits to offset U.S. tax on the GILTI you still owe.
What Corporations Actually Pay
Domestic C corporations don’t pay 21% on their GILTI. Section 250 provides a deduction that lowers the effective rate, and that deduction changed at the start of 2026.6Office of the Law Revision Counsel. 26 USC 250 – Foreign-Derived Deduction Eligible Income and Net CFC Tested Income
- Through December 31, 2025: a 50% deduction, producing an effective federal rate of 10.5%.
- Starting January 1, 2026: a 40% deduction, producing an effective federal rate of 12.6%.
The Section 250 deduction is available only to domestic C corporations and to individuals who make a Section 962 election. S corporations, partnerships, and electing-out individuals get no deduction, so their GILTI is taxed at ordinary income rates.7Internal Revenue Service. IRC Section 250 Deduction – Foreign-Derived Intangible Income (FDII) The deduction also cannot exceed your taxable income; if other losses push taxable income below your GILTI inclusion, the unused portion of the deduction is wasted with no carryforward.
Foreign Tax Credits on GILTI
Domestic corporations are deemed to have paid a portion of the foreign income taxes their CFCs paid on tested income. For 2026, the deemed-paid credit equals 90% of those foreign taxes, up from 80% under the original TCJA rules.8Office of the Law Revision Counsel. 26 USC 960 – Deemed Paid Credit for Subpart F Inclusions The 10% haircut means you never fully credit the foreign tax. In practical terms, a CFC paying roughly 14% or more in foreign tax should generate enough credit to fully offset the 12.6% U.S. rate for 2026; lower foreign rates leave residual U.S. tax.
Two structural limits make this credit less useful than it sounds. GILTI sits in its own basket, so foreign taxes on GILTI only offset U.S. tax on GILTI, never on domestic, branch, or passive income.9Office of the Law Revision Counsel. 26 USC 904 – Limitation on Credit And excess GILTI foreign tax credits cannot be carried forward or back.10eCFR. 26 CFR 1.904-2 – Carryback and Carryover of Unused Foreign Tax A high-foreign-tax year produces wasted credits; a low-tax year the next year triggers a full U.S. bill, with no way to smooth across years.
What Individual Shareholders Pay
Individual U.S. shareholders face a much steeper effective rate than corporations. Without any election, your GILTI inclusion is added to ordinary income and taxed at your marginal rate, which can reach 37% for 2026. There’s no Section 250 deduction, and the Section 960 deemed-paid foreign tax credit is only available to domestic corporations.
The Section 962 Election
Section 962 lets an individual elect to be taxed on GILTI and Subpart F inclusions as if they were a domestic corporation. The election caps the rate at the 21% corporate rate, opens the door to the deemed-paid foreign tax credit, and makes the Section 250 deduction available, bringing the effective rate to 12.6% for 2026.
There is a catch. When the CFC later distributes those previously taxed earnings as a dividend, the individual may owe additional tax on the gap between the corporate-rate tax already paid and the tax that would have applied at individual rates. The election is made annually on your return and can be changed year to year, but the mechanics are complex enough that most electing taxpayers work with an international tax advisor.
Filing Requirements and Penalties
GILTI compliance runs across several forms, and the penalties for missing them are heavy.
- Form 5471 is the foundational information return for U.S. shareholders of CFCs. Schedule I-1 reports each CFC’s tested income, tested loss, and QBAI.
- Form 8992 calculates your total GILTI inclusion across all CFCs. Most filers also complete Schedule A; members of a U.S. consolidated group file Schedule B.11Internal Revenue Service. Instructions for Form 8992 (Rev. December 2024)
- Form 8993 is required to claim the Section 250 deduction for GILTI and foreign-derived intangible income.
Failing to file a complete and correct Form 5471 on time triggers a $10,000 penalty per form, per annual accounting period. If the IRS sends a notice and the form still isn’t filed within 90 days, an additional $10,000 accrues for each 30-day period of continued noncompliance, capped at a $50,000 continuation penalty.12Internal Revenue Service. International Information Reporting Penalties
For a shareholder with multiple CFCs, these penalties stack per entity. Three unfiled Forms 5471 that ride through the full continuation period can generate $180,000 in penalties before any tax is even assessed. The IRS has enforced these penalties aggressively, and not knowing you had a CFC is rarely a successful defense, which is why anyone with 10% or more of any foreign corporation should pin down their status before the return is due rather than after a notice arrives.