Understanding how CFC income is taxed and reported on Form 5471—calculations, schedules, and planning strategies, including 2026 NCTI changes under the One Big Beautiful Bill Act
Quick Facts:
- 12.6% Effective NCTI rate starting 2026 (was ~10.5% under GILTI)
- 40% NCTI deduction starting 2026 (reduced from 50%)
- 90% Foreign tax credits available 2026+ (increased from 80%)
- Schedule I-1 Primary GILTI/NCTI reporting schedule on Form 5471
Table of Contents
Introduction: Why This Matters
If you own a controlled foreign corporation (CFC), you may owe U.S. taxes even if the corporation never distributes a single dollar to you. This is because of two anti-deferral regimes: Subpart F and GILTI (renamed NCTI starting in 2026).
Proper reporting of CFC income on Form 5471 is mandatory. Misunderstanding these rules can lead to both penalties and unexpected tax bills. However, significant tax planning opportunities exist for those who understand how these systems work. For a comprehensive overview of Form 5471 requirements, see our Complete Guide to Form 5471.
2025 OBBBA Changes
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, significantly reformed CFC taxation effective for tax years beginning after December 31, 2025. GILTI is renamed to NCTI (Net CFC Tested Income), QBAI is eliminated, and tax rates change substantially. This guide covers both current rules (through 2025) and new rules (2026+).
Understanding Subpart F Income
What is Subpart F Income?
Subpart F income, defined under IRC Section 952, represents income that Congress determined was susceptible to deferral abuse. This income is taxed to U.S. shareholders immediately, regardless of whether the CFC distributes any money.
Subpart F income is reported on Form 5471 Schedule I.
Categories of Subpart F Income
1. Insurance Income (Section 953)
Income derived from insuring U.S. risks or related person insurance income.
2. Foreign Base Company Income (Section 954)
This is the largest category and includes several subcategories:
Foreign Personal Holding Company Income (FPHCI):
- Dividends, interest, royalties, and rents
- Annuities
- Gains from property sales that produce passive income
- Commodities transactions
- Foreign currency gains
Foreign Base Company Sales Income:
- Sales of property involving related parties
- Property manufactured outside the CFC’s country of organization
Foreign Base Company Services Income:
- Services performed for or on behalf of related persons
- Services performed outside the CFC’s country of organization
3. International Boycott Income
Income from participation in international boycotts.
4. Illegal Payments
Bribes, kickbacks, and other illegal payments.
5. Section 901(j) Income
Income from countries with which the U.S. does not allow foreign tax credits.
High-Tax Exception for Subpart F
Subpart F income may be excluded from current taxation if it is subject to a sufficiently high foreign tax. The effective foreign tax rate must exceed 90% of the maximum U.S. corporate rate.
Through 2025:
- Threshold: 18.9% (90% × 21%)
- Election required under Regulation 1.954-1(d)(5)
Starting 2026 (OBBBA):
- Threshold rises to approximately 25.2% due to increased effective NCTI rates
- Election mechanics may be updated in future IRS guidance
CFC Look-Through Rule (Now Permanent)
The OBBBA permanently extended the CFC look-through rule under Section 954(c)(6). This rule allows certain related-party payments (dividends, interest, rents, royalties) between CFCs to be excluded from Subpart F income if attributable to the payor CFC’s active income. Previously scheduled to expire after 2025, this rule now provides permanent planning certainty.
Understanding GILTI (Through 2025) and NCTI (2026+)
What is GILTI?
GILTI stands for Global Intangible Low-Taxed Income. Introduced by the 2017 Tax Cuts and Jobs Act under IRC Section 951A, GILTI targets CFC income that exceeds a routine return on the corporation’s tangible assets.
In simpler terms: after you calculate Subpart F income, GILTI captures most of the remaining CFC income.
Important: Starting in 2026, GILTI is renamed to NCTI (Net CFC Tested Income) under the OBBBA. The fundamental concept remains similar, but key calculations change significantly.
