What Is GILTI? Understanding the Tax Rule for U.S. Business Owners Abroad
If you’re a U.S. citizen running a business through a company outside the United States, you may have encountered the term GILTI — often without a clear explanation of what it actually means.
GILTI stands for Global Intangible Low-Taxed Income, a tax rule introduced in the 2017 Tax Cuts and Jobs Act (TCJA). The rule was designed to prevent U.S. companies from shifting profits to low-tax jurisdictions and deferring U.S. taxation indefinitely.
While the policy was largely aimed at multinational corporations, the rules now apply to many U.S. entrepreneurs who operate through foreign companies.
Understanding what GILTI tax is and how GILTI income is calculated is an important step in understanding the broader tax environment for Americans doing business internationally.
The System Before GILTI: Deferral of Foreign Profits
To understand why GILTI exists, it helps to back up and take in the whole picture, starting with understanding how the system worked before 2017.
Historically, U.S. shareholders of foreign corporations were often able to defer U.S. tax on foreign profits until those profits were repatriated to the United States.
In practical terms, that meant:
- A foreign corporation could earn profits abroad.
- Those profits could accumulate inside the company.
- U.S. tax was generally triggered only when the profits were distributed as dividends.
This structure allowed companies to delay U.S. taxation for years or even decades.
Large multinational companies became especially skilled at using this system. Many placed intellectual property (e.g., patents, software, brand assets) in low-tax countries such as Ireland or Bermuda, where profits could accumulate at relatively low tax rates.
From the perspective of U.S. policymakers, the result was a significant erosion of the U.S. tax base.
The 2017 Tax Reform and the End of Deferral
The Tax Cuts and Jobs Act of 2017 fundamentally changed this system.
Two major provisions were introduced:
1. The Section 965 Transition Tax
Before moving to a new system, the law imposed a one-time tax on previously untaxed foreign earnings held by U.S.-owned foreign corporations. This was known as the repatriation tax.
The idea was simple: before changing the rules, Congress required companies to pay tax on profits that had accumulated overseas under the old system.
2. A New World Order: GILTI
After the transition tax, the new rule was introduced.
Instead of allowing indefinite deferral, GILTI requires certain U.S. shareholders to include foreign corporate income in their U.S. taxable income every year, even if the profits remain inside the company.
This marked a major structural shift: Foreign corporate income was no longer always deferred.
In many cases, it became currently taxable to U.S. shareholders.
What Is GILTI Income?
At its core, GILTI income represents foreign corporate profits that must be included in a U.S. shareholder’s taxable income annually.
The technical calculation is complex, but the concept is straightforward.
First, the foreign corporation’s income is calculated. Then, certain adjustments are applied under U.S. tax rules.
Originally, the GILTI system assumed that companies could earn a 10% deemed return on tangible business assets without triggering GILTI. This return was based on a measure called Qualified Business Asset Investment (QBAI).
The reasoning was that profits tied to tangible investment (e.g. factories, equipment, buildings) were less likely to represent profit shifting. If your business owned a building, manufacturing equipment, etc., it would be rewarded with this deduction.
However, profits exceeding that threshold were treated as potentially “intangible” income and therefore subject to the GILTI inclusion.
In simplified terms:
Foreign corporate profits above the deemed return could be taxed currently in the United States, even if the money remained overseas.
What Is a GILTI Inclusion?
The term GILTI inclusion refers to the amount of income that must be reported by a U.S. shareholder on their tax return each year.
This inclusion happens even if the foreign corporation does not distribute any cash.
Before GILTI, profits could remain inside a foreign corporation without triggering U.S. tax. After GILTI, those profits may still be taxed to the shareholder even if no dividend is paid.
For many business owners abroad, this was the moment the rules felt very different.
Who Does GILTI Apply To?
GILTI generally applies to U.S. shareholders of Controlled Foreign Corporations (CFCs).
A CFC is typically defined as a foreign corporation where:
- More than 50% of the company is owned by U.S. shareholders, and
- Each relevant U.S shareholder owns at least 10% of the company.
This structure is common among Americans living abroad who:
- Incorporate a local business in Europe
- Operate through a foreign limited company
- Own shares in an overseas startup or investment vehicle
Many expat entrepreneurs do not realize that simply incorporating abroad can place them within the CFC framework, which then introduces GILTI considerations.
GILTI and Small Business Owners Abroad
One of the unexpected consequences of the 2017 reform is that rules designed for large multinational companies also apply to smaller businesses run by Americans overseas.
For example, a U.S. citizen living in Europe might form a company to operate locally, hire employees, and pay corporate tax in their country of residence.
From a local perspective, this is simply normal business activity.
From a U.S. tax perspective, however, that company may still be treated as a controlled foreign corporation, and the shareholder may still have a GILTI inclusion each year.
In most cases, an individual with a GILTI inclusion is not allowed to use foreign tax credits to offset much of the U.S. tax liability. The legal entity (the foreign corporation) that pays the foreign tax is separate from the U.S. shareholder who has to include the income. In other cases, additional tax may arise depending on tax rates and ownership structure.
The key point is that GILTI does not distinguish between multinational corporations and small operating businesses. It applies based on ownership rules.
How the Rules Are Continuing to Evolve
International tax policy has continued to evolve since GILTI was introduced.
Global coordination through OECD tax initiatives and ongoing U.S. regulatory changes have reshaped how foreign corporate income is categorized and reported.
In practice, some terminology and calculation methods have shifted toward broader concepts such as CFC-tested income, reflecting an expansion of the anti-deferral framework.
While the underlying policy objective remains the same (preventing profit shifting to low-tax jurisdictions) the technical implementation continues to evolve. Even the name has changed to Net CFC Tested Income (NCTI, pronounced “neck-tie”) to move away from the focus on intangible income and dial in on profits. Instead of accusing owners of foreign business of being “GILTI” of tax evasion, Congress has preferred to tighten the restrictions, which can feel like wearing a neck-tie on a hot Spanish afternoon.
For business owners, this means the rules are not static. Understanding the structure of GILTI is important, but keeping current with regulatory changes is equally important.
The introduction of GILTI fundamentally changed how the United States taxes foreign corporate income. Before 2017, foreign profits could often remain inside a company for years without triggering U.S. tax. Today, those profits may be taxed annually to the U.S. shareholder, even if they are not distributed.
For Americans operating businesses abroad, this means:
- Incorporating overseas does not eliminate U.S. tax exposure.
- Ownership of a foreign corporation may create annual reporting and income inclusion requirements.
- Structure, elections, and planning decisions can materially affect the outcome.
Understanding what GILTI is and how it applies to foreign corporations owned by U.S. taxpayers is now an essential part of cross-border business planning.
About the Author
If you’re a U.S. business owner, entrepreneur, or shareholder in a foreign company seeking to connect with a U.S. tax advisor specializing in people with complex tax profiles, learn more about Nicolás Castillo, CPA, and how his company, Rook International CPAs and Advisors, supports international U.S. business owners.