GILTI Tax Explained for US Expats

GILTI stands for Global Intangible Low-Taxed Income.

Despite the name, GILTI is often a misnomer for US expats. While the intangible part suggests it only applies to intellectual property or high-tech patents, the rule actually applies to virtually all ordinary business profits earned by a foreign corporation that exceed a specific return on tangible assets.

Key Components of the GILTI Definition:

• Global: It applies to income earned anywhere in the world outside the United States.
• Intangible: In the eyes of the IRS, any profit that exceeds a 10% return on your business’s tangible assets (like machinery or office buildings) is legally classified as intangible income.

• Low-Taxed: The rule was designed to target income sitting in tax havens. However, even if you pay a moderate tax rate in your country of residence, you may still trigger a US tax bill if you don’t utilize specific elections.
• Income: This refers to the net tested income of your foreign company, your revenue minus allowable business expenses.

 The GILTI rule essentially creates a minimum tax on foreign corporate earnings owned by US shareholders. It ensures that the US government gets its fair share of your foreign business profits in real-time, effectively ending the era of tax-free offshore deferral.

To determine if you are subject to GILTI (officially renamed to Net CFC Tested Income or NCTI as of 2026), you must meet specific IRS definitions regarding ownership and control. The tax is not based on your residency, but on your status as a US person owning a foreign business.

US Shareholders of Controlled Foreign Corporations

The tax applies if you are a US person who holds a significant stake in a foreign company.

Under Section 951A, two conditions must be met simultaneously for the GILTI rules to trigger:

Quick Reference: GILTI Eligibility Criteria for Expats

One of the most complex aspects of GILTI foreign corporation reporting is that you can be deemed to own shares held by family members. 

For example, if you own 5% of a company and your spouse owns 6%, the IRS considers you a 11% owner, crossing the threshold into US Shareholder status.

Calculating your GILTI is a multi-step process. In 2026, the formula has been simplified but also expanded, as certain deductions that previously lowered the tax bill have been eliminated.

Much of this information is first reported on Form 5471, where you disclose the financials of your foreign corporation, including income, expenses, and balance sheet details. 

From there, the actual GILTI computation is performed on Form 8992, which aggregates the results across all your controlled foreign corporations (CFCs).

The 2026 GILTI Calculation Formula

As of 2026, the formula has been streamlined but the tax floor has been raised. The most significant change is the elimination of the QBAI deduction for many taxpayers under the new Net CFC Tested Income (NCTI) regime.

Total Tested Income – Total Tested Loss = GILTI Inclusion

Key Concepts in the Calculation

To arrive at your final number, you must navigate these four pillars:

• Tested Income: This is the gross income of your foreign corporation minus allocable deductions (like business expenses and foreign taxes). Think of this as the taxable profit of your company under US rules.
• Tested Loss: If one of your foreign corporations loses money, that Tested Loss can be used to offset the Tested Income of another CFC you own, potentially reducing your overall GILTI exposure.
• QBAI (Qualified Business Asset Investment): Historically, you could subtract 10% of the value of your tangible assets (machinery, buildings) to reduce your tax.

• Foreign Tax Credits (FTC): This is your primary defense. You can claim a credit for the taxes your corporation already paid to a foreign government. In 2026, the haircut on these credits was reduced; you can now claim 90% of foreign taxes paid (up from 80% in previous years).

The High-Tax Exception

If your foreign corporation pays a local corporate tax rate of at least 18.9% (which is 90% of the 21% US corporate rate), you may be able to elect the High-Tax Exception. This allows you to exclude that income from the GILTI calculation entirely, potentially saving you from the complex math of Form 8992.

For many US expats, the GILTI tax is the most significant hurdle to running a business abroad. It fundamentally changed how the IRS views your foreign earnings.

Before these rules existed, you could often keep your business profits inside your foreign company to reinvest or save for the future without the US taking a cut. 

Today, that benefit has largely vanished. Under Section 951A, the US taxes those profits in the same year the company earns them, regardless of what you do with the money.

The “Taxed Before You Get Paid” Problem

The biggest issue for expats is that GILTI creates a tax bill on money you haven’t actually received. You are required to pay US tax on your company’s profits even if:

• The cash is still sitting in the company’s business bank account.
• You used the money to buy new equipment or hire employees.
• You never paid yourself a salary or a dividend.

Essentially, the IRS treats the company’s profit as your personal income. Without professional help—like making a Section 962 election—this dry income (income you haven’t physically pocketed) could be taxed at high US personal rates.

Common Affected Businesses

While the government originally designed these rules for massive tech corporations, the GILTI tax for expats now hits small, service-based businesses the hardest. 

In 2026, because you can no longer deduct a portion of your physical assets (the QBAI deduction), these businesses are even more exposed.

