The US Rules for Cross-Border Business

US international tax is two systems working against each other. The United States taxes its residents and citizens on worldwide income, and it taxes non-residents on income sourced to the United States. Every other country does some version of the same thing. Where those claims overlap, the same dollar is taxed twice unless a credit, a treaty or a deliberate structure prevents it.

Everything below follows from that overlap: the foreign tax credit exists to relieve it, treaties exist to allocate it, anti-deferral rules exist to stop taxpayers exploiting it, and Pillar Two exists because countries stopped trusting each other to police it.

What changed for tax years beginning after 31 December 2025

Public Law 119-21, enacted 4 July 2025, is the largest change to the US international regime since 2017. For tax years beginning after 31 December 2025:

Three consequences worth stating plainly.

Capital-intensive foreign operations lost their shelter. Former §951A(b) - which defined GILTI by subtracting a net deemed tangible income return of 10% of qualified business asset investment - was struck out in full. Groups with substantial foreign tangible assets now include the whole of their tested income.

The break-even foreign rate moved up. §960(d) now deems a domestic corporation to have paid 90% of the product of its inclusion percentage and aggregate tested foreign income taxes, against 80% before. The foreign effective rate at which a CFC’s income is fully offset rises from roughly 13.125% to roughly 14%.

Interest and R&E expense no longer dilute the NCTI basket. Only the §250 deduction and directly allocable deductions are apportioned to that basket. For US-parented groups carrying significant domestic interest expense, this is frequently the largest single credit improvement in the package.

There is also a new 10% haircut on foreign taxes attributable to distributions of previously-taxed net CFC tested income, applying to distributions made on or after 28 June 2025 - an earlier date than the rest of the package, and easy to miss.

A note on the forms: the statute changed and the IRS forms have not caught up. Forms 8992 and 8993 still carry GILTI and FDII in their titles.

Controlled foreign corporations and anti-deferral

What makes a foreign corporation a CFC

Under §957, a foreign corporation is a controlled foreign corporation if more than 50% of its stock - by vote or by value - is owned by United States shareholders on any day during its taxable year.

A “United States shareholder” under §951(b) is a US person owning 10% or more of the total combined voting power, or 10% or more of the total value, of the corporation’s stock. The value prong was added in 2017 and it catches structures that were designed against a vote-only test.

Subpart F income

§952 lists five categories: insurance income, foreign base company income, international boycott income, illegal bribes and kickbacks to government officials, and income from a §901(j) country.

Foreign base company income under §954(a) now has three categories, not five: foreign personal holding company income (§954(c)), foreign base company sales income (§954(d)) and foreign base company services income (§954(e)). Foreign base company shipping income was repealed in 2004 and foreign base company oil-related income in 2017.

The §954(c)(6) CFC look-through rule - under which dividends, interest, rents and royalties received from a related CFC are not foreign personal holding company income to the extent allocable to income that is neither subpart F income nor effectively connected income - was made permanent by P.L. 119-21. It had been an annual extender for nearly two decades; groups can now plan on it.

Downward attribution, restored

§958(b)(4) is back. It provides that the constructive ownership rules of §318(a)(3) “shall not be applied so as to consider a United States person as owning stock which is owned by a person who is not a United States person” - switching off downward attribution from foreign persons, which the 2017 Act had repealed.

The repeal had created large numbers of accidental CFCs: US subsidiaries of foreign-parented groups found themselves treated as owning their foreign sister companies, with the compliance burden that implies and no economic ownership to match. Restoring §958(b)(4) removes most of those.

To preserve the inclusions Congress actually intended, P.L. 119-21 added new §951B, which creates a parallel regime for a “foreign controlled United States shareholder” of a “foreign controlled foreign corporation” - applying the §951(b) test at more than 50% rather than 10%.

Both changes apply to taxable years of foreign corporations beginning after 31 December 2025.

The pro rata share rule changed too

§951(a) now requires a US shareholder that owns stock on any day during the CFC year to take an inclusion, prorated for the period of ownership - replacing the old rule keyed to ownership on the last day of the year, and the 30-day minimum CFC period. Mid-year acquisitions and dispositions now produce inclusions where previously they might not have.

Foreign tax credits

The limitation is the whole game

The credit is capped by §904 at US tax on foreign-source taxable income. So where deductions land determines how much credit is usable, which makes expense allocation - not the credit computation - the substantive work.

Treasury Regulation §1.861-8 governs how expenses, losses and other deductions are allocated and apportioned between US and foreign source and among statutory groupings.

Individuals, estates and trusts claim the credit on Form 1116; corporations claim it on Form 1118, as do individuals making a §962 election.

Overall foreign loss and overall domestic loss

Under §904(f), a taxpayer with an overall foreign loss must resource foreign-source taxable income in later years as US-source, up to the lesser of the unrecaptured loss or 50% of that year’s foreign-source taxable income. That shrinks the limitation.

§904(g) is the mirror image: an overall domestic loss recharacterises later US-source income as foreign-source, up to the lesser of the unrecaptured loss or 50% of that year’s US-source income, which expands it.

Both balances persist for years and are frequently mistracked through advisor changes and system migrations. The ODL side is one of the few places in international tax where reconstructing the history produces a refund rather than a filing.

Treaties, residence and permanent establishment

What a treaty does

A treaty allocates taxing rights between two countries and reduces withholding on cross-border payments. The United States Model Income Tax Convention, most recently released 17 February 2016, is the template from which US treaties are negotiated.

Permanent establishment

Article 5 of the US Model defines a permanent establishment as “a fixed place of business through which the business of an enterprise is wholly or partly carried on” - including a place of management, branch, office, factory, workshop, and a mine, oil or gas well, quarry or other place of extraction.

