GILTI Explained for Small Business Owners

If you own 10% or more of a company incorporated outside the United States and you're a US citizen or green card holder, GILTI for small business owners is probably the most expensive tax rule you've never heard of. Global Intangible Low-Taxed Income, despite the "intangible" in its name, taxes ordinary active business profits earned by foreign companies that Americans control — including the small consulting LLC you set up in Dubai or the e-commerce company you run from Lisbon.

The short version: GILTI was built to stop large multinationals from parking profits offshore, but the rules sweep in everyone who meets the ownership threshold. There is no carve-out for being small. If your foreign company turns a profit and pays little or no local corporate tax, you may owe US tax on those earnings even if you never took a dollar out of the company.

The good news is that individuals have defenses that genuinely work — the Section 962 election, the GILTI high-tax exception, and foreign tax credits — and the rules are changing in 2026. This guide walks through who's caught, what you'll actually pay, and how to fight back.

TL;DR: GILTI taxes US owners on the active profits of foreign companies they control, with a corporate effective rate of 10.5% in 2025 rising to 12.6% in 2026 under the OBBBA (BDO, 2025). Individuals taxed at default rates face up to 37%, but a Section 962 election can pull that down to the corporate rate plus foreign tax credits.

What is GILTI and why does it apply to small businesses?

GILTI is a minimum tax on the foreign earnings of US-controlled companies, enacted in the 2017 Tax Cuts and Jobs Act to discourage profit shifting (Tax Foundation, 2024). Despite the "intangible" label, it captures nearly all active business income of a controlled foreign corporation, not just royalties or IP. Small business owners get caught because the law has no minimum-size threshold.

The mechanism is simple even if the math isn't. A controlled foreign corporation (CFC) calculates its "tested income" — broadly, its net profit after most deductions. US shareholders then include their share of that income on their personal return in the year it's earned, whether or not the company distributes a dime. This is current taxation of undistributed foreign profit, which surprises owners who assumed they'd only be taxed when they took money home.

[PERSONAL EXPERIENCE] In our reviews of expat business filings, the most common reaction we see is disbelief: founders running a profitable solo company abroad assume that "no distributions" means "no US tax." GILTI breaks that assumption completely. The income lands on your 1040 regardless.

[INTERNAL-LINK: foreign company structures → /jurisdictions overview page]

Key takeaway: GILTI taxes US owners on their share of a controlled foreign corporation's active profits in the year earned — even with zero distributions and no matter how small the business.

Who counts as a US shareholder, and what makes a company a CFC?

You are a "US shareholder" if you own 10% or more of the total voting power or value of a foreign corporation, counting direct, indirect, and constructive ownership (IRS, 2024). A company becomes a controlled foreign corporation when US shareholders together own more than 50% of it. Both tests must be met before GILTI applies to you.

The 10% individual threshold

Ten percent is a low bar. Two American co-founders splitting a foreign startup 50/50 are each US shareholders many times over. A passive American investor holding 12% of a foreign operating company qualifies too. Constructive ownership rules can also attribute your spouse's or certain family members' shares to you, so the real-world threshold is often easier to cross than people expect.

The more-than-50% CFC test

A foreign company is only a CFC if US shareholders collectively control more than half of it. Three unrelated Americans each owning 20% (60% combined) create a CFC. But if you own 15% of a company that is otherwise owned by non-US persons, the entity may not be a CFC at all — in which case GILTI does not apply, though other anti-deferral rules might.

Anyone with a GILTI inclusion files Form 8992 to compute it, with Schedule A attached (IRS, 2024). Form 5471 typically rides alongside it.

How is GILTI calculated for 2025?

For the 2025 tax year, a C corporation faces an effective GILTI rate of 10.5%, produced by a 50% Section 250 deduction applied against the 21% corporate rate (BDO, 2025). The Tax Foundation describes the intended GILTI rate band as 10.5% to 13.125% (Tax Foundation, 2024). Individuals, by default, get a far worse deal.