The GILTI Formula (Through 2025)
GILTI = Net CFC Tested Income − (10% × QBAI) − Specified Interest Expense
Components Explained:
- Net CFC Tested Income: The CFC’s gross income minus allocable deductions, excluding Subpart F income
- QBAI (Qualified Business Asset Investment): The average adjusted tax basis of depreciable tangible property used in the CFC’s trade or business
- Net Deemed Tangible Income Return: 10% of QBAI—this is the “routine return” excluded from GILTI
- Specified Interest Expense: Interest expense allocated to GILTI
The NCTI Formula (2026 and Beyond – OBBBA)
NCTI = Net CFC Tested Income − Specified Interest Expense
(QBAI exclusion eliminated)
Key Changes Under OBBBA:
| Feature | GILTI (Through 2025) | NCTI (2026+) |
|---|---|---|
| Name | Global Intangible Low-Taxed Income | Net CFC Tested Income |
| QBAI Exclusion | 10% of tangible assets | Eliminated |
| Section 250 Deduction | 50% | 40% |
| Effective Rate (Corporate) | ~10.5% | 12.6% |
| FTC Haircut | 20% (80% creditable) | 10% (90% creditable) |
| IRC Section | 951A | 951A (renamed) |
What’s Included in Tested Income?
Tested income includes all CFC gross income EXCEPT:
- Subpart F income (already taxed separately)
- Effectively connected income (ECI)
- Dividends from related persons
- Foreign oil and gas extraction income
- High-tax excluded income (if elected)
GILTI/NCTI vs. Subpart F: Key Differences
| Feature | Subpart F | GILTI (2025) | NCTI (2026+) |
|---|---|---|---|
| Origin | 1962 (Revenue Act) | 2017 (TCJA) | 2025 (OBBBA) |
| IRC Section | 952 | 951A | 951A |
| Income Type | Specific categories (mostly passive) | Residual above routine return | All residual income |
| QBAI Exclusion | N/A | 10% deemed return | None |
| High-Tax Exception | 90% of U.S. rate | 90% of U.S. rate | ~90% of effective rate |
| Foreign Tax Credit | Separate basket | 80% creditable | 90% creditable |
| Section 250 Deduction | Not available | 50% | 40% |
Ordering Rules
When calculating CFC income inclusions:
- Calculate Subpart F income first
- Exclude Subpart F from tested income
- Calculate GILTI/NCTI on remaining income
- Report both on Form 5471
Form 5471 Schedules for GILTI/NCTI and Subpart F
Understanding which schedules report what information is essential for compliance.
Schedule I: CFC Shareholders’ Income Inclusions
- Reports Subpart F income by category
- Calculates pro rata share for each shareholder
- Documents Section 951(a) inclusions
Schedule I-1: Information for GILTI/NCTI
- Reports tested income and tested loss
- Documents QBAI calculations (through 2025)
- Records specified interest expense
- Shows tested foreign income taxes
- Feeds into Form 8992 for individual GILTI/NCTI calculation
2026 Update: Schedule I-1 will be updated to reflect NCTI terminology and the elimination of QBAI. Watch for revised IRS instructions for the 2026 tax year.
