President Trump's Tax Cuts and Jobs Act in 2017 was the largest tax reform in the United States since 1986. Part of this reform were new rules applicable to controlled foreign corporations (CFC) earning so-called "global intangible low tax income" or "GILTI".
Very generally, GILTI could result in accrual-based taxation of U.S. shareholders if the net income of a CFC exceeded 10% of the CFC's tangible assets carried on its balance sheet. Take for example a U.S. citizen resident in Canada operating a fully active services business in Canada through a Canadian corporation. Prior to 2018 assuming the income did not trip up any of the subpart-F service income recharacterization this income would not be subpart-F income and would be taxed on a "repatriation" basis (in this case paying a dividend to the U.S. shareholder) rather than being taxed on an accrual basis.
Assuming the services business in the above scenario carried negligible tangible assets on its balance sheet yet earned significant net income due to self-created intellectual property in the business then its owner would likely be subject to accrual-based taxation on the CFC's income (subject to making a 962 election to have the individual taxed as though he or she is a corporation, high-tax kick out and other mitigating techniques).
Although this GILTI regime was aimed at onshoring intellectual property, this result in the above scenario was generally thought to be overreaching and not actually having the intended policy result. The intended policy result, very generally, being to incentivize multinationals such as Apple, Alphabet, etc. to move their intangible profits from low-tax jurisdictions such as Ireland back to the United States.
For technical reasons much of President Trump's 2017 tax reform was not "permanent". Many provisions included sunset provisions in order to pass the Congressional Budget Office's requirements for passing a budget through "reconciliation". This is not particularly relevant but many of the provisions in the GILTI were set to expire on January 1, 2026 in order to in fact decrease certain deductions and tax credits available in calculating GILTI.
With the One Big Beautiful Bill Act (OBBBA) Present Trump replaced the GILTI with a new but similar regime. The GILTI regime is terminated for tax years beginning after December 31, 2025 and is replaced by a "netCFC tested income" (NCTI) regime.
Although the rules are complex, and there are many changes to the regime, the "net deemed tangible income return", which is what resulted in the 10% of tangible asset book value threshold (or the "normal" return on tangible assets concept) has been eliminated entirely from the calculation for tax years beginning after December 31, 2025. This regime is no longer even purporting to indirectly target returns on intangible assets.
The NCTI regime makes additional changes, including: (1) Reducing the 50% deduction in the calculation of GILTI to 40% in the calculation of NCTI resulting in an effective tax rate of 12.6% rather than 10.5% for US corporations owning CFCs or individuals making a 962 election; and (2) Increasing the availability of a foreign tax credit to 90% (from 80%).
Under the GILTI regime, after the deduction for 10% of the book value of tangible assets (which could be significant), a CFC needed to pay a tax rate of 13.25% in order to not have a GILTI inclusion following deductions and imputed foreign tax credits.
Under the NCTI regime a CFC will need to pay a tax rate of 14% in order for its US shareholder to not have an NCTI inclusion on an accrual basis. Canadian active income tax rates are generally range from 23% to 30% depending on the province. However, if your corporation is eligible for the small business deduction then the first $500,000 of income is taxed at a rate of less than 14% in each Canadian province.
If you are a U.S. citizen who operates your business through a Canadian corporate structure, the replacement of the GILTI regime with the NCTI regime effective January 1, 2026 will have an impact on the cross-border tax analysis and may result in you paying tax to the IRS where you previously did not.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
