IRC 951A and NCTI tax: What US expat business owners must know in 2026
If you own part of a foreign company, the US may tax you on that company's profits even if it never pays you a dividend. IRC 951A is the rule that makes this happen, and understanding it is the single most important step an expat business owner can take to avoid unexpected tax bills and penalties.
This guide explains how the IRC 951A inclusion works and how the net CFC tested income calculation flows from your foreign company's books to your US return.
It covers what changed when the One Big Beautiful Bill Act rebranded the regime in 2025. Every figure below uses tax year 2025 rules unless labeled otherwise.
What is IRC 951A? NCTI overview
IRC 951A is the statutory backbone of the GILTI regime, targeting low-taxed foreign profits earned by CFCs owned by US shareholders.
Section 951A was enacted as part of the Tax Cuts and Jobs Act in 2017. Before that, US shareholders of controlled foreign corporations could defer US tax on active business income indefinitely – the US only taxed certain passive or mobile categories of income under Subpart F, codified in IRC 951.
IRC 951A closed that gap. It requires US shareholders to include their pro-rata share of a CFC's residual profits – now formally called net CFC tested income – in US gross income every year, regardless of whether those profits are distributed.
The inclusion targets profits that are taxed at a low effective rate abroad. In practical terms, if your foreign company earns operating income and pays little or no foreign tax on it, IRC 951A ensures the US taxes the difference.
International tax rules require US persons to report income from every country. IRC 951A is one of the most consequential of those rules for expat business owners because it can create a US tax liability on income you never received in cash.
What does NCTI stand for – and how does it relate to GILTI?
NCTI stands for net CFC tested income – the aggregate of all positive tested income from CFCs after subtracting tested losses. It is the income base on which the IRC 951A inclusion is calculated.
The distinction matters because the terms NCTI and GILTI refer to different parts of the same regime:
- NCTI – net CFC tested income – is the computational input. It is the total tested income across all your CFCs, reduced by tested losses.
- GILTI – Global Intangible Low-Taxed Income – is the inclusion amount. It is what you actually report on your US return after subtracting the net deemed tangible income return, or NDTIR, from NCTI.
- The IRC 951A inclusion is the statutory mechanism that pulls the GILTI/NCTI amount into your US gross income.
Some practitioners abbreviate net CFC tested income as CTI tax or NCTI tax – both refer to the same IRC 951A inclusion.
The One Big Beautiful Bill Act, signed July 4, 2025, rebranded the entire regime as NCTI tax, effective for tax years beginning after December 31, 2025. For tax year 2025 returns filed in 2026, the law, IRS forms, and instructions still use the term GILTI.
Unlike CIT in income tax contexts – which refers to the corporate income tax a foreign country imposes on your CFC – the NCTI inclusion is a US-side calculation that applies to individual shareholders as well as corporations.
The distinction between NCTI vs. GILTI is largely one of labeling, but the timing matters. For tax year 2025 returns filed in 2026, the operative term is still GILTI; you'll start seeing "NCTI" on IRS guidance and tax software starting with tax year 2026 returns.
Who must include IRC 951A income? Net CFC tested income applicability and ownership thresholds
Any US person who owns at least 10% of a CFC – directly, indirectly, or constructively – is potentially subject to an IRC 951A inclusion.
Two definitions control whether you are affected:
- US shareholder: A US person owning 10% or more of the total combined voting power or value of a foreign corporation. "US person" includes citizens, green card holders, resident aliens, domestic partnerships, corporations, estates, and trusts.
- Controlled foreign corporation – CFC: A foreign corporation more than 50% owned – by vote or value – by US shareholders. A single US person owning more than 50% makes the entity a CFC. Multiple US shareholders each owning 10% or more can collectively push the entity past the 50% threshold.
Constructive ownership rules under IRC 958 can attribute shares owned by family members, partnerships, corporations, trusts, and estates to you. This means you may be treated as a US shareholder even if your direct ownership is below 10%.
Pass-through entity shareholders – partners in a partnership or S corporation shareholders that own CFC stock – must include their pro-rata share of any Sec. 951A income on their individual returns.
A foreign corporation with a single US owner holding more than 50% is automatically a controlled foreign corporation, and that owner is subject to the IRC 951A inclusion.
How IRC 951A works: The step-by-step NCTI calculation
The Section 951A inclusion equals the US shareholder's pro-rata share of NCTI minus the net deemed tangible income return – the portion of foreign profit attributable to tangible assets is exempt.
The IRC 951A calculation follows five steps:
- Determine each CFC's tested income or tested loss. Start with the CFC's gross income, subtract allocable deductions, and remove excluded categories – Subpart F income, ECI, high-tax exclusion income, related-person dividends, and foreign oil and gas extraction income. The result is 951A tested income if positive, or a tested loss if negative.