Schedule H and H-1: Earnings and Profits
- Schedule H: Current E&P calculation
- Schedule H-1: New schedule for Corporate Alternative Minimum Tax (CAMT) purposes (added December 2024)
- Lines 20a and 20b request Top-up Tax information
Schedule J: Accumulated Earnings and Profits
- Tracks accumulated earnings and profits over time
- Separates amounts by PTEP (previously taxed earnings and profits) groups
- Critical for distribution analysis
Schedule P: Previously Taxed Earnings and Profits (PTEP)
- Tracks income already taxed under Subpart F or GILTI/NCTI
- Prevents double taxation when distributions occur
- Contains multiple PTEP groups
Schedule Q: CFC Income by Income Groups
- Allocates income for foreign tax credit purposes
- Groups income by Section 904 baskets
- Supports Section 960 deemed paid credits
- Updated in December 2024 instructions with changes to line 4, column (xv)
Calculation Examples
Example 1: GILTI Calculation (2025 Rules)
Scenario:
- U.S. individual owns 100% of an Irish CFC
- CFC has $1,000,000 gross income
- $200,000 in deductible expenses
- $2,000,000 QBAI (depreciable tangible property)
- $50,000 specified interest expense
- $80,000 foreign taxes paid
Step 1: Calculate Net CFC Tested Income
| Item | Amount |
|---|---|
| Gross income | $1,000,000 |
| Less: Deductions | ($200,000) |
| Net tested income | $800,000 |
Step 2: Calculate Net Deemed Tangible Income Return
| Item | Amount |
|---|---|
| QBAI | $2,000,000 |
| × 10% deemed return | × 10% |
| Deemed tangible return | $200,000 |
Step 3: Calculate GILTI
| Item | Amount |
|---|---|
| Net tested income | $800,000 |
| Less: Deemed tangible return | ($200,000) |
| Less: Specified interest expense | ($50,000) |
| GILTI Inclusion | $550,000 |
Step 4: Tax for Corporate Shareholder (with Section 250)
| Item | Amount |
|---|---|
| GILTI inclusion | $550,000 |
| Section 250 deduction (50%) | ($275,000) |
| Taxable GILTI | $275,000 |
| Tax at 21% | $57,750 |
Example 2: NCTI Calculation (2026 Rules Under OBBBA)
Same scenario as above, but under 2026 rules:
Step 1: Calculate Net CFC Tested Income
| Item | Amount |
|---|---|
| Gross income | $1,000,000 |
| Less: Deductions | ($200,000) |
| Net tested income | $800,000 |
Step 2: Calculate NCTI (No QBAI Exclusion)
| Item | Amount |
|---|---|
| Net tested income | $800,000 |
| Less: QBAI exclusion | $0 (eliminated) |
| Less: Specified interest expense | ($50,000) |
| NCTI Inclusion | $750,000 |
Step 3: Tax for Corporate Shareholder (with Section 250)
| Item | Amount |
|---|---|
| NCTI inclusion | $750,000 |
| Section 250 deduction (40%) | ($300,000) |
| Taxable NCTI | $450,000 |
| Tax at 21% | $94,500 |
Comparison: 2025 vs. 2026
| Factor | GILTI (2025) | NCTI (2026) | Change |
|---|---|---|---|
| Inclusion amount | $550,000 | $750,000 | +$200,000 |
| Section 250 deduction | $275,000 | $300,000 | +$25,000 |
| Taxable amount | $275,000 | $450,000 | +$175,000 |
| Tax liability | $57,750 | $94,500 | +$36,750 |
Key Insight: The elimination of QBAI increases taxable income for CFCs with significant tangible assets. However, the improved FTC haircut (90% vs. 80%) may offset some of this increase for CFCs paying foreign taxes.
Section 962 Election: A Planning Opportunity
What is Section 962?
Section 962 allows individual U.S. shareholders of CFCs to be taxed at corporate rates instead of individual rates on their Subpart F and GILTI/NCTI inclusions.
When Section 962 Makes Sense
Consider the Section 962 election when you have:
- High GILTI/NCTI or Subpart F income
- Significant foreign taxes paid by the CFC
- A long-term reinvestment strategy
- A desire to maximize foreign tax credits
How Section 962 Works
- Make the election on a timely filed return
- Attach a statement with required information
- Compute tax as if you were a corporation
- Claim the Section 250 deduction (40% for NCTI starting 2026)
- Take foreign tax credits under Section 960
Section 962 Comparison (2026 NCTI Rules)
| Factor | Without Section 962 | With Section 962 |
|---|---|---|
| NCTI Inclusion | $750,000 | $750,000 |
| Section 250 Deduction | N/A | ($300,000) |
| Taxable Amount | $750,000 | $450,000 |
| Tax Rate | 37% | 21% |
| Tax Liability | $277,500 | $94,500 |
| Savings | — | $183,000 |
Section 962 Limitations
- Future distributions may be taxed at individual rates
- Basis tracking becomes more complex
- Election must be made annually
- State tax implications vary by state
High-Tax Exclusion Elections
Subpart F High-Tax Exception
Income can be excluded from Subpart F if the effective foreign tax rate exceeds 90% of the maximum U.S. corporate rate.