Consulting Companies

If you run a solo consulting firm in a country like the UK or Australia, you probably don’t own much more than a laptop. Because the IRS no longer gives you a free pass on profits for having physical equipment, every dollar of your consulting profit is now subject to GILTI.

Digital Nomad Businesses

Expats running software companies or selling digital products from countries with low or no local taxes (like the UAE) face a direct hit. Since you aren’t paying much tax locally, you won’t have foreign tax credits to lower your US bill.

Online Agencies

Marketing, SEO, and creative agencies usually have high profit margins. These profits now flow directly onto your personal US tax return as Tested Income, often leading to an unexpected tax bill in April.

E-commerce Companies

Even if you sell physical products, operating through a foreign corporation (like a Canadian Inc.) means your year-end profits are caught in the GILTI net.

Foreign Incorporated Freelancers

Many expats incorporate locally just to get a work visa or to pay into a local pension system. The IRS doesn’t consider your reasons; if you own the company, you are now a US Shareholder and must handle the heavy GILTI foreign corporation reporting requirements.

Comparison: How GILTI Rules Have Tightened (2026 Update)

This table highlights why 2026 marks a major shift for expat business owners:

If you own a foreign company, you can no longer hide money in it to avoid US taxes. The 2026 expansion means your US tax bill will likely go up unless you use specific strategies to protect your earnings.

While the GILTI tax rules in 2026 are broader than ever, several advanced planning strategies can help US expats reduce or even eliminate their US tax liability. These strategies focus on changing how the IRS views your income or your entity.

A Section 962 election allows an individual shareholder to be treated like a US corporation for tax purposes—but only for their GILTI and Subpart F income.

• Lower Tax Rate: Instead of being taxed at your individual marginal rate (which can be as high as 37%), your GILTI income is taxed at the 21% corporate rate.
• The Section 250 Deduction: By making this election, you unlock a 40% deduction on your corporate profits. This brings your effective US tax rate down to 12.6% (21% x 60%).
• Deemed-Paid Foreign Tax Credits: This is the biggest win. Without this election, individuals cannot use the taxes their company paid to a foreign government as a credit. With a 962 election, you can claim 90% of those foreign taxes as a credit against your US bill.

If you live in a high-tax country such as the UK, Germany, or Japan, you may not need to rely on complex deductions to manage GILTI exposure. 

Instead, you can elect to exclude high-taxed income from the GILTI calculation altogether. To qualify, your foreign corporation must be subject to an effective local tax rate of at least 18.9%, which represents 90% of the US corporate tax rate. 

When this threshold is met and the election is made, the qualifying income is excluded from your Section 951A calculation, which can significantly simplify reporting and may even eliminate the need to perform detailed computations on Form 8992.

A Check-the-Box election (Form 8832) tells the IRS to ignore your foreign corporation and treat it as a disregarded entity (like a sole proprietorship).

• Benefit: Since the company is no longer a corporation in the eyes of the IRS, GILTI no longer applies.
• Strategy: You can then use the Foreign Earned Income Exclusion (FEIE) to exclude up to $130,000 (2025 tax year limit) of your business profits from US tax.
• Risk: This may subject your profits to US Self-Employment Tax (15.3%) unless you live in a country with a Social Security Totalization Agreement with the US.

One of the simplest ways to reduce GILTI exposure for a foreign corporation is by lowering its tested income through strategic salary payments. 

By paying yourself a reasonable salary, you create a deductible business expense that reduces the company’s overall profit, which in turn lowers the amount subject to GILTI. 

At the same time, this approach offers a second benefit: the salary you receive can often be offset on your personal US tax return using tools like the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credits, potentially minimizing or eliminating your individual tax liability.

Comparison of GILTI Mitigation Strategies (2026)

While both GILTI and Subpart F are anti-deferral regimes designed to tax foreign profits in the year they are earned, they target different types of income.

Think of Subpart F as a scalpel, targeting specific passive income, while GILTI is a net, catching almost everything else that remains.

The Order of Operations

The IRS calculates these in a specific sequence:

Key Differences: GILTI vs. Subpart F

Key Differences for Expats

The most critical distinction for an expat business owner is how the tax is calculated. 

Subpart F is generally more expensive because it is taxed at your high individual tax rates without any special deductions.

However, GILTI is often more burdensome for service providers because it captures 100% of active business profits. In 2026, the removal of the tangible asset deduction (QBAI) means that even businesses with boots on the ground and physical offices can no longer shield any portion of their profits from the GILTI net.

Reporting GILTI tax for US expats is one of the most paperwork-intensive tasks in the tax code. Even if your final tax bill is 0, failing to file these forms can lead to automatic penalties starting at 10,000 dollars per form, per year.

In 2026, the forms have been updated to reflect the transition from GILTI to NCTI (Net CFC Tested Income) terminology.

