The House passed House Resolution 1 (the Act) giving its final stamp of approval to the reconciliation package as amended by the Senate. President Donald Trump signed the Act in to law on July 4. Nestled inside the Act are several provisions of importance to taxpayers with international tax considerations. In this article, Forvis Mazars explores some of the Act’s tax provisions and their impact on domestic and foreign taxpayers.
Permanent extension of the CFC look-through rules under Section 954(c)(6). The Act would permanently extend Section 954(c)(6)’s look through rules for controlled foreign corporations (“CFCs”), which generally treats dividends, interest, rents, and royalties received by a CFC from related CFCs as income other than foreign personal holding company income to the extent the income is attributable to non-subpart F income or income effectively connected with a US trade or business.
High-Level Thoughts: Making this provision permanent is a reasonable change to the Internal Revenue Code as it has been largely relied upon by many taxpayers since it was offered as a temporary solution in 2006.
- Restoration of the no downward attribution rules of Section 958(b)(4)’s constructive ownership rules with an exception under new Section 951B designed to tax Subpart F income of certain non-CFCs. The TCJA repealed the limitation under Section 958(b)(4) that prevented downward attribution of stock ownership from foreign persons to US entities. Since its repeal, foreign corporations have been able to be deemed as a CFC despite having no direct or indirect US Shareholders, which has led to burdensome compliance obligations. The Act would reinstate old Section 958(b)(4) to prevent this type of attribution but also provide a limited exception through creation a new Section 951B. Under new Section 951B, a US person would be subject to tax on a foreign corporation’s subpart F income or GILTI if it would directly or indirectly own more than 50 percent of a foreign corporation if downward attribution were applied.
High-Level Thoughts: The restoration of old Section 958(b)(4) will be a welcomed amendment for most taxpayers as the repeal of this provision has largely resulted in undue compliance burdens despite the relief provided by Rev. Proc. 2019-40 and subsequent regulations. Notwithstanding this improvement, the inclusion of Section 951B to tax income that would be Subpart F income or GILTI but for the fact the foreign corporation in question is not a de-facto CFC still presents similar issues that the TCJA created when it repealed Section 958(b)(4).
- Redefines roles of Section 163(j)’s interest limitation provisions with certain interest capitalization provisions to generally give the Sec. 163(j) limitation priority. The Act would effectively provide that Sec. 163(j) limitation is calculated prior to the application of any interest capitalization rules, except for interest capitalized under Section 263(g) or 263A(f). In so doing, certain ordering rules would require that the Section 163(j) limit apply first to amounts of interest which would be required to be capitalized, excluding amounts capitalized under Section 263(g) and 263A(f), and then any remainder would then be applied to amounts of interest that would be deducted. The Act further provides that no portion of business interest carried forwards are to be treated as business interest expense to which an interest capitalization provision applies.
High-Level Thoughts: This change in coordination is a deviation from the Treasury Regulations which generally provide that the Sec. 163(j) limitation analysis be applied only to business interest expense that has been reduced for amounts capitalized. This modification is expected to result in less interest expense being deductible due to higher likelihood of interest expense limitation computations that now must be applied to include capitalized interest where it historically has not been applied. This is likely to impact those who capitalized interest under various sections other than Section 263(g) or 263A(f). This also has ramifications for computations of Subpart F income and Net Combined Tested Income since the Section 163(j) limitation is required to be applied at the CFC level potentially resulting in higher CFC inclusions.
- Repeals the one-month deferral election under Section 898 for determining tax years of specified foreign corporations. The Act would require that all specified foreign corporations (including the ones that have made the one-month deferral election historically) to adopt the majority US Shareholder’s tax year. Specified foreign corporations are generally defined to include any CFCs or any foreign corporation that has a US Shareholder directly or indirectly owning more than 50% of the total vote or value of its shares during a testing period.
High-Level Thoughts: This modification is likely to result in simplification in the determination of income inclusions at the specified foreign corporation level.
