GILTI Is Out, Net CFC Tested Income (NCTI) Is In
- Aug 16
- 4 min read
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, brings sweeping changes to the U.S. international tax regime—especially to the rules governing Global Intangible Low-Taxed Income (GILTI). For multinational businesses and their advisors, understanding these changes is critical, as they affect both federal and state tax liabilities and planning strategies.
What’s Changed?
Name and Concept: The OBBBA renames GILTI as “Net CFC Tested Income” (NCTI) for tax years beginning after December 31, 2025. This is more than a cosmetic change: the computational mechanics of the inclusion have been fundamentally altered.
No More QBAI Deduction: Under prior law, GILTI was calculated as the U.S. shareholder’s share of a controlled foreign corporation’s (CFC’s) “tested income,” reduced by a 10% return on the CFC’s qualified business asset investment (QBAI)—essentially, a deduction for tangible assets. The OBBBA eliminates this QBAI deduction. Now, NCTI is simply the U.S. shareholder’s pro rata share of the CFC’s tested income, with no reduction for tangible assets.
Section 250 Deduction Reduced: The deduction under IRC §250 for this income is reduced from 50% (under prior law) to 40%. This increases the effective U.S. tax rate on NCTI from 10.5% to 12.6% (before foreign tax credits).
Foreign Tax Credit (FTC) Improvements: The FTC “haircut” is reduced from 20% to 10%, so 90% of foreign taxes paid on NCTI can be credited against U.S. tax, up from 80% under prior law. This means that if a CFC pays at least a 14% effective foreign tax rate, there may be no residual U.S. tax on NCTI.
Expense Allocation for FTCs: Only expenses directly allocable to CFC income (and the §250 deduction) must be allocated to the NCTI basket for FTC purposes. U.S. expenses like interest and R&D are now allocated to U.S. source income, a taxpayer-favorable change.
What Does This Mean for Multinational Companies?
Higher U.S. Tax Base: The removal of the QBAI deduction means more CFC income is subject to current U.S. tax. Companies with significant tangible assets abroad will see a larger portion of their foreign earnings included in U.S. taxable income.
Potential for Lower Residual U.S. Tax: The increased FTC percentage (from 80% to 90%) and the more limited expense allocation rules mean that, for many companies, the U.S. residual tax on NCTI may be lower, especially if their CFCs are in higher-tax jurisdictions.
No More Focus on “Intangibles”: The new NCTI regime no longer purports to target only “intangible” income. Instead, it sweeps in all active foreign income of a CFC, except for subpart F income and income connected with a U.S. trade or business.
Section 250 Deduction Still Matters: The reduced §250 deduction (now 40%) means a higher effective U.S. tax rate on NCTI, but the deduction remains a key planning point.
State Tax Conformity: A Patchwork of Approaches
How Do States Handle GILTI/NCTI?
Federal Taxable Income as a Starting Point: Most states begin their corporate income tax calculation with federal taxable income, which now includes NCTI instead of GILTI for tax years after 2025.
Static vs. Rolling Conformity: States differ in how they conform to the Internal Revenue Code (IRC):
Rolling Conformity States: These states automatically adopt changes to the IRC as they occur. For tax years beginning after December 31, 2025, these states will include NCTI (not GILTI) in their tax base, subject to any state-specific modifications or deductions.
Static Conformity States: These states conform to the IRC as of a specific date. If a state’s conformity date is before the OBBBA’s effective date, it will continue to include GILTI (with the QBAI deduction) in its tax base, not NCTI, until the legislature updates the conformity date.
State-Specific Adjustments: Some states provide a full or partial deduction for GILTI/NCTI, while others tax a portion or all of it. For example:
Nebraska: A rolling conformity state that taxes §951A income and allows the §250 deduction, so NCTI (with the 40% deduction) will be included in the tax base.
Utah: Also a rolling conformity state, but does not conform to special deductions like §250. Instead, it provides a 50% dividends received deduction for §951A income.
Minnesota: A static conformity state (as of May 1, 2023) that taxes GILTI, not NCTI, unless the legislature updates the conformity date.
Tennessee: Requires taxpayers to subtract GILTI and add back 5% of the amount, effectively taxing only 5% of GILTI, and does not allow the §250 deduction.
New Jersey: Includes GILTI and FDII in the tax base, allows the §250 deduction if taken federally, and uses a special allocation formula based on GDP rather than apportionment factors.
Apportionment and Constitutional Issues
Factor Representation: The OBBBA’s shift to NCTI strengthens the argument that, if a state taxes NCTI, it must also include the CFC’s apportionment factors (property, payroll, sales) in the state’s apportionment formula. This is because NCTI is clearly active foreign income, not U.S.-sourced income. The Supreme Court’s decision in Moore v. United States further supports this position, likening CFC income inclusions to passthrough income, which requires factor representation.
Potential for State Law Changes: Given these constitutional and policy concerns, some states may reconsider whether to tax NCTI at all, or may provide additional deductions or exclusions to avoid taxing foreign active business income.
Practical Takeaways
Federal Taxpayers: U.S. shareholders of CFCs should expect a higher inclusion of foreign income in their U.S. tax base due to the elimination of the QBAI deduction, but may benefit from a higher FTC and more favorable expense allocation rules.
State Taxpayers: The treatment of NCTI (or GILTI) at the state level will depend on each state’s conformity approach and specific modifications. Taxpayers should monitor state legislative developments and be prepared for increased complexity, especially in static conformity states.
Planning: Multinational businesses should review their CFC structures, foreign tax positions, and state apportionment methodologies in light of these changes. Coordination between federal and state tax planning is more important than ever.
Conclusion
The OBBBA’s overhaul of the GILTI regime—now NCTI—marks a significant shift in U.S. international tax policy. While the changes may simplify some aspects of the calculation and bring the U.S. closer to international norms, they also increase the U.S. tax base and create new challenges for state tax compliance. Taxpayers and advisors should carefully assess the impact of these changes on both their federal and state tax positions for tax years beginning after December 31, 2025.