Understanding how the GILTI tax applies in real-world situations is the best way to identify your level of risk. The 2026 rules have shifted the landscape significantly, primarily because the tax-free buffer for physical assets has been removed.

Here is how the rules typically play out across common US expat business structures.

US Freelancer with a Foreign Company

Many freelancers incorporate a foreign company, such as a Georgian LLC or a Portuguese Lda, to facilitate local residency or professionalize their operations.

• The Problem: If you are the sole owner, your company is a Controlled Foreign Corporation (CFC). Because service businesses usually own very few physical assets, nearly 100% of your profit is now categorized as NCTI.
• The 2026 Shift: Previously, you could shield a small amount of profit if you had a dedicated office. Now, every dollar of profit is potentially taxable in the US in the year it is earned.

UAE Free Zone Company

The UAE remains a popular hub for expats due to its 0% or 9% corporate tax rates.

• The Challenge: Because the UAE tax rate is often below the US minimum threshold, you will likely owe a top-up tax to the IRS.
• The 2026 Reality: With the US effective tax rate on NCTI rising to 12.6%, US owners of UAE companies will likely see a larger bill. Since there are few local taxes to use as credits, this is often a direct out-of-pocket expense for the expat.

UK Limited Company Owned by a US Citizen

The UK is a high-tax jurisdiction, but these rules still create a massive reporting burden.

• The Mechanism: The UK corporate tax rate is currently 19% or 25%. Under the High-Tax Exception, most US expats in the UK can elect to exclude their profits from the calculation because the UK rate is higher than the required 18.9% (which is 90% of the US 21% corporate rate).
• The Trap: Even if you owe 0 dollars in tax because of the high UK rates, you must still file Form 5471 and Form 8992 to report the income and claim the exception.

Canadian Incorporated Business

For Americans living in Canada, the interaction between the CRA and the IRS is complex but manageable.

• The Strategy: Most Canadian-incorporated US owners use a Section 962 election.
• The Result: This allows you to be taxed at corporate rates and claim 90% of the Canadian corporate taxes you paid as a credit against your US liability. In most cases, this wipes out the US bill, but it requires specialized accounting to sync the tax years of both countries.

Digital Nomad Running an Agency Abroad

If you run a marketing or SEO agency while moving between countries, you might not have a permanent tax home.

• The Risk: If your company is incorporated in a low-tax country like Panama or Estonia, the IRS views your profit as low-taxed income.
• The 2026 Solution: Without high local taxes to offset the bill, nomads often use a Check-the-Box election to treat the company as a transparent entity. This allows them to use the Foreign Earned Income Exclusion on their business profits, provided they meet the physical presence or bona fide residence tests.

Because the GILTI rules are so complex, many US expats discover their reporting obligations years late. The IRS currently uses advanced AI data-matching to identify Americans who own foreign corporations but have not filed Form 5471 or Form 8992.

If you have missed these filings, the penalties can be severe, often starting at $10,000 per year, per form. However, the IRS provides several paths to get back into compliance without facing heavy fines.

Streamlined Foreign Offshore Procedures

This is the gold standard for US expats who were unaware of their GILTI requirements.

• Who it is for: Expats who acted non-willfully (meaning you genuinely did not know about the law) and have lived outside the US for at least 330 full days in one of the last three years.
• The Benefit: You can catch up on the last three years of tax returns and six years of FBARs. The IRS waives all late-filing and accuracy-related penalties.
• The 2026 Update: Under the One Big Beautiful Bill Act (OBBBA), you must also ensure your catch-up filings account for the new NCTI definitions and the elimination of the asset buffer (QBAI).

Delinquent International Information Return Submission Procedures (DIIRSP)

If you filed your tax returns on time and paid all taxes due but failed to include required international information forms such as Form 5471, you may be eligible to use the Delinquent International Information Return Submission Procedures (DIIRSP). 

This option is intended for taxpayers whose only issue is missing forms, not unpaid tax.

The key limitation is that this relief is only available if no additional tax liability would have resulted from the missing GILTI reporting. 

If the omission would have triggered a tax bill, you cannot use DIIRSP and should instead consider the Streamlined Filing Compliance Procedures. To correct the issue, you must submit the missing forms by mail along with a statement explaining your reasonable cause for the delay.

Reasonable Cause

If you do not qualify for DIIRSP or other relief programs, you may still request penalty abatement based on reasonable cause. 

To do this, you must demonstrate that you exercised ordinary business care and prudence but were nevertheless unable to meet your filing obligations.

Valid reasons may include reliance on a qualified tax professional who provided incorrect advice, a serious illness, or the impact of a natural disaster. 

However, the IRS generally does not accept explanations such as forgetting to file or finding the rules too complex as sufficient justification for reasonable cause.

Summary of IRS Disclosure Options