Under Code Sec. 250, domestic corporations are allowed a deduction of 37.5% of their foreign-derived intangible income (FDII, defined below) and 50% of their global intangible low-taxed income (GILTI). The rate of the deduction is reduced for tax years after 2025. There is a limitation on the deduction based on taxable income.
Domestic corporations allowed a deduction for a portion of their FDII and GILTI:
In the case of a domestic corporation for any tax year, a deduction is allowed in an amount equal to the sum of:
(A) 37.5% of the FDII of the domestic corporation for the tax year, plus
(B) 50% of (i) the GILTI amount (if any) which is included in the gross income of the domestic corporation under Code Sec. 951A for the tax year, and (ii) the amount treated as a dividend received by the corporation under Code Sec. 78 which is attributable to the amount described in item (i). Code Sec. 250(a)(1).
Note: Coupled with the 21% tax rate for domestic corporations, these deductions result in effective tax rates of 13.125% on foreign-derived intangible income and of 10.5% on GILTI (with respect to domestic corporations) for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.
Because only 80% of foreign tax credits are allowed to offset U.S. tax on GILTI, the minimum foreign tax rate, with respect to GILTI, at which no U.S. residual tax is owed by a domestic corporation is 13.125% (80% of that foreign rate equals the 10.5% U.S. rate on GILTI).
If the foreign tax rate on GILTI is 0%, then the U.S. residual tax rate on GILTI is 10.5%. Therefore, as foreign tax rates on GILTI range between 0% and 13.125%, the total combined foreign and U.S. tax rate on GILTI ranges between 10.5% and 13.125%.
At foreign tax rates greater than or equal to 13.125%, there is no residual U.S. tax owed on GILTI, so that the combined foreign and U.S. tax rate on GILTI equals the foreign tax rate.
The deduction for FDII and GILTI is available only to C corporations that are not RICs or REITs, because of Code Sec. 852(b)(2)(C) and Code Sec. 857(b)(2)(A) respectively.
The IRS may prescribe regs or other guidance as may be necessary or appropriate to carry out the provisions in Code Sec. 250. Code Sec. 250(c)
FDII of a Domestic Corporation
For purposes of calculating the deduction for FDII and GILTI, the foreign-derived intangible income of any domestic corporation is the amount which bears the same ratio to the deemed intangible income of the corporation as:
(A) the foreign-derived deduction eligible income of the corporation, bears to
(B) the deduction eligible income of the corporation. Code Sec. 250(b)(1).
The deemed intangible income is the excess (if any) of:
(i) the deduction eligible income of the domestic corporation, over
(ii) the deemed tangible income return of the corporation. Code Sec. 250(b)(2)(A
The deemed tangible income return is, with respect to any corporation, an amount equal to 10% of the corporation's qualified business asset investment (as defined in Code Sec. 951A(d), determined by substituting “deduction eligible income” for “tested income” in Code Sec. 951A(d)(2) and without regard to whether the corporation is a CFC). Code Sec. 250(b)(2)(B).
The deduction eligible income is, with respect to any domestic corporation, the excess (if any) of:
(i) gross income of the corporation determined without regard to:
§ the subpart F income of the corporation determined under Code Sec. 951(a)(1)
§ the GILTI determined under Code Sec. 951A,
§ any financial services income (as defined in Code Sec. 904(d)(2)(D)) of the corporation
§ any dividend received from a corporation which is a CFC of the domestic corporation
any domestic oil and gas extraction income of the corporation (i.e., income described in Code Sec. 907(c)(1), determined by substituting “within the U.S.” for “without the U.S.”) any foreign branch income (as defined in Code Sec. 904(d)(2)(J)), over
(ii) the deductions (including taxes) properly allocable to that gross income. Code Sec. 250(b)(3)(A).
Foreign-derived deduction eligible income is, with respect to any taxpayer for any tax year, any deduction eligible income of the taxpayer which is derived in connection with:
(A) property which is sold by the taxpayer to any person who is not a U.S. person, and which the taxpayer establishes to the IRS's satisfaction is for a foreign use (see below), or
(B) services provided by the taxpayer which the taxpayer establishes to the IRS's satisfaction are provided to any person, or with respect to property, not located within the U.S. Code Sec. 250(b)(4).
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