2026 International Tax Update: Preparing for the Shift from GILTI/FDII to NCTI/FDDEI

Date: December 7, 2025
Context: Post-Enactment of the One Big Beautiful Bill Act (OBBBA)

As we approach the end of 2025, US multinational corporations and their advisors are facing the most significant overhaul of the international tax landscape since the 2017 Tax Cuts and Jobs Act (TCJA). With the enactment of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, the “sunset” provisions we feared have been replaced by a new, permanent regime starting January 1, 2026.

The headline changes are structural and semantic: GILTI is replaced by NCTI, and FDII is replaced by FDDEI. However, the real impact lies in the math. The elimination of the Qualified Business Asset Investment (QBAI) deduction and the adjustment of Section 250 rates will materially alter effective tax rates (ETRs) for nearly every US taxpayer with cross-border operations.

This guide details exactly what is changing for the 2026 tax year and how to model your liability under the new NCTI and FDDEI rules.

Key Takeaways for Tax Year 2026

• GILTI is now NCTI: Global Intangible Low-Taxed Income is renamed Net CFC Tested Income (NCTI).
• QBAI is Eliminated: The 10% return on tangible assets exclusion is removed. All net CFC income is now subject to US tax, not just the “intangible” portion.
• New NCTI Tax Rate: The Section 250 deduction for NCTI drops to 40% (previously 50%), resulting in an effective federal rate of 12.6% (up from 10.5%).
• FDII is now FDDEI: Foreign-Derived Intangible Income is renamed Foreign-Derived Deduction Eligible Income (FDDEI).
• New FDDEI Tax Rate: The deduction drops to 33.34% (previously 37.5%), raising the effective rate on export income to 14%.
• FTC Haircut Improved: Taxpayers can now claim 90% of deemed-paid foreign tax credits (up from 80%), offering relief for high-taxed income.
• BEAT Stabilized: The Base Erosion and Anti-Abuse Tax (BEAT) rate is permanently set at 10.5%, avoiding the scheduled increase to 12.5%.

Detailed Analysis: The Shift from GILTI to NCTI

For tax years beginning after December 31, 2025, the concept of “Global Intangible Low-Taxed Income” is retired. The new regime, Net CFC Tested Income (NCTI), simplifies the base but broadens the net.

1. The Elimination of QBAI

Under the old GILTI regime (2018–2025), companies could exclude a “deemed tangible income return” equal to 10% of their Qualified Business Asset Investment (QBAI)—essentially their depreciable tangible assets. This meant that capital-intensive businesses (manufacturing, heavy industry) often had zero GILTI inclusion.

For 2026, the QBAI exclusion is gone. NCTI functions as a true minimum tax on all CFC earnings that are not Subpart F or high-taxed. If your CFC earns $1 of net income, that $1 is tested income.

2. The Section 250 Deduction and Effective Rate

The mechanism for taxing this income remains similar: the US shareholder includes the income and takes a Section 250 deduction. However, the deduction percentage has been reduced.

Component	2025 (GILTI)	2026 (NCTI)	Impact
Base Name	Global Intangible Low-Taxed Income	Net CFC Tested Income	Rebranding + Base Broadening
Tangible Asset Exclusion	10% of QBAI	0% (Eliminated)	Major tax increase for manufacturers
Section 250 Deduction	50%	40%	Deduction reduced
Effective Federal Rate	10.5%	12.6%	2.1% rate increase
FTC “Haircut” (Disallowance)	20% disallowed (80% credit)	10% disallowed (90% credit)	Favorable change

Scenario A: The Manufacturing Impact

Context: HeavyMetal Corp is a US manufacturer with a factory in Vietnam (CFC). The CFC has $10M in profit and $100M in tangible assets (QBAI).

• 2025 Calculation (GILTI):
  • Net Income: $10M
  • QBAI Exclusion: $10M (10% of $100M)
  • GILTI Inclusion: $0 ($10M – $10M)
  • US Tax: $0
• 2026 Calculation (NCTI):
  • Net Income: $10M
  • QBAI Exclusion: $0 (Eliminated)
  • NCTI Inclusion: $10M
  • Section 250 Deduction (40%): ($4M)
  • Taxable Income: $6M
  • Tax at 21%: $1.26M

Result: HeavyMetal Corp goes from paying zero US tax on foreign earnings to owing $1.26M, solely due to the QBAI elimination.

Detailed Analysis: FDII becomes FDDEI

The export incentive formerly known as FDII has been renamed Foreign-Derived Deduction Eligible Income (FDDEI). Like NCTI, the tangible asset threshold (QBAI) has been removed from the calculation, simplifying the math but potentially reducing the benefit for asset-heavy exporters.

