GILTI Tax Strategy Guide (2026)

Rules, Calculations, and Planning Options for U.S. International Businesses

Last Updated: 2026 Applies To: U.S. shareholders of CFCs Regime: Tax Cuts and Jobs Act (TCJA)

PLAIN-LANGUAGE SUMMARY

GILTI (Global Intangible Low-Taxed Income) is a U.S. federal tax that requires U.S. shareholders of controlled foreign corporations (CFCs) to include a portion of foreign earnings in their U.S. taxable income — even if those earnings are never distributed.

Introduced by the Tax Cuts and Jobs Act (TCJA) in 2017, GILTI targets excess returns above a 10% deemed return on tangible assets (QBAI).

It applies to C-corps, S-corps, partnerships, and individuals.

Legal reduction strategies include the high-tax exception, foreign tax credit optimization, and entity structure planning — all of which must be implemented before year-end.

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What Is GILTI?

Global Intangible Low-Taxed Income (GILTI) is a U.S. tax rule under IRC §951A, introduced by the Tax Cuts and Jobs Act (TCJA), that requires U.S. shareholders owning 10% or more of a controlled foreign corporation (CFC) to include a portion of that corporation’s net income in their U.S. taxable income each year — regardless of whether any earnings are distributed to the U.S. shareholder.

GILTI was designed to prevent U.S. multinational companies from shifting profits to low-tax foreign jurisdictions. Before TCJA, income earned by foreign subsidiaries could remain offshore indefinitely without U.S. tax consequence. GILTI changed that by establishing a minimum tax on foreign earnings that exceed a 10% return on tangible assets.

KEY POINT:
GILTI applies even if a foreign subsidiary pays no dividends. U.S. shareholders must include their GILTI amount in taxable income each year, whether or not any funds leave the foreign entity.

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How GILTI Is Calculated

GILTI is not based on total foreign income — it targets excess returns above a tangible asset threshold. The calculation works as follows:

1. Aggregate net tested income of all CFCs

Start with the sum of net tested income (or tested loss) across all controlled foreign corporations owned by the U.S. shareholder. Tested income excludes Subpart F income, ECI, and certain high-taxed income.

2. Subtract the Net Deemed Tangible Income Return (NDTIR)

Subtract 10% of the Qualified Business Asset Investment (QBAI) — the adjusted basis of tangible depreciable property used in the CFC’s trade or business. This is the “deemed return” that is not subject to GILTI.

3. Result = GILTI inclusion amount

The remainder is the GILTI inclusion — the amount the U.S. shareholder must add to U.S. taxable income. C-corporations may apply a 50% deduction under IRC §250; S-corporations and individuals cannot.

4. Apply foreign tax credits (where available)

C-corporations can use foreign tax credits (subject to the GILTI FTC basket limitation) to offset the resulting U.S. tax. Proper structuring is required to maximize credit utilization.

Who Does GILTI Apply To?

GILTI applies to any U.S. person (individual, corporation, partnership, trust, or estate) who:

  • Owns 10% or more of the voting stock or value of a controlled foreign corporation (CFC), and
  • Has net tested income in that CFC exceeding the QBAI-based return threshold

OFTEN OVERLOOKED

Small and mid-sized businesses are frequently surprised by GILTI. Any U.S. company with a foreign subsidiary generating active business income — including SaaS companies with offshore development entities, manufacturers with foreign plants, and service firms with international offices — may have GILTI exposure.

Common situations that trigger GILTI exposure:

  • Foreign subsidiaries generating active business income above the QBAI threshold
  • Intellectual property held in low-tax foreign jurisdictions
  • SaaS, software, or digital product operations located outside the U.S.
  • Manufacturing or professional service entities in foreign countries
  • IP licensing arrangements where royalties accumulate offshore

GILTI vs. Subpart F Income: Key Differences

Feature Subpart F Income GILTI
Introduced 1962 2017 (TCJA)
Income type Specific passive / mobile income categories Broad residual active income
Distribution required? No — included immediately No — included immediately
Scope Narrow — defined income categories Broad — catches what Subpart F does not
§250 Deduction (C-corps)? No Yes — 50% deduction available
FTC basket General basket Separate GILTI basket
HTE election available? Yes (separate rules) Yes (final regs 2020)

CRITICAL DISTINCTION

Many companies assume they have no current-year inclusion because they have no Subpart F income. GILTI captures income that Subpart F does not — it is a catch-all on top of Subpart F, not a replacement.

Legal GILTI Reduction Strategies

There is no legal mechanism to “avoid” GILTI entirely — but there are well-established, IRS-sanctioned strategies to reduce it materially. The key is proactive, pre-year-end planning.

Elect to exclude CFC income from GILTI if it was taxed at an effective foreign rate exceeding 90% of the U.S. corporate rate (above ~18.9% in 2026). This is an annual election and one of the most powerful planning tools available.

Structure FTC usage to offset GILTI liability through the GILTI basket. Requires advance planning around the FTC limitation calculation, haircut rules, and cross-crediting restrictions.

