International Tax Provisions of the 2025 Reconciliation Act

On July 4, 2025, President Donald Trump signed into law “[a]n Act to provide for reconciliation pursuant to title II of H. Con. Res. 14.” (formerly known as the One Big Beautiful Bill Act, referred to herein as the “Act”), an all-encompassing reconciliation bill including sweeping domestic policy changes championed by the president that are expected to impact virtually every industry, business, and household of America. 

The Act contains several meaningful international tax provisions, though perhaps the most significant “news” is that it does not include the so-called “revenge” tax initially proposed in earlier drafts as section 899. Section 899 would have broadly increased taxes on non-US taxpayers with US source and/or US trade or business income that are resident in jurisdictions imposing taxes on US residents that the administration and Congress deem “unfair” (e.g., digital services taxes). Its removal was the result of a request from Treasury Secretary Bessent after the G7 (comprised of the USA, Canada, France, Italy, Germany, Japan and the UK) agreed to exempt US multinationals from adverse rules being enacted in many jurisdictions in application of the Pillar 2 rules developed by the OECD/G20 Inclusive Framework. Proposed section 899 and its punitive tax regime could, however, be revived later if the G7 countries fail to persuade the other 130 or so other countries that are parties to the Inclusive Framework to agree to the proposed exemption.

GILTI/FDII

The Tax Cut and Jobs Act (TCJA), enacted in December 2017, introduced the concepts of “global intangible low-taxed income” (GILTI) and “foreign-derived intangible income” (FDII) to the Code (see prior client alert here). With the enactment of the GILTI regime, the TCJA shifted the US international tax structure, which previously generally delayed US federal income taxation of US shareholders with respect to income earned through an ownership interest in a foreign corporation until such income was distributed to them to a modified “territorial” tax regime that subjects a wider range of such income to US federal income taxation on a current basis. Under the current rules, a US taxpayer with an interest in a CFC (see definition below) must include GILTI in its taxable income on a current basis, subject to, if the taxpayer is a corporation, a reduced effective tax rate due to a 50% deduction under section 250 of the Code. In addition, section 250 of the Code also provides US corporate taxpayers that sell property or services to foreign customers (thereby earning FDII) a deduction equal to 37.5% of that FDII (resulting in the relevant income being taxed at an effective rate of 13.125%). The Act makes various revisions to the GILTI and FDII rules, effective for tax years beginning after December 31, 2025. Among those, the Act:

• Eliminates a deduction for 10% of the tax basis of qualified tangible assets (referred to as qualified business asset investment or QBAI) when computing GILTI or FDII, further reducing the amount of earnings and profits that may be repatriated tax-free and incentivizing onshoring of manufacturing operations;
• Renames GILTI as net CFC tested income (NCTI) and FDII as foreign-derived deduction eligible income (FDDEI), to reflect the fact that neither category of income, after the elimination of the QBAI deduction, relates to income from intangibles in any meaningful way; 
• Reduces the corporate deduction for NCTI from 50% to 40% and the deduction for FDDEI from 37.5% to 33.34%, while increasing the foreign tax credit limit from 80% to 90% for NCTI, thereby creating effective tax rates of 14% for both NCTI and FDDEI; and
• Limits deductions allocated to foreign source income for purposes of computing the foreign tax credit associated with NCTI and deductions allocated to income considered to compute FDDEI.

BEAT

The TCJA also introduced the concept of “base erosion and anti-abuse tax” (BEAT), a 10% alternative minimum tax, on US taxpayers with deductible amounts paid or accrued to foreign related persons that the TCJA deemed excessive. The BEAT rules remain largely the same under the Act, but the Act increases the BEAT tax rate from 10% to 10.5%, which is lower than the rate it was originally scheduled to increase to (12.5%) in 2026.

CFCs

A foreign corporation is a “controlled foreign corporation” (“CFC”) if US persons that own (or are deemed to own), directly or indirectly, 10% or more of its stock, by vote or value (“US Shareholders”) collectively own (or are deemed to own), directly or indirectly, more than 50% of its stock, by vote or value. In addition to the GILTI regime, changes to which are discussed above, US Shareholders that directly or indirectly own stock of a CFC are required to include in their own income their pro rata share of the CFCs’ Subpart F (i.e., generally passive) income and, under section 956 of the Code, of the CFC’s investment in US property.

Section 954(c)(6) of the Code is a look-through rule that prevents US Shareholders from having to include in their taxable income dividends, interest and other passive items of income their CFCs receive or accrue from related CFCs. Under the TCJA, this rule was scheduled to sunset at the end of this year. The Act makes it permanent.

The Act also limits the number of foreign corporations that are treated as CFCs by reversing the TCJA’s deletion of section 958(b)(4) of the Code. Under the reinstated section 958(b)(4), a US person is not deemed to own stock owned by a non-US person. A practical effect of the TCJA’s repeal of section 958(b)(4) was that non-US subsidiaries of foreign-parented groups were automatically classified as CFCs if the group also had a US subsidiary, without regard to the foreign parent’s ownership—an unintended and largely unworkable result. Reinstating section 958(b)(4) avoids this problem, which is a welcome development, among other things, from a tax compliance point of view.

The Act, however, includes a narrow exception to the reinstatement of section 958(b)(4) to address foreign-parented structures with “de-controlled” foreign subsidiaries partly owned by US subsidiaries. This is intended to address the core policy concern that had caused the deletion of section 958(b)(4) while eliminating the overbreadth that had resulted from that deletion.

Under current law, only US Shareholders that own, directly or indirect, stock of a foreign corporation on the last day of the year on which the corporation is a CFC are required to include in income their pro rata share of the corporation’s Subpart F income. The same holds for GILTI inclusions. Effective for taxable years of foreign corporations beginning after December 31, 2025, the Act changes this rule and instead determines Subpart F income and GILTI inclusions based on the number of days in a taxable year that a foreign corporation is a CFC and a US Shareholder owns, directly or indirectly, stock of such CFC, regardless of whether the US Shareholder owns stock of the foreign corporation on the last day of the year on which corporation is a CFC. However, the last day rule continues to apply to determine current year inclusions under section 956 of the Code. 

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Luc Moritz, an O’Melveny partner licensed to practice law in California; Alexander Anderson, an O’Melveny partner licensed to practice law in New York;  Billy Abbott, an O’Melveny partner licensed to practice law in California and New York; Dawn Lim, an O’Melveny counsel licensed to practice law in New York; and Arsalan Memon, an O’Melveny associate licensed to practice law in California, New Jersey, and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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