The deduction rate for FDDEI is permanently set at 33.34% for tax years beginning after 2025. This is less generous than the 2025 rate of 37.5%.

• 2025 Effective Rate: 13.125% (21% * (1 – 37.5%))
• 2026 Effective Rate: 14.00% (21% * (1 – 33.34%))

While the rate increase is modest (0.875%), the removal of the QBAI reduction in the FDDEI formula is actually favorable for exporters. Previously, a high QBAI reduced your eligible FDII benefit. Under the new FDDEI rules, owning factories in the US no longer penalizes your export deduction.

The Foreign Tax Credit (FTC) “Good News”

To offset the broader base of NCTI, the OBBBA improved the Foreign Tax Credit rules. Under GILTI, taxpayers could only claim 80% of the foreign taxes paid by their CFCs (a 20% “haircut”).

For 2026, the allowable credit increases to 90%.

Scenario B: The High-Tax Service Firm

Context: TechServ Inc. has a subsidiary in Germany earning $1M. The German tax rate is 15% ($150k tax paid).

• 2025 (GILTI):
  • US Tax Liability (10.5%): $105,000
  • FTC Available: $120,000 (80% of $150k)
  • Net US Tax: $0 (Excess Credit of $15k)
• 2026 (NCTI):
  • US Tax Liability (12.6%): $126,000
  • FTC Available: $135,000 (90% of $150k)
  • Net US Tax: $0 (Excess Credit of $9k)

Insight: Even though the US tax rate increased to 12.6%, the improved FTC creditability (90%) protected TechServ Inc. from additional US tax. This change makes the “breakeven” foreign tax rate approximately 14% (12.6% / 90%), meaning income taxed abroad at 14% or higher generally won’t trigger residual US tax.

Common Pitfalls & Mistakes

As you prepare your 2026 provision and estimated tax models, avoid these common errors:

1. Assuming QBAI Still Protects You: This is the most dangerous assumption. If your 2026 cash flow models assume a QBAI carve-out, you will be significantly under-reserved. Remove QBAI from all 2026 projections immediately.
2. State Conformity Gaps: Many states conform to the Internal Revenue Code (IRC) as of a specific fixed date. If a state has not updated its conformity date to include the OBBBA (July 2025), they may still be applying the old GILTI rules or, worse, decoupling entirely. Review state-specific modifications for “NCTI.”
3. Overlooking Expense Apportionment: With the rate changes, the value of deductions allocated to NCTI vs. FDDEI changes. Re-run your Section 861 expense apportionment models; strategies that worked at a 10.5% rate may be inefficient at 12.6%.
4. Ignoring the BEAT: While the rate stayed at 10.5% (instead of rising to 12.5%), the base erosion rules are strict. Ensure your intercompany payments (royalties, interest) do not inadvertently trip the 3% base erosion percentage threshold.

Frequently Asked Questions (FAQ)

1. Is GILTI completely gone in 2026?

Legally, yes. The term “GILTI” has been struck from the code and replaced with “NCTI” (Net CFC Tested Income). However, the mechanics—taxing shareholder-level inclusions of CFC income—remain the same. The primary differences are the elimination of the tangible asset exclusion (QBAI) and the new tax rates.

2. What is the effective tax rate on NCTI for 2026?

The effective federal tax rate is 12.6%. This is calculated by taking the 21% corporate rate and applying the new 40% Section 250 deduction (21% x (1 – 0.40) = 12.6%). This assumes you have no foreign tax credits to offset the liability.

3. Did the BEAT rate increase to 12.5% as originally planned in the TCJA?

No. The One Big Beautiful Bill Act (OBBBA) permanently fixed the BEAT rate at 10.5% for tax years beginning after December 31, 2025. The scheduled increase to 12.5% was repealed.

4. When do these changes take effect?

These changes apply to tax years beginning after December 31, 2025. For calendar year taxpayers, this means the rules apply starting January 1, 2026. Fiscal year taxpayers will switch to the new rules at the start of their 2026 fiscal year.

Conclusion

The transition from GILTI/FDII to NCTI/FDDEI represents a maturation of the US international tax system. While the acronyms have changed, the policy intent remains clear: a broad-base minimum tax on foreign earnings and a preferential rate for domestic exports.

The most critical action item for 2025 is to update your financial models. The loss of QBAI will hit manufacturers hard, while the improved FTC creditability will soften the blow for service companies in high-tax jurisdictions. Work with your tax advisor now to quantify the cash tax impact before the first estimated payment of 2026 is due.