- Repurposing of the GILTI and FDII regime to be codified as FDDEI and NCTI.
- Repeal of Net Deemed Tangible Income Return Requirement. The Act would repeal the requirement that net deemed tangible income return be considered in the computation of FDII and GILTI (i.e. the 10% return on QBAI). In so doing, the current GILTI regime would be renamed Net CFC Tested Income (NCTI) and the current FDII regime would be renamed foreign derived deduction eligible income (FDDEI).
- Decreases to the Section 250 deduction rates for NCTI (formerly GILTI) and FDDEI (formerly FDII). The Act would reduce the Section 250 deduction rate for NCTI from 50% to 40% and reduce the Section 250 deduction rate for FDDEI from 37.5% to 33.34%. With the other changes discussed herein, the effective tax rate for NCTI and FDDEI is approximately 14%.
- Redefining Deduction Eligible Income for purposes of the FDDEI deduction. The Act would modify the definition of deduction eligible income that was historically used in computing the FDII deduction (now FDDEI deduction) in many ways. First, it would exclude income or gain from sales or dispositions of property arising after June 16, 2025, that would give rise to rents or royalties. Next, it clarifies that any income of a kind that would be foreign personal holding company income and any Section 1293 income from passive foreign investment companies (when a qualified elective fund election had been made) would be excluded from the definition of deduction eligible income. This exclusion is expected to apply to income received or accrued after June 16, 2025. Finally, and most significantly, the expense allocation and apportionment rules for deduction eligible income would be modified to only include directly allocable deductions against deduction eligible income, thereby removing the requirement that apportioned interest and R&D expenses against deduction eligible income for purposes of computing the FDDEI deduction.
High-Level Thoughts: This last modification essentially repeals the adjusted taxable income circularity issues between Sec. 163(j), 172, and 250(a)(2) that had historically plagued taxpayers with determining FDII, NOL utilization and deductible business interest expense under Sec. 163(j) for a tax year. Moreover, this modification is largely expected to result in larger NCTI (former GILTI) inclusions and larger FDDEI bases for US shareholders. In the collective, it remains to be seen what the overall US tax implications are for NCTI and FDDEI when considering other components – namely, the lower Section 250 deduction rates for NCTI and FDDEI as well as the modifications to the FTC limitation computation used for the NCTI FTC limitation basket that are provided for in the Act. Because of the multiple components modified in the Act, implications for taxpayers are largely determined through a modeling exercise and results may vary on a case-by-case basis.
- Modifies the pro-rata share Rules for CFC inclusions to consider CFC inclusions for Subpart F and NCTI based on the time-period of CFC ownership rather than ownership on the last day of tax year. The Act would amend the pro-rata share rules of Section 958 to provide that if a foreign corporation is a CFC at any time during a tax year, US Shareholders must include in gross income their pro-rata share of the CFC’s Subpart F income, and NCTI for the tax year. This is a change from the prior rule that required an inclusion only by US shareholder(s) that owned stock of a CFC on the last day of the tax year. The Act preserves the last day of the year concept for Section 956 inclusions.
High-Level Thoughts: This change as applied to Subpart F income and NCTI is expected to expand the scope of taxpayers that may have such inclusions. If enacted, taxpayers are likely faced with monitoring the ownership of a foreign company owned by US Shareholders at all times of a tax year.
- Repeal of the CFC inclusion adjustment to US shareholder’s Section 163(j) computations previously permitted by the CFC Group Election in the Treasury Regulations. The Act effectively repeals all CFC inclusion adjustments from being considered in a US Shareholder’s adjusted taxable income (ATI) limitation computation under Section 163(j). Under current law, CFC inclusions are generally not permitted to be included in a US Shareholder’s Section 163(j) ATI computation unless a CFC Group election is made under Treas. Reg. 1.163(j)-7. CFC inclusions have generally included Subpart F income inclusions, NCTI (f/k/a GILTI) inclusions, and Section 956 inclusions.