How foreign subsidiaries are structured — their form, jurisdiction, and ownership chain — directly affects GILTI exposure. Restructuring can reduce tested income or increase available QBAI deductions.

How to Reduce GILTI Tax Before Year-End: Step-by-Step

1. Calculate current GILTI exposure

Identify all CFCs, aggregate net tested income, and compute the QBAI-based exclusion to determine the inclusion amount before any elections or credits.

2. Test for high-tax exception eligibility

Determine the effective foreign tax rate on each CFC’s tested income. If it exceeds the HTE threshold, evaluate whether making the annual election is beneficial given the overall tax picture.

3. Model FTC utilization and limitations

Run the FTC limitation calculation for the GILTI basket. Determine how much of available foreign tax credits can offset the resulting U.S. tax and identify any excess credit carryforward positions.

GILTI and Transfer Pricing: Why They Are Connected

GILTI and transfer pricing are not independent issues — they interact at every level of a multinational structure. For related planning support, review our International Tax Planning and Transfer Pricing services.

  • Intercompany pricing determines how income is allocated among CFCs and the U.S. parent
  • Incorrect pricing can inflate tested income and therefore GILTI inclusion
  • IP location and royalty arrangements are among the highest-scrutiny areas for the IRS
  • Inconsistent intercompany agreements increase both GILTI and transfer pricing audit risk simultaneously

PLANNING NOTE

Any GILTI reduction strategy that involves restructuring intercompany arrangements must also be reviewed for transfer pricing compliance. The two planning workstreams must be coordinated — not run in parallel without integration.

Businesses should also review their International Tax Compliance requirements before year-end planning decisions are finalized.

Common GILTI Mistakes (and Their Cost)

Mistake Consequence
Ignoring GILTI until filing season Planning window closed; overpayment is likely
Assuming no tax if profits are reinvested offshore GILTI applies regardless of distributions
Not coordinating GILTI with FTC planning Credits go unused; effective rate increases unnecessarily
Treating each CFC in isolation GILTI is calculated at the aggregate level — isolation leads to miscalculation
Not reviewing HTE eligibility annually Leaving the HTE election on the table when foreign rates qualify
Misaligned transfer pricing and GILTI positions Inflated GILTI exposure and dual audit risk
S-corp owners assuming §250 deduction applies §250 deduction is not available to S-corporations — higher effective GILTI rate

For additional federal tax guidance, review the IRS International Businesses resource page.

Frequently Asked Questions About GILTI

Yes. GILTI applies regardless of whether a foreign subsidiary distributes earnings. U.S. shareholders must include their share of GILTI in taxable income each year, even if all profits are retained and reinvested abroad. This is one of the most frequently misunderstood aspects of the GILTI regime.

The GILTI high-tax exception (HTE) allows U.S. shareholders to exclude CFC income from the GILTI calculation if the income was subject to a foreign effective tax rate exceeding 90% of the U.S. corporate rate — more than approximately 18.9% as of 2026. The election is made annually on a CFC-by-CFC basis and can significantly reduce GILTI liability for companies operating in higher-tax jurisdictions such as Germany, the UK, Canada, and Japan.

Subpart F income (introduced in 1962) covers specific categories of passive or easily movable income — dividends, rents, royalties, certain services. GILTI (introduced in 2017) is a broader residual rule that captures active business income not covered by Subpart F. GILTI is effectively a catch-all: if income from a CFC is not excluded by Subpart F or another specific rule, GILTI likely applies to the excess above the QBAI return.

Yes, GILTI can apply to S-corporations that are U.S. shareholders of CFCs. However, S-corporations cannot claim the IRC §250 deduction that reduces the GILTI inclusion for C-corporations by 50%. This makes GILTI considerably more costly for S-corp shareholders with foreign subsidiaries and makes entity structure planning particularly important in these situations.

GILTI and transfer pricing are directly connected. Intercompany pricing determines how income is allocated among foreign subsidiaries and the U.S. parent. Incorrect or undocumented transfer pricing can inflate GILTI tested income, distort inclusion calculations, and increase IRS audit risk across both issues simultaneously. Any GILTI planning strategy that involves restructuring intercompany arrangements must also be reviewed for transfer pricing compliance.

Yes. There is no mechanism to avoid GILTI entirely, but several IRS-sanctioned strategies can reduce it materially: (1) electing the high-tax exception for qualifying CFC income; (2) optimizing foreign tax credit utilization in the GILTI basket; (3) increasing QBAI investment to raise the tangible income return threshold; (4) reviewing entity and IP structures; and (5) aligning intercompany transfer pricing. All of these must be implemented proactively — preferably before year-end.

GILTI planning should begin well before the end of the tax year — ideally mid-year or earlier. Most planning elections and structural adjustments cannot be made retroactively after the CFC’s tax year closes. Companies that wait until filing season typically have no meaningful planning options remaining and either overpay or face post-filing correction costs.