- Aggregate to arrive at NCTI. Add up tested income from all your CFCs and subtract tested losses. The result is your net CFC tested income. The net tested income under the GILTI regime is the starting point for computing the IRC 951A inclusion.
- Calculate the net deemed tangible income return – NDTIR. For tax year 2025, start with 10% of the applicable aggregate QBAI used in the Form 8992 calculation. Then reduce that deemed tangible income return by specified interest expense, generally the excess of tested interest expense over tested interest income. The resulting amount, subject to the Form 8992 rules, is the net deemed tangible income return.
- Subtract NDTIR from NCTI. The result is your GILTI inclusion amount – the Section 951A inclusion that flows to your US return. If NDTIR exceeds NCTI, the inclusion is zero.
- Apply the Section 250 deduction and foreign tax credits. C-corporations deduct 50% of the GILTI inclusion for tax year 2025, reducing the effective tax rate. Deemed paid foreign tax credits under IRC 960 offset remaining US tax. Individuals do not receive the Section 250 deduction unless they make a Section 962 election.
Tested income and tested loss: Definitions and key exclusions
Tested income is a CFC's gross income minus allocable deductions, but only after stripping out Subpart F income and other specifically excluded categories.
The following items are excluded from tested income:
- Subpart F income already included under IRC 951
- Income effectively connected with a US trade or business
- Income subject to a high-tax exclusion election
- Dividends received from related persons – as defined in IRC 954(d)(3)
- Foreign oil and gas extraction income
If a CFC's deductions exceed its gross income after these exclusions, the result is a tested loss. Tested losses from one CFC offset tested income from other CFCs when computing NCTI at the shareholder level.
Each CFC's 951A tested income is calculated separately on Schedule I-1 of Form 5471.
Qualified business asset investment: The tangible asset exemption
QBAI is the mechanism that shields a normal return on tangible assets from the IRC 951A inclusion – only profits above that deemed return are subject to US tax.
Qualified business asset investment is the average of a CFC's aggregate adjusted bases in specified tangible property used in a trade or business, measured at the close of each quarter of the CFC's tax year.
Only property for which a depreciation deduction is allowable under IRC 167 qualifies – meaning cash, financial assets, inventory, and land do not count.
Based on a common TFX client scenario: A US expat owns 100% of a manufacturing CFC with $4 million in QBAI. The deemed tangible income return is 10% of $4 million, or $400,000 for tax year 2025.
If the CFC's tested income is $600,000, the GILTI inclusion is $600,000 minus $400,000, or $200,000. The QBAI exemption reduces the taxable amount by two-thirds.
For tax year 2026 and beyond: The One Big Beautiful Bill Act repeals the QBAI exemption entirely. Starting with returns for tax year 2026, there is no deemed tangible income return – the full NCTI amount is subject to the inclusion. This is a significant change for CFCs with substantial tangible assets.
Tested interest expense and tested interest income under IRC 951A
Tested interest expense under IRC 951A reduces your net deemed tangible income return (NDTIR), not your QBAI. CFCs with significant debt financing end up with a smaller NDTIR and therefore a larger IRC 951A inclusion, even though their QBAI itself is unchanged.
Tested interest expense is the interest expense properly allocable to a CFC's tested income, net of any interest income the shareholder takes into account. For tax year 2025, this amount is subtracted from 10% of QBAI to arrive at NDTIR, so it shrinks the exemption available, but it does not reduce the QBAI figure itself.
Tested interest income at the US shareholder level offsets tested interest expense across the CFC group. If one CFC earns interest income on intercompany loans while another pays interest expense, the netting can reduce the overall impact on QBAI.
The logic is direct: a CFC that finances its tangible assets with debt has less of its own capital at risk, so the deemed return exemption is reduced proportionally.
For tax year 2026 and beyond, the QBAI exemption is repealed, which makes the tested interest expense adjustment irrelevant going forward. This simplifies the calculation but removes a planning lever that benefited asset-heavy CFCs.
IRC 951A vs. IRC 951: NCTI vs Subpart F – key differences
Unlike Subpart F under IRC 951, which targets specific categories of passive or mobile income, IRC 951A casts a broader net over all residual CFC profits not already taxed under Subpart F.
The two regimes target different types of CFC income. Here is a side-by-side comparison:
| Feature | IRC 951 – Subpart F | IRC 951A – GILTI/NCTI |
|---|---|---|
| Income targeted | Specific categories: passive income, foreign base company income, insurance income | All residual CFC profits not captured by Subpart F |
| Minimum foreign tax rate threshold | No general threshold – income is included regardless of foreign tax rate | High-tax exclusion available at 18.9% effective rate, tax year 2025 |
| Tangible asset exemption | No QBAI exemption | NDTIR = 10% of QBAI, tax year 2025; repealed for tax year 2026+ |
| Section 250 deduction | Not available | 50% for C-corporations, tax year 2025; 40% for tax year 2026+ |
| Computation level | CFC-by-CFC | Aggregated across all CFCs at the US shareholder level |
Both inclusions flow through Form 5471 and are reported by the US shareholder on their Form 1040 or Form 1120. Subpart F income is computed first, and any income already included under Subpart F is excluded from the IRC 951A tested income calculation.
