The GILTI tax is changing in 2025, and U.S. entrepreneurs with international businesses need to act now to minimize taxes. Here’s what you need to know:
- What is GILTI? A U.S. tax on foreign income earned by Controlled Foreign Corporations (CFCs). It applies even if profits aren’t distributed.
- Who pays it? U.S. individuals or corporations owning at least 10% of a foreign company.
- Key changes in 2025:
- Corporate GILTI tax rates rise to 13.125%–16.406%.
- Individual shareholders could face taxes up to 37% without proper planning.
- New deduction and reporting rules affect compliance and tax planning.
How to reduce GILTI tax:
- Use foreign tax credits to offset U.S. taxes (limited to 80% of foreign taxes paid).
- Elect the high-tax exclusion for income taxed above 18.9% abroad.
- Restructure foreign operations or elect Section 962 to access lower corporate tax rates.
Why it matters: GILTI is designed to discourage profit shifting to low-tax countries. Without careful planning, you risk higher taxes and compliance penalties. Start optimizing your tax strategy now to safeguard your profits in 2025.
This guide explains how GILTI works, what’s changing, and strategies to minimize your tax burden.
How GILTI Tax Works
For U.S. entrepreneurs with foreign operations, grasping how GILTI works is key to navigating its rules and implications.
What Is GILTI and Who Must Pay It?
GILTI, short for "Global Intangible Low-Taxed Income", refers to income earned by foreign affiliates of U.S. companies that exceeds a standard return on tangible assets. It primarily targets earnings from intangibles and aims to reduce profit shifting to low-tax jurisdictions.
"GILTI is defined as income earned by Controlled Foreign Corporations that is not already taxed under separate rules (e.g., subpart F)."
This tax applies to U.S. taxpayers – whether individuals, residents, or corporations – who own at least 10% of the voting power in a foreign corporation. Such ownership qualifies the foreign entity as a Controlled Foreign Corporation (CFC) under U.S. tax law.
GILTI imposes a minimum tax on foreign income that exceeds a routine return on tangible assets. It specifically applies to income not already taxed under rules like Subpart F. The goal? To discourage companies from shifting profits to low-tax countries.
In 2020, only about 0.1% of U.S. corporations (6,815 out of 6.4 million) reported GILTI on their tax returns. However, among corporations with assets exceeding $1 billion, this percentage jumped to 12%.
How GILTI Is Calculated
Calculating GILTI involves a specific formula that determines how much of your foreign income is subject to U.S. tax:
GILTI = Net CFC tested income – (10% × Qualified Business Asset Investment (QBAI) – interest expense)
- Net CFC tested income includes gross income earned by a CFC, excluding items like Subpart F income, U.S.-connected business income, related-party dividends, and foreign oil or gas income.
- Qualified Business Asset Investment (QBAI) refers to the average quarterly tax basis of tangible property used in generating the tested income. The formula deducts 10% of this average, meaning only income above this threshold is taxed.
Corporate shareholders benefit from a Section 250 deduction, lowering their effective GILTI tax rates to 10.5–13.125% through 2025, after which rates will increase to 13.125–16.406%.
For individual shareholders, GILTI is taxed at ordinary income rates – up to 37%. However, individuals can elect Section 962 to access corporate tax rates, though this adds complexity to their filings.
To avoid double taxation, foreign tax credits play a role. However, only 80% of foreign taxes paid can be credited against U.S. liability, and unused credits cannot carry forward or backward to other tax years.
How GILTI Fits with Other U.S. Tax Rules
GILTI doesn’t operate in a vacuum – it interacts with other U.S. tax provisions, making international tax planning a challenging task.
One critical relationship is between GILTI and Subpart F. Both provisions aim to limit tax deferral on foreign income, but they target different earnings.
"There is a fundamental difference between the definitions of Subpart F income and GILTI: Subpart F income is defined initially by what it includes, and GILTI is defined initially by what it excludes." – Joshua Ashman and Nathan Mintz, The Tax Adviser
Subpart F income is taxed at the full corporate rate of 21%, while GILTI income for corporations benefits from the Section 250 deduction, reducing the effective rate.