Through 2025:
- Threshold: 18.9% (90% × 21%)
- Election made under Regulation 1.954-1(d)(5)
Starting 2026:
- Threshold expected to rise to approximately 25.2%
- Reflects higher effective NCTI rates under OBBBA
GILTI/NCTI High-Tax Exclusion
Final regulations issued in 2020 allow GILTI income to be excluded if subject to sufficiently high foreign tax.
- Effective rate must exceed 90% of U.S. effective rate
- Determination made on a QBU-by-QBU basis
- Annual election available
When to Consider High-Tax Exclusions
- CFCs operating in high-tax jurisdictions (above 25% for 2026+)
- Can significantly reduce tested income
- May eliminate NCTI inclusion entirely
- Professional analysis recommended to evaluate benefit
Foreign Tax Credits for CFC Income
Section 960 Deemed Paid Credits
U.S. shareholders can claim credits for foreign taxes paid by the CFC. These are “deemed paid” credits based on your pro rata share of the CFC’s income.
GILTI/NCTI Foreign Tax Credits
Through 2025:
- Only 80% of foreign taxes are allowed as credits under Section 960(d)
- No carryforward of unused GILTI credits
- This 20% haircut ensures some U.S. tax is paid
Starting 2026 (OBBBA):
- 90% of foreign taxes are allowed as credits (10% haircut)
- No carryforward of unused NCTI credits
- Interest and R&E deductions excluded from FTC limitation calculations
Subpart F Foreign Tax Credits
- Full foreign taxes allowed (no haircut limitation)
- Credits go into a separate basket from GILTI/NCTI
- Normal carryforward and carryback rules apply
Additional OBBBA Changes Affecting CFC Reporting
Pro Rata Share Rules Modified
Starting in 2026, U.S. shareholders may have Subpart F or NCTI inclusions if they own CFC stock on any day of the year, not just the last day. This expands the number of shareholders subject to income inclusions.
CFC Year-End Alignment Required
CFCs can no longer elect a tax year beginning one month earlier than the majority U.S. shareholder’s tax year. CFCs with November 30 year-ends must align to December 31, resulting in a 13-month inclusion in 2025 for affected taxpayers.
Downward Attribution Rule Restored
The OBBBA restores the limitation on “downward attribution” of stock for CFC status determination. This may reduce the number of foreign corporations treated as CFCs, potentially affecting some taxpayers’ filing obligations.
Form 5471 Reporting Process
Pre-Filing Checklist
Before completing Form 5471:
- Determine CFC status of the foreign corporation (see filer category requirements)
- Identify all U.S. shareholders (including any-day ownership for 2026+)
- Calculate Subpart F income by category
- Calculate tested income for GILTI/NCTI purposes
- Determine QBAI (through 2025 only)
- Compute earnings and profits under U.S. tax rules
Form 5471 Schedule Completion
- Complete Schedule H (Current E&P)
- Complete Schedule H-1 (CAMT purposes, if applicable)
- Complete Schedule I (Subpart F income)
- Complete Schedule I-1 (GILTI/NCTI information)
- Complete Schedule J (Accumulated E&P)
- Complete Schedule P (Previously taxed E&P)
- Complete Schedule Q (Income by groups for foreign tax credit)
Related Forms
- Form 8992 (U.S. Shareholder Calculation of GILTI/NCTI)
- Form 1118 (Foreign Tax Credit for Corporations)
- Form 1116 (Foreign Tax Credit for Individuals)
- Section 962 election statement (if applicable)
Common Mistakes and Pitfalls
Avoid these common errors with GILTI/NCTI and Subpart F reporting:
- Failing to recognize CFC status when aggregated U.S. ownership exceeds 50%
- Not calculating E&P under U.S. rules—foreign accounting standards differ significantly
- Overlooking Subpart F categories such as foreign personal holding company income
- Incorrect QBAI determination (through 2025)—only depreciable tangible property qualifies
- Missing high-tax exclusion opportunities in jurisdictions with rates above threshold
- Improper foreign tax credit allocation between NCTI and Subpart F baskets
- Forgetting Section 962 election opportunity for individual shareholders
- PTEP tracking errors leading to potential double taxation
- Incorrect tested income calculation by including Subpart F amounts
- Not planning for OBBBA transition (2025 to 2026 changes)
Non-compliance with Form 5471 can result in penalties up to $60,000 per form. Learn about relief options in our Form 5471 penalties guide.
