What’s the Difference Between FDII (Now FDDEI) and GILTI (Now NCTI)?
Applicable to pre-2026 tax years, the foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) regimes impact the total U.S. taxation of U.S. multinational corporations’ global operations. While the GILTI regime imposes an additional U.S. tax on foreign corporation earnings, in contrast FDII was designed to reduce the effective U.S. tax rate on certain types of foreign-source income.
New tax law passed in 2025 through legislation known as the One Big Beautiful Bill Act (OBBBA) streamlines and changes the naming of these two rules. Beginning in 2026, FDII will become known as foreign-derived deduction-eligible income (FDDEI). Simultaneously, the GILTI regime will become known as net CFC tested income, or NCTI.
Understanding how these rules interact is key for tax professionals developing a corporate tax planning strategy that puts their business in an optimal tax position.
[For concise summaries of tax law changes and side-by-side comparisons with the law prior to enactment, download our One Big Beautiful Bill Act Roadmap.]
Comparing FDII/FDDEI and GILTI/NCTI
The FDII/FDDEI tax deduction rules operate in tandem with the GILTI/NCTI rules under §951A. But while the FDII and GILTI regimes have similar policy objectives and incorporate similar calculations, they are each applied to foreign income differently:
- FDII is the portion of a domestic corporation’s intangible income relative to total net income that’s derived from serving foreign markets. Section 250 allows a domestic corporation to deduct 37.5% of the excess of the corporation’s income from export sales over a fixed return on its tangible depreciable assets for the year.
- When transitioning to the FDDEI rules in 2026, while retaining the basic intent of FDII, the new rules remove the element involving tangible assets, while also changing the Section 250 deduction percentage to 33.34%.
- GILTI requires U.S. shareholders of controlled foreign corporations (CFCs) to include in their income (in a manner similar to the inclusion of Subpart F income) the excess of the CFC’s “tested income” over the shareholder’s share of the deemed tangible income return of its CFC. Section 250 allows shareholders to claim a 50% deduction of their GILTI inclusion.
- Similar to the FDDEI changes noted above, beginning in 2026, the new FCTI rules remove the GILTI deemed tangible income return element, while also changing the Section 250 deduction percentage to 40%.
What’s included in QBAI?
Both the FDII and GILTI regimes use the term “qualified business asset investment” (QBAI) to refer to the tangible depreciable asset base.
FDII permits deduction of a specified percentage of the excess income derived from export sales above a fixed return on QBAI, while GILTI requires inclusion of the U.S. shareholders’ share of the excess of CFC income over the fixed return on QBAI.
As noted above, the QBAI impact on these tax regimes is removed beginning in 2026.
How did the One Big Beautiful Bill Act (OBBBA) impact FDII?
Enacted in 2025, the One Big Beautiful Bill Act renamed FDII to FDDEI and streamlined the calculation by, in part, removing the multiplication of deemed intangible income (DII) by the foreign derived ratio. It also removes DII, and consequently deemed tangible income return, from the FDII calculation.
The law expands the exceptions to deduction eligible income (DEI) from six to eight categories and reduces the types of expenses considered when calculating DEI.
Additionally, the law reduces the deduction rate of FDDEI to 33.34%, changing the effective tax rate from 13.125% to a rounded 14%.
The changes to FDII are applicable to taxable years beginning after Dec. 31, 2025.
[To understand all the tax changes and implications from the OBBBA, download our One Big Beautiful Bill Act Roadmap.]
What qualifies as FDII/FDDEI income?
Under the broad definition of FDII, a corporation’s foreign-derived income may include sales of intangible or tangible products (whether manufactured or purchased for resale by the corporation) to a foreign person for use outside the U.S., as well as income derived from a broad range of services.
This general structure of eligible foreign income is retained following the 2026 transition to FDDEI.
What income is excluded from FDII/FDDEI?
Certain income is categorically excluded from qualifying as FDII:
- Amounts included in gross income under §951(a)(1) (Subpart F and investments in U.S. property)
- GILTI included in gross income
- Financial services income
- Any dividend received from a controlled foreign corporation with respect to which the corporation is a U.S. shareholder
- Any domestic oil and gas extraction income
- Any foreign branch income
- When transitioning to FDDEI, new rules will also specifically exclude the income from sales of both intangible assets, and non-inventory tangible assets.
Can you take a foreign tax credit against GILTI/NCTI income?
There is a 20% reduction to GILTI-related foreign income taxes eligible for credit in the U.S. Beginning in 2026, the NCTI rules will change this reduction percentage to 10%, increasing the amount of foreign income taxes eligible for credit.
It’s important to remember that FDII calculations on foreign income are interrelated with the effect of foreign tax credits, which can provide an offset when U.S. tax rules impose tax on the same income earned in foreign countries.
However, foreign tax credits are limited annually to the amount of U.S. tax on foreign source taxable income as computed under U.S. tax principles. Therefore, if the U.S. person pays more tax to the source country on the foreign source income than is due to the U.S. on the same foreign source income, the U.S. will limit the amount of taxes paid to the source country that can be used as credits against U.S. tax liability.
Foreign income taxes not credited because of the limitation can sometimes be carried back or forward to other taxable years, subject to the limitations for those years.
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