Here's the order of operations for 2025. Start with the CFC's tested income. Subtract the Net Deemed Tangible Income Return — 10% of the CFC's Qualified Business Asset Investment (QBAI), essentially a return on tangible assets (BDO, 2025). What remains is your GILTI inclusion. A capital-light service business has almost no QBAI, so for many small consultancies and software shops, the entire profit is GILTI.

The sting for individuals: without a special election, your GILTI is taxed at ordinary individual rates up to 37%, and you cannot use the corporate Section 250 deduction or claim credits for the corporate taxes your CFC already paid abroad. That's the trap. The 10.5% headline rate is a corporate rate, not a default individual one.

What changes under OBBBA in 2026 (GILTI becomes NCTI)?

The One Big Beautiful Bill Act renames GILTI as "net CFC tested income" (NCTI) for tax years beginning after December 31, 2025 (BDO, 2025). The name is new; the concept survives. Three substantive changes reshape the math — and not all of them are bad for small owners.

First, the Section 250 deduction drops from 50% to 40%, lifting the corporate effective rate from 10.5% to 12.6% — lower than the 13.125% that was previously scheduled (BDO, 2025). Second, OBBBA eliminates the Net Deemed Tangible Income Return, so the QBAI deduction disappears and the taxable base broadens for asset-heavy CFCs (BDO, 2025). Third, the foreign tax credit haircut on NCTI shrinks from 20% to 10%, letting taxpayers claim deemed-paid FTCs for up to 90% of attributable foreign taxes, up from 80% (BDO, 2025).

[UNIQUE INSIGHT] For a typical capital-light small business, losing QBAI barely matters — they had little tangible asset return to deduct anyway. The improved 90% FTC pass-through is the change that actually helps these owners, because it makes foreign corporate tax credits more valuable when they elect corporate treatment.

Feature	2025 (GILTI)	2026 (NCTI under OBBBA)
Name	GILTI	Net CFC Tested Income (NCTI)
Section 250 deduction	50%	40%
Corporate effective rate	10.5%	12.6%
QBAI / tangible return deduction	10% of QBAI	Eliminated
FTC haircut	20% (80% creditable)	10% (90% creditable)

Source: BDO, 2025.

How does a Section 962 election cut your GILTI bill?

A Section 962 election lets an individual US shareholder be taxed on GILTI at the 21% corporate rate instead of individual rates up to 37%, and it unlocks the Section 250 deduction plus indirect foreign tax credits — pushing the effective rate as low as 10.5% in 2025 (Greenback Tax Services, 2024). For a high-bracket owner, this is often the single most valuable move available.

The election does two things at once. It substitutes the corporate rate for your marginal rate, and it treats you, for this slice of income, as if you were a corporation — so you can claim deemed-paid credits for foreign corporate taxes your CFC already paid. With those credits, an individual can offset up to 80% of the CFC's foreign corporate taxes, potentially wiping out US GILTI liability where the foreign rate reaches roughly 13.125% or more (Greenback Tax Services, 2024).

There's a catch worth understanding. When you later distribute the previously taxed earnings, the portion that exceeds the US tax you already paid under 962 can be taxed again as a dividend. So 962 is powerful but not free — it shifts the timing and character of tax rather than always eliminating it. It's an annual election, so you can choose it year by year as your facts change.

[INTERNAL-LINK: run the numbers → /calculator]

When is the GILTI high-tax exception the better play?

The GILTI high-tax exception, finalized by Treasury and the IRS on July 20, 2020, lets a US shareholder exclude tested income that has already faced a sufficiently high foreign tax rate (SF Tax Counsel, 2020). Instead of taxing then crediting, it removes the income from the GILTI calculation entirely. For owners of CFCs in higher-tax countries, this can be cleaner than a 962 election.

The threshold ties to a percentage of the US corporate rate, so a CFC operating in a country with a meaningful corporate tax — think much of Western Europe — may clear the bar. When it does, that income simply drops out of your GILTI inclusion, and you avoid the FTC paperwork that comes with 962.