Frequently Asked Questions
What is the difference between GILTI and Subpart F?
Subpart F targets specific categories of passive income (dividends, interest, royalties) and has existed since 1962. GILTI (now NCTI), introduced in 2017, captures residual CFC income exceeding a routine return. Subpart F is calculated first, then excluded from GILTI/NCTI tested income.
What changed under the OBBBA for GILTI?
The One Big Beautiful Bill Act (effective 2026) renames GILTI to NCTI, eliminates the QBAI exclusion, reduces the Section 250 deduction from 50% to 40%, and improves the foreign tax credit haircut from 20% to 10%. The effective tax rate on NCTI increases to approximately 12.6%.
Do I pay tax on GILTI/NCTI even without distributions?
Yes. Both GILTI/NCTI and Subpart F income are taxed to U.S. shareholders regardless of whether the CFC distributes any cash. This is called “phantom income” taxation.
What is QBAI and is it still relevant?
QBAI (Qualified Business Asset Investment) is the average adjusted tax basis of depreciable tangible property. Through 2025, a 10% deemed return on QBAI is excluded from GILTI. Starting in 2026, the QBAI exclusion is eliminated under OBBBA.
Can I exclude high-taxed income from GILTI/NCTI?
Yes. If income is subject to foreign tax exceeding 90% of the U.S. effective rate (approximately 25.2% for 2026+), you may elect to exclude it from NCTI tested income under the high-tax exclusion regulations.
What is the Section 962 election?
Section 962 allows individual CFC shareholders to be taxed at corporate rates (21%) instead of individual rates (up to 37%) on Subpart F and GILTI/NCTI inclusions. This election also allows claiming the Section 250 deduction and deemed paid foreign tax credits.
How do foreign tax credits work for NCTI (2026+)?
Under the OBBBA, you can claim a deemed paid credit for 90% of foreign taxes allocable to NCTI (up from 80% for GILTI). NCTI credits still cannot be carried forward to other years.
What schedules report GILTI/NCTI on Form 5471?
Schedule I-1 is the primary GILTI/NCTI schedule. It reports tested income, tested loss, QBAI (through 2025), specified interest expense, and tested foreign income taxes. This information flows to Form 8992 for the overall calculation.
Is Subpart F income taxed at ordinary rates?
Yes. Subpart F income is included in the U.S. shareholder’s gross income and taxed at ordinary income rates. For individuals, this can be as high as 37%. The Section 962 election can reduce this rate.
What if my CFC has losses?
CFC losses become “tested losses” that can offset tested income from other CFCs you own. However, tested losses cannot offset Subpart F income, and GILTI/NCTI calculations are done on an aggregate basis across all your CFCs.
Professional GILTI/NCTI and Subpart F Services
GILTI/NCTI and Subpart F calculations involve complex rules that require professional expertise. The 2025 OBBBA changes add additional complexity for tax years starting in 2026. SDO CPA provides:
- CFC income analysis and calculations
- Earnings and profits computation under U.S. tax rules
- GILTI/NCTI optimization strategies
- Section 962 election analysis
- High-tax exclusion planning
- Foreign tax credit optimization
- OBBBA transition planning
Ready to navigate complex CFC taxation? Connect with SDO CPA for assistance with tax planning and compliance.
Related Articles
- Complete Guide to Form 5471 for U.S. Shareholders of Foreign Corporations
- Form 5471 Categories of Filers: Determine Your Filing Requirements
- Form 5471 Penalties: Understanding Relief Options and the $60,000 Risk
- Complete Guide to Form 5472 for Foreign-Owned U.S. Corporations
This guide is for informational purposes only and does not constitute tax or legal advice. GILTI/NCTI and Subpart F rules are highly technical and subject to change. The OBBBA changes are effective for tax years beginning after December 31, 2025. Consult a qualified tax professional for advice specific to your situation.