Foreign tax credits are handled differently under GILTI rules. Only 80% of foreign taxes paid can be used to offset U.S. taxes, and there’s no allowance to carry credits forward or backward. However, the GILTI high-tax exception provides relief for certain CFC income already subject to high foreign tax rates, reducing the risk of double taxation.
Another related provision is Foreign-Derived Intangible Income (FDII). While GILTI discourages companies from moving intangible assets offshore, FDII rewards keeping those assets in the U.S. by offering favorable tax treatment for income derived from exporting intangible property.
Coordinating these rules effectively is essential for managing the complexities of international tax and optimizing your overall tax position.
2025 Changes to GILTI Tax Rules
Big changes are coming to GILTI taxation in 2025, bringing more clarity for U.S. businesses with international operations. These updates address expiring provisions from the Tax Cuts and Jobs Act (TCJA) and aim to help businesses better navigate their global tax responsibilities. The adjustments focus on deductions, filing requirements, and how foreign subsidiaries are structured.
New Deduction Rates and Tax Rates
One of the most notable shifts involves the Section 250 deduction rates, which directly impact the effective tax rates for GILTI and FDII. Under the Opportunity, Building, and Broadband Act (OBBBA), the GILTI deduction rate drops slightly from 50% to 49.2%, while the FDII deduction rate decreases from 37.5% to 36.5%. As a result, the effective corporate tax rates will be 10.668% for GILTI and 13.335% for FDII. These adjustments ensure that rates will not increase further after 2025.
The Base Erosion Anti-Abuse Tax (BEAT) is also seeing a minor increase, moving from 10% to 10.1% for most corporations, and rising to 11.1% for certain affiliated groups. For individual shareholders, opting for Section 962 treatment to be taxed at corporate rates can provide a more favorable alternative to paying ordinary income tax rates, which can go as high as 37%.
Updated Filing and Reporting Requirements
With these tax rate changes, accurate and thorough reporting becomes even more critical. For the 2025 tax year, U.S. shareholders must pay close attention to GILTI reporting requirements.
Key forms include:
- Form 8992: This calculates your share of tested income, tested loss, and qualified business asset investment (QBAI) for each controlled foreign corporation (CFC).
- Form 5471: This provides details about your ownership and key financial data for your CFC’s operations.
- Form 8993: Corporate shareholders claiming the Section 250 deduction will need this to document their GILTI and FDII deductions.
State-level differences in how GILTI is treated add another layer of complexity, making a comprehensive review of your tax situation essential.
How Changes Affect Foreign Subsidiaries
The 2025 rate adjustments also bring implications for structuring foreign subsidiaries. With stabilized rates, businesses can better predict tax costs when planning international expansion or restructuring.
For example, if your CFC operates in a country with a tax rate exceeding 18.9%, you may qualify for the high-tax exception, which excludes that income from GILTI. Asset-heavy subsidiaries may benefit from the QBAI deduction, which reduces GILTI exposure on tangible investments. Multi-CFC setups require extra attention, as GILTI calculations combine income and losses across all controlled foreign entities. Balancing profitable CFCs in low-tax jurisdictions with those generating losses or operating in high-tax areas can help optimize your overall tax position.
These legislative changes also influence transfer pricing strategies. With lower effective rates, there’s less incentive to move intangible assets offshore. Keeping intellectual property in the U.S. can still yield benefits, such as the FDII effective rate of 13.335%. While the new rules provide a stable framework for decision-making, the complexity of GILTI calculations underscores the need for careful planning and scenario analysis to fine-tune your tax strategy.
How to Reduce GILTI Tax Legally
Reducing your GILTI tax burden requires thoughtful planning and a mix of strategies. Recent updates to tax laws have made international tax planning more predictable, giving you better tools to manage your tax obligations effectively.
Using Foreign Tax Credits
One way to lower your GILTI tax liability is by utilizing foreign tax credits. These credits are specifically allocated to a separate "basket" for GILTI income, meaning they can only be applied to offset taxes on this type of income. However, they come with an important limitation: they must be used within the same tax year.
To maximize the benefits, you can coordinate income from high-tax and low-tax jurisdictions, aiming for an overall lower tax result. Additionally, making entity classification elections can enhance your foreign tax credit position. This allows you to restructure how and when foreign taxes impact your U.S. tax return. Timing major transactions or distributions to align with available foreign tax credits can also be a smart move.