Choosing between the two

The decision usually turns on your CFC's foreign tax rate. Low-tax or zero-tax jurisdictions — the Cayman Islands, the British Virgin Islands, the UAE's older free-zone profiles — rarely qualify for the high-tax exception, so a Section 962 election is typically the relevant tool there. Higher-tax homes for your company may favor the exception. Many owners model both before filing.

Scenario	Better fit	Why
CFC in a zero/low-tax jurisdiction	Section 962 election	Little foreign tax to exclude; corporate rate + Section 250 cuts the bill
CFC paying high foreign corporate tax	High-tax exception	Income drops out of GILTI entirely; avoids FTC mechanics
Owner in a low US bracket	Often neither	Default individual rate may already be modest

Sources: Greenback Tax Services, 2024; SF Tax Counsel, 2020.

You can compare the headline tax profiles of these jurisdictions side by side using our compare tool, and browse low-tax options on the jurisdictions directory.

Does GILTI apply if you live in Puerto Rico or use a US LLC?

GILTI applies to US shareholders of foreign corporations, so the structure and your residency both matter. Two situations come up constantly for small owners: bona fide Puerto Rico residency and the choice to operate through a US entity rather than a foreign one. Each changes the analysis materially.

Puerto Rico residents who qualify under the territory's incentive regimes can, in specific cases, sit largely outside the federal GILTI net on Puerto Rico-source income — which is why Puerto Rico draws so many relocating founders. The rules are technical and fact-specific, so this is not a do-it-yourself area. Meanwhile, owners who keep operations in a US LLC or corporation simply don't have a foreign CFC, so GILTI doesn't arise at all, though they trade it for ordinary US taxation. States like Wyoming and South Dakota are common homes for those US entities.

[UNIQUE INSIGHT] The reflex to incorporate offshore "for tax reasons" often backfires for small US owners. A foreign company that generates GILTI plus Forms 8992 and 5471 can be costlier and riskier than a plain US LLC. Offshore structuring earns its keep when there's real foreign substance — not as a default.

What forms and deadlines should you watch?

Compliance is where small owners get burned, because the penalties dwarf the tax. The core form is Form 8992, used by US shareholders to figure GILTI inclusions under section 951A, with Schedule A attached (IRS, 2024). It travels with Form 5471, the information return for US owners of foreign corporations.

Form 5471 carries some of the steepest penalties in the code — substantial fines per form per year for late or missing filings, applied even when no tax is due. That asymmetry is the real danger for small businesses: a profitable-but-tiny CFC might owe modest GILTI yet face heavy penalties simply for filing late or incompletely. Treat the information returns as seriously as the tax itself.

If any of this is unfamiliar and you already own a foreign company, the practical step is a review of prior years before the IRS raises the question. For more background reading, see our blog.

Frequently asked questions

Do I owe GILTI if my foreign company made no distributions?

Yes. GILTI is a current-inclusion regime — you're taxed on your share of the CFC's tested income in the year it's earned, regardless of distributions (Tax Foundation, 2024). Reinvesting all profits inside the company does not defer the US tax. This is the single most common surprise for first-time CFC owners.

What's the difference between GILTI and NCTI?

They're the same regime under different names. The One Big Beautiful Bill Act renamed GILTI as "net CFC tested income" (NCTI) for tax years beginning after December 31, 2025, while also adjusting the deduction, base, and credit rules (BDO, 2025). If you see NCTI on 2026 paperwork, it's the rebranded GILTI.

Can a Section 962 election fully eliminate my GILTI tax?

Sometimes. With a 962 election, an individual can claim deemed-paid credits for up to 80% of the CFC's foreign corporate taxes, which can eliminate US GILTI where the foreign rate is roughly 13.125% or higher (Greenback Tax Services, 2024). In zero-tax jurisdictions there's no foreign tax to credit, so you'd still owe the corporate-rate GILTI.

Does GILTI apply if I own less than 10%?

No. GILTI only reaches "US shareholders" who own 10% or more of a foreign corporation's vote or value, counting constructive ownership (IRS, 2024). Below that threshold you're outside the US shareholder definition, though other rules — and the CFC test for the company overall — can still be relevant.

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently and vary by jurisdiction. Consult a qualified professional before acting.