A building site or construction or installation project is a permanent establishment only if it lasts more than twelve months, aggregating connected activities of related enterprises at the same site.

PE risk is the most common unplanned exposure for a growing business. It is usually created by people - a salesperson habitually concluding contracts, an engineer stationed on a customer site - rather than by a deliberate decision to open an office.

Limitation on benefits

Article 22 denies treaty benefits to a resident of a treaty country unless that resident is a “qualified person,” or qualifies under the active trade or business, derivative benefits or competent authority provisions. Residence alone is not enough.

The purpose is anti-treaty-shopping: the article tests ownership, base erosion, publicly traded status and business activity, so that only entities with genuine economic nexus to the treaty country obtain reduced withholding.

A foreign entity claims treaty benefits by giving Form W-8BEN-E to the withholding agent or payer - not to the IRS - identifying the treaty article and the limitation-on-benefits provision it satisfies.

Pillar Two and the global minimum tax

Under the OECD/G20 Inclusive Framework’s Global Anti-Base Erosion rules, groups with consolidated revenues of EUR 750 million in at least two of the four preceding fiscal years are subject to a 15% minimum effective tax rate, jurisdiction by jurisdiction, with a top-up tax collected where the rate falls short.

The side-by-side agreement

In December 2025 the Inclusive Framework announced a way forward on the global minimum tax package, and on 5 January 2026 the OECD released the side-by-side package.

Under it, a group whose ultimate parent entity sits in a jurisdiction with a Qualified Side-by-Side Regime may elect a deemed top-up tax of zero under both the Income Inclusion Rule and the Undertaxed Profits Rule, for domestic and foreign operations. The United States is the jurisdiction this was designed around.

Three things about it that get misreported:

• It applies for fiscal years beginning on or after 1 January 2026. Fiscal years 2024 and 2025 remain fully subject to the GloBE rules regardless of later eligibility.
• Qualified Domestic Minimum Top-up Taxes are unaffected. A QDMTT liability in a jurisdiction where the group operates is still payable.
• GloBE Information Return filing continues. Groups electing the safe harbour in IIR and UTPR jurisdictions file the relevant section of the GIR while continuing to file jurisdictional sections for QDMTT purposes.

A page written in 2024 telling US-parented groups to prepare for UTPR exposure from 2026 is now wrong. A page telling them Pillar Two no longer applies to them is also wrong.

Digital services taxes

Several countries impose a turnover tax on digital revenues that sits outside the income tax system and outside treaty relief. As of April 2026, digital services taxes were in force in Austria, Denmark, France, Hungary, Italy, Poland, Portugal, Spain, Turkey and the United Kingdom, with further measures announced or proposed in Belgium, the Czech Republic, Germany, Latvia, Norway, Slovakia and Slovenia.

Canada rescinded its digital services tax, announced on 29 June 2025.

Because these taxes are levied on gross revenue rather than profit, they are generally not creditable, and they are not covered by treaty. For a business with digital revenue in multiple European markets the cost is real and the planning options are limited.

Rates and coverage change frequently. Figures here are as of April 2026 and are reviewed quarterly.

Working with WTP Advisors

We advise US-parented groups with foreign operations and foreign-parented groups with US operations, on the full range above - and we do the compliance that follows from it, the planning that precedes it, and the transfer pricing that sits underneath most of it.

Contact our international tax team

Frequently asked questions

Is GILTI still called GILTI?

Not for tax years beginning after 31 December 2025. P.L. 119-21 renamed the §951A inclusion “net CFC tested income” and the §250(b) benefit “foreign-derived deduction eligible income”, struck the 10% QBAI routine return from both, and set the §250 deduction at 40% and 33.34%. For tax years beginning before 2026 the old names and the 50% and 37.5% rates still govern. The IRS form titles still use the older terminology.

What makes a foreign corporation a CFC?

More than 50% ownership by United States shareholders, measured by vote or by value, on any day during the corporation’s taxable year. A United States shareholder is a US person owning 10% or more by vote or by value.

Does Pillar Two still apply to a US-parented group?

Partly. From fiscal years beginning on or after 1 January 2026, a US-parented group may elect a deemed zero top-up tax under the Income Inclusion Rule and the Undertaxed Profits Rule under the side-by-side package. Qualified Domestic Minimum Top-up Taxes still apply, and GloBE Information Return filing continues. Fiscal years 2024 and 2025 get no relief.

We just acquired a foreign subsidiary mid-year. Do we have an inclusion?

Probably. Since the P.L. 119-21 changes, a US shareholder owning CFC stock on any day during the CFC’s year takes a prorated inclusion. The old rule, which keyed off ownership on the last day of the year, no longer applies.

What is a permanent establishment, and how do we create one accidentally?

A fixed place of business through which an enterprise’s business is wholly or partly carried on, under Article 5 of the US Model treaty. Accidental PEs are usually created by people rather than premises - an employee habitually concluding contracts in a country, or a long-running installation project. A construction or installation project becomes a PE only if it lasts more than twelve months.

Sources

• 26 U.S.C. §250 · §951A · §951 · §951B · §952 · §954 · §957 · §958 · §960 · §904
• Treas. Reg. §1.861-8 (eCFR)
• United States Model Income Tax Convention, 17 February 2016 - Article 5 permanent establishment; Article 22 limitation on benefits
• OECD - FAQs on the Global Anti-Base Erosion Model Rules - 15% minimum rate; EUR 750 million threshold in at least two of the four preceding fiscal years
• OECD - International community agrees way forward on global minimum tax package, December 2025 and the side-by-side package, 5 January 2026
• Tax Foundation - Digital Services Taxes in Europe, data as of April 2026
• Government of Canada - Canada rescinds Digital Services Tax, 29 June 2025
• IRS - About Form W-8BEN-E