Applying the High-Tax Exclusion
The high-tax exclusion is another effective tool. This option lets you exclude income from GILTI tax if the controlled foreign corporation (CFC) pays foreign taxes at an effective rate higher than 18.9% – a figure that equals 90% of the current U.S. corporate tax rate of 21%.
For instance, if a CFC in Germany pays taxes at a rate of 26%, that income is fully excluded from GILTI calculations. On the other hand, income taxed below the 18.9% threshold remains subject to GILTI tax. Keep in mind, currency fluctuations can influence your effective foreign tax rate and eligibility for this exclusion. This election applies annually across all entities in your controlling domestic group. Adjusting the timing of income can help ensure you meet the required threshold.
Restructuring Your Offshore Companies
Restructuring your offshore operations is another way to manage GILTI tax. For example, assigning reasonable salaries to U.S. shareholders working in the CFC can help remove those amounts from "tested income". Additionally, the Section 962 election allows individual shareholders to be taxed as if they owned their CFC shares through a U.S. corporation. This can provide access to lower corporate tax rates and better utilization of foreign tax credits.
If you have multiple CFCs, balancing income and losses across jurisdictions becomes critical. Profitable CFCs in low-tax regions can offset losses from those in higher-tax areas, reducing your overall GILTI exposure. These restructuring strategies can also work in tandem with offshore asset protection measures, creating a more comprehensive tax and financial plan.
GILTI Tax and Offshore Asset Protection
Managing GILTI tax isn’t just about compliance; it’s about weaving tax planning and asset protection into a unified strategy for safeguarding wealth. When done right, these elements work hand in hand, ensuring both tax efficiency and asset security while staying fully aligned with U.S. tax laws.
Combining Tax Planning with Asset Protection
To effectively integrate these strategies, start by viewing Controlled Foreign Corporation (CFC) rules as more than just a compliance hurdle – they can be a strategic advantage. This means designing offshore structures with a proactive approach, rather than trying to retrofit tax strategies into existing setups.
Different types of entities can address both tax and asset protection needs. For example, using a U.S. corporation as a holding company for CFC interests can offer tax advantages while bolstering asset protection. Similarly, private LLCs and offshore trusts can be aligned with GILTI strategies through the Section 962 election. This approach allows for corporate-level tax treatment while offering additional privacy and shielding assets from creditors. It’s all about creating a balance between tax savings and safeguarding your wealth.
Currency exposure is another crucial factor to consider in offshore asset protection. Structuring arrangements to mitigate currency risks becomes especially important when fluctuations could impact eligibility for high-tax exclusions.
Transfer pricing is also a key piece of the puzzle. By carefully reviewing and structuring transfer pricing, you can reduce GILTI exposure. Allocating investments in depreciable assets to more profitable CFCs, while ensuring a sound business rationale for offshore structures, optimizes tax outcomes and strengthens your global investment framework.
Planning for Long-Term Wealth Growth
Tax and asset strategies should always include a long-term perspective, especially with upcoming tax changes on the horizon. For instance, the effective GILTI tax rate is set to increase from 13.125% to 16.406% in 2026, making proactive planning even more critical.
Forward-thinking decisions today can provide flexibility for tomorrow. For example, the high-tax exclusion election has implications for foreign tax credit availability down the road. Likewise, asset protection strategies should remain adaptable as international tax laws evolve.
When tax efficiency and asset protection are aligned, they create a solid foundation for wealth growth. Savings from GILTI planning – whether through foreign tax credits, high-tax exclusions, or restructuring – can be reinvested to strengthen both financial and protective measures. Coordinating major decisions, like funding offshore trusts or establishing protective entities, ensures that tax and asset considerations are addressed together, rather than in isolation.
Engaging experienced advisors is essential to navigate this complex landscape. With the right guidance, offshore structures can deliver tax efficiency and lasting asset protection while staying compliant with ever-changing U.S. tax regulations.
The goal is to strike a balance between immediate tax savings and long-term wealth preservation. While the penalties for failing to comply with GILTI regulations can be severe, well-designed strategies can offer both financial benefits and robust protection for the future.
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Conclusion: Managing GILTI Tax in 2025
The GILTI tax rules present both hurdles and opportunities for U.S. entrepreneurs, particularly with the tax rate set to increase from 10.5% to 13.125% in 2026 as key provisions of the Tax Cuts and Jobs Act (TCJA) phase out. This makes proactive planning more important than ever.
