How does OBBBA Impact Taxpayers with International Operations?

Recent legislative updates have introduced substantial changes to the U.S. tax code affecting multinational taxpayers. These reforms aim to refine the treatment of income earned through controlled foreign corporations (CFCs), enhance the integrity of foreign income inclusion rules, and adjust key provisions related to foreign-derived income and net CFC tested income. The following overview highlights the most significant updates for taxpayers with international operations. These provisions generally take effect after December 31, 2025.

Foreign Soured Net CFC Tested Income  [Formerly known as Global Intangible Low-Taxed Income (GILTI)]

• The IRC Section 250 deduction allowed is reduced to 40%.
• Interest or R&E expenses are no longer allocated to this category of income. Deductions that would have been allocated to the “net CFC tested income” category must be allocated to US sourced taxable income for purposes of determining the foreign tax credit.
• The bill eliminates the net deemed tangible income return (NDTIR) from the calculation, removing the tax benefit previously associated with holding tangible fixed assets in a CFC.
• The foreign tax credit related to net CFC tested income will be increased from 80% to 90%, bringing the effective tax rate to 12.6%.

Foreign Derived Deduction Eligible Income [Formerly known as Foreign Derived Intangible Income (FDII)]

• IRS Section 250 deduction percentage is changed to 33.34%.
• Interest and R&E expenses no longer reduce the benefit.
• Qualified business asset investment (QBAI) is no longer a factor in determining the deduction.

Base Erosion Anti-Abuse Tax (BEAT) Tax Rate

• Raised from 10% to 10.5%
• Changes to Section 174 and Section 163(j) may affect the calculations in determining applicability of the tax and amount.

Sub Part F

• Look-through rules for controlled foreign corporations (CFC) have been made permanent. Interest, rent, dividend, and royalties received from a CFC will continue to be excluded from foreign personal holding company income if paid out of earnings that are neither Sub Part F income nor income that is effectively connected to US trade or business.
• Restoration of downward attribution of stock ownership in applying constructive ownership rules under IRC Section 958(b)(4) in determining if an entity is a CFC. Additionally, new IRC Section 951B was created, which gives effect to the legislative history by only subjecting US shareholders that are related to “faux CFCs” to the CFC inclusion rules.
• Modifications to pro rata share of sub part F income, effectively removing the “last day rule.” These modifications would also apply to net CFC tested income (GILTI).
• Repeal of election for one-month deferral in determination of tax year of a specified foreign corporation. In general, the majority owner of a CFC will determine that tax year for US reporting purposes. A CFC with November 30, 2025, tax year would have a short period return from December 1, 2025, to December 31, 2025, for the transition period. Treasury guidance is expected on how to accrue foreign income taxes for the short period.

These legislative changes mark a significant shift in the U.S. international tax framework. Taxpayers with foreign operations or investments should begin planning now to adapt to the new rules and avoid unexpected liabilities.  International tax rules can be fairly complicated so please reach out to your Wegner tax advisor to clarify these rules to your business situation.