High-Level Thoughts: This modification to the Section 163(j) computation is expected to be most significant to taxpayers that have historically made the CFC group election solely for the purposes of being able to deduct more interest expense at the US Shareholder level. If enacted, such taxpayers in are likely to be more limited in the amount of interest expense that can be deducted.
- FTC Limitation Modifications
- Modifications to sourcing rules for inventory sold to include a cap to the amount of foreign source income reflected in the FTC limitation computation. The Act would include a new sourcing rule for FTC limitation purposes that effectively caps the amount of foreign source income from the sale of inventory that is produced in the United States but sold through a foreign office to no more than 50% of the total taxable income from the sale or disposition of inventory property. The Act is careful to note that this rule is to apply only for Section 904 FTC limitation purposes.
High-Level Thoughts: The implications of this provision are largely expected to be determined based on the facts and circumstances of the taxpayer in question. For example, this provision, if enacted may be beneficial to taxpayers that produce inventory solely in the US but then sell through a foreign branch.
- Modification of the FTC Limitation rules as applied to NCTI. The Act would effectively modify the expense allocation and apportionment rules associated with the NCTI limitation category (f/k/a GILTI) by only requiring an allocation of the Section 250 deduction relating to NCTI and an allocation of any directly allocated expenses. Any expenses that would be apportioned because they do not definitely relate to NCTI, would effectively be allocated and apportioned to the US source residual basket for FTC limitation purposes.
High-Level Thoughts: This development is likely a taxpayer friendly provision that simplifies the NCTI (f/k/a GILTI) basket computation for FTC limitation purposes and increases the amount of utilizable FTCs in a given tax year. Specifically, this provision removes any interest expense and stewardship expenses that would historically have been considered in the GILTI basket computation.
- Modification of Section 960(d) haircut for NCTI Foreign Tax Credits (formerly GILTI FTCs). The TCJA provided a 20% haircut to all tested income taxes generated through the GILTI computation under Section 960(d), meaning taxpayers are only able to claim an FTC equal to 80% of the foreign income taxes paid associated with tested income. The Act would reduce this 20% haircut to 10% and effectively allow for 90% of foreign income taxes paid pursuant to the NCTI.
High-Level Thoughts: This development is designed to eliminate some of the double taxation issues associated with the historical GILTI regime’s interactions with the FTC regime and should result in higher eligible FTCs relating to NCTI.
- Modification of the BEAT regime to slightly increase the Base Erosion Minimum Tax Amount (BEMTA). The Act would modify the current BEAT rules in two important ways. First, the 2026 sunset provisions that would have eliminated the ability to claim R&D credits and certain other credits against the BEMTA liability would be repealed in its entirety. Second, the BEAT rate would increase from 10% to 10.5% when determining the BEMTA for tax years after 2025.
High-Level Thoughts: The changes to the BEAT regime are expected to be slightly more unfavorable to applicable taxpayers due to the change in the BEAT rate despite the protection of R&D credits and other Section 38 credits being included in the final Act. Notably, a provision in the initial Senate Bill that would have treated certain capitalized interest payments as base erosion payments was not included. In addition, the inclusion of a high-tax exclusion to certain base erosion payments was removed from the final Act.
- Modifications to sourcing rules for inventory sold to include a cap to the amount of foreign source income reflected in the FTC limitation computation. The Act would include a new sourcing rule for FTC limitation purposes that effectively caps the amount of foreign source income from the sale of inventory that is produced in the United States but sold through a foreign office to no more than 50% of the total taxable income from the sale or disposition of inventory property. The Act is careful to note that this rule is to apply only for Section 904 FTC limitation purposes.
The Act’s provisions outlined in this article the contain a myriad of changes for taxpayers with international tax considerations. Forvis Mazars can assist you as you navigate the modifications to the treatment of CFCs, the rebranding of GILTI and FDII, and the alterations to BEAT taxes outlined in the Act. For more resources related to the Act, check out our website and our 2025 Tax Bill Guide. For additional guidance, contact a member of the Forvis Mazars team here.