GILTI (Net CFC Tested Income) for Individual Owners
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
GILTI — global intangible low-taxed income, renamed net CFC tested income for tax years beginning after 2025 — requires U.S. shareholders of a controlled foreign corporation to include most of the company's active profit in their own income each year, distributed or not. It was designed to stop multinationals parking profit in low-tax countries. It applies equally to an American who owns a small company abroad.
On this page
- Which companies does it reach?
- How is the inclusion computed?
- Why are individuals hit harder than corporations?
- What does the Section 962 election do?
- What is the high-tax exclusion?
- What happens when the company distributes the earnings?
- How does this interact with the foreign earned income exclusion?
- Frequently asked questions
- Next step
Which companies does it reach?
Any controlled foreign corporation — a foreign company more than 50% owned, by vote or value, by U.S. persons who each own 10% or more. A one-owner company abroad is a CFC by definition. Each U.S. shareholder with 10% or more computes an inclusion for their share.
How is the inclusion computed?
On Form 8992, with inputs from Form 5471. The starting point is the CFC's "tested income" — its gross income minus deductions, excluding a few categories such as subpart F income and income effectively connected with a U.S. business. After the 2025 changes, the former deemed return on tangible assets (the QBAI exemption) no longer reduces the figure, so essentially all tested income is included. Your share is included in your gross income for the year.
Why are individuals hit harder than corporations?
Because the two main offsets were written for corporations:
- The deduction. Corporate shareholders deduct a portion of the inclusion under Section 250, lowering the effective rate. Individuals get no deduction by default.
- The foreign tax credit. Corporations credit most of the foreign corporate tax the CFC paid against the inclusion. Individuals, by default, credit none of it — the company paid the tax, not them.
So an individual with a profitable company in a country that already taxes it can owe full U.S. ordinary-rate tax on the same profit, with no credit. This is the result the elections below are meant to fix.
What does the Section 962 election do?
It lets an individual be taxed on the inclusion as if they were a domestic corporation: the corporate rate applies, the Section 250 deduction becomes available, and the CFC's foreign taxes become creditable (subject to the haircut that applies to corporations). The price is a second layer of tax when the company later distributes the earnings — the election defers rather than eliminates. It's made annually, per shareholder, and is usually worthwhile when the company pays meaningful foreign corporate tax.
What is the high-tax exclusion?
An election to exclude from tested income any item that was subject to foreign tax at a rate above a threshold set relative to the U.S. corporate rate. For companies in high-tax countries — Germany, Israel, much of Europe — it can remove the inclusion entirely, leaving only Form 5471 reporting. It's made on the Form 5471 and is binding for related shareholders.
What happens when the company distributes the earnings?
Earnings already included are "previously taxed" and come out tax-free to a shareholder who didn't make the 962 election (though currency gain or loss on the distribution is recognized). For a 962 electing shareholder, the distribution is taxed again, less the tax already paid, which is the trade-off noted above.
How does this interact with the foreign earned income exclusion?
It doesn't. The inclusion is not earned income and can't be excluded. A salary the company pays you for work performed abroad is earned income and can be — which is one reason owner-operators often pay themselves a salary rather than leaving profit in the company.
Frequently asked questions
My company is tiny. Does this really apply?
Yes. There is no size exception. A consulting company with one owner and modest profit computes the same inclusion.
Can I avoid it by electing disregarded-entity treatment?
Yes — a disregarded entity isn't a CFC, so there's no inclusion; its income is simply yours on Schedule C, with self-employment tax and the exclusion or credit available. For many one-owner companies that's the cleaner result.
Is the inclusion taxed at capital-gains rates?
No. It is ordinary income to an individual, unless the 962 election applies corporate treatment.
What forms are involved?
Form 5471 (with its schedules), Form 8992 for the computation, and — under the 962 election — Form 8993 for the deduction and Form 1118 for the credit for the company's foreign tax.
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. If you own a company abroad and want to know whether this inclusion applies and which election fits, our team can model the alternatives before the year closes. See pricing or book a free fit call.
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