To prepare for 2025, entrepreneurs should focus on key strategies, such as revisiting high-tax election options, optimizing the cross-crediting of foreign income, and reassessing expense allocations to maximize foreign tax credits. These steps can make a significant difference in managing the impact of GILTI.
Additionally, GILTI’s design – imposing a minimum tax to discourage profit shifting – requires careful planning. Factors like transfer pricing, currency fluctuations, entity restructuring, and the timing of income recognition need to be addressed with precision.
"GILTI is designed to disincentivize profit shifting through transfer pricing by ensuring that the most profitable foreign activities of U.S.-based companies are subject to a minimum tax rate".
With legislative reviews on the horizon, including adjustments to GILTI, FDII, and BEAT rates, and the 2026 alignment with Pillar Two, staying up to date on federal, state, and international tax developments is critical for maintaining a competitive edge.
Success in this complex tax environment depends on viewing GILTI as part of a broader international strategy, not just a compliance task. When managed effectively, GILTI planning can support wealth preservation and even unlock growth opportunities. While penalties for non-compliance remain steep, thoughtful strategies can lead to immediate tax savings and long-term financial stability.
Combining GILTI planning with asset protection efforts is crucial. Those who refine their strategies now will be better equipped to navigate the evolving international tax landscape and position themselves for future success.
FAQs
What is the GILTI high-tax exclusion, and how can U.S. entrepreneurs use it to reduce their tax liability in 2025?
The GILTI High-Tax Exclusion Explained
The GILTI high-tax exclusion offers U.S. business owners a way to reduce their tax burden on Global Intangible Low-Taxed Income (GILTI). This is done by excluding certain foreign income that has already been taxed at a high rate in another country. To qualify, the foreign income from a controlled foreign corporation (CFC) must be taxed at an effective rate exceeding 18.9% – which is 90% of the U.S. corporate tax rate of 21%. By utilizing this exclusion, the amount of foreign income subject to U.S. taxes can be reduced.
One key feature of the high-tax exclusion is that it can be elected on an annual basis. This gives entrepreneurs the flexibility to adjust their tax strategy depending on changes in their income and the foreign tax rates they face each year. However, it’s crucial to evaluate how this election might affect foreign tax credits and broader tax planning strategies. Working with a tax professional is highly recommended to navigate these complexities and make informed decisions tailored to your financial situation.
What’s the difference between GILTI and Subpart F income, and how do they affect U.S. businesses with international operations?
GILTI vs. Subpart F Income: Key Differences
GILTI (Global Intangible Low-Taxed Income) and Subpart F income differ both in their scope and how they are taxed. Subpart F income targets specific types of income, such as passive income and certain foreign base company earnings. In contrast, GILTI takes a broader approach, applying to a controlled foreign corporation’s (CFC) income, with the exception of a routine return on tangible assets.
These differences play a crucial role in tax planning. For starters, GILTI typically results in a lower effective tax rate – currently 10.5%, though this is set to rise to 13.125% after 2025 – compared to the 21% corporate tax rate applied to Subpart F income. Additionally, GILTI offers U.S. businesses the ability to claim foreign tax credits for up to 80% of foreign taxes paid, which can significantly reduce their overall tax burden. Understanding these distinctions is essential for U.S. companies looking to refine their international tax strategies and limit their tax exposure.
How will the 2025 changes to GILTI tax rates and deductions impact U.S. businesses with foreign subsidiaries?
In 2025, U.S. businesses with foreign subsidiaries will see an increase in the GILTI (Global Intangible Low-Taxed Income) tax rate. This stems from a reduction in the GILTI deduction, dropping from 50% to 37.5%, which raises the effective tax rate from 10.5% to 13.125%. As a result, companies will face a heavier tax load on their foreign earnings, potentially impacting profitability and tax planning strategies.
To navigate these changes, businesses might consider several approaches. These include maximizing foreign tax credits, restructuring international operations, or utilizing high-tax exclusions to offset the increased tax burden. Additionally, revisiting global tax strategies, even in countries with higher tax rates, could help companies better align with the updated rules and manage their financial outcomes effectively.