If you own interests in specified foreign corporations, both regimes may apply simultaneously to different portions of the same CFC's income.
The Section 250 deduction: Reducing your NCTI inclusion
The Section 250 deduction is available only to C-corporations – individual expat business owners must make a Section 962 election to access a comparable benefit on their IRC 951A inclusion.
For tax year 2025, US C-corporations may deduct 50% of their GILTI inclusion under IRC 250. This effectively reduces the corporate tax rate on GILTI from 21% to 10.5%.
Individuals who own CFCs directly do not automatically receive this deduction.
Without a Section 962 election, an individual expat faces the full ordinary income tax rate – up to 37% – on their IRC 951A inclusion. The Section 250 deduction is one of the primary reasons the Section 962 election exists.
For tax year 2026 and beyond: The OBBBA reduces the Section 250 deduction from 50% to 40%, raising the effective corporate rate on NCTI from 10.5% to 12.6%.
IRC 951A reporting requirements: Form 5471 and Form 8992
Every US shareholder of a CFC must comply with Sec. 951A by filing Form 5471 and Form 8992 – failure to file can result in substantial penalties, and, barring reasonable cause, the statute of limitations on the entire tax return stays open indefinitely
Meeting your 951A reporting requirements means filing two key forms:
- Form 5471 – Filed by every US shareholder of a CFC. It reports the CFC's income, balance sheet, and ownership structure. Schedule I-1 calculates tested income and QBAI for IRC 951A purposes. A separate Form 5471 is required for each CFC.
- Form 8992 – The US shareholder-level worksheet that computes the GILTI/NCTI inclusion by aggregating tested income, tested losses, and QBAI across all CFCs. The result flows to your Form 1040 or Form 1120.
Attachment – Both forms are filed as attachments to your US tax return. If you make a Section 962 election, you attach the election statement to the same return.
Penalties for failure to file Form 5471 – The IRC 6038 penalty is $10,000 per form per annual accounting period. If you still have not filed 90 days after the IRS mails a notice of failure, an additional $10,000 is charged for each 30-day period the failure continues, up to a maximum additional penalty of $50,000 per form.
US expats who have missed prior-year filings should consider the Delinquent International Information Return Submission Procedures – DIIRSP. This program allows you to come into compliance and potentially avoid penalties.
Deemed paid foreign tax credits under IRC 960 and IRC 951A
The GILTI foreign tax credit basket is separate from the general limitation basket, meaning excess credits in one basket cannot offset tax in the other.
US C-corporations and individuals making a Section 962 election may claim a deemed paid foreign tax credit under IRC 960 for taxes paid by the CFC on tested income.
This credit reduces the US tax on the IRC 951A inclusion dollar-for-dollar, subject to two important limitations:
- Haircut: For tax year 2025, only 80% of the foreign taxes paid on tested income are creditable. The remaining 20% is permanently lost. For tax year 2026+, the OBBBA improves this to 90% creditable – a 10% haircut.
- Separate basket: The GILTI foreign tax credit falls in its own basket under Section 904(d)(1)(A). Excess credits in the GILTI basket cannot offset tax in the general limitation basket, and vice versa.
The practical effect: if your CFC operates in a country with a tax rate above 13.125% for tax year 2025, the foreign tax credits may fully offset the US tax on the IRC 951A inclusion.
If the foreign rate is lower, you will owe the difference to the IRS.
Accurate timing of foreign income and taxes paid is critical to maximizing these credits. Mismatched tax years between the CFC and the US shareholder can result in lost credits.
The Section 962 election: How individual expats access corporate-rate benefits
A Section 962 election can dramatically reduce an individual expat owner's effective tax rate on IRC 951A income – but it creates a deferred second-layer tax on future CFC distributions.
The Section 962 election is the primary tool individual CFC owners use to reduce their IRC 951A tax burden. Here is how it works:
- The individual elects to be taxed as a domestic corporation on IRC 951A and Subpart F inclusions for that tax year.
- This unlocks the Section 250 deduction – 50% for tax year 2025 – reducing the effective rate from up to 37% to approximately 10.5%.
- The individual also gains access to deemed paid foreign tax credits under IRC 960, which can further reduce or eliminate the US tax.
- The GILTI high-tax exclusion is elected by the CFC's controlling domestic shareholders under the final regulations and is binding on the affected US shareholders. Special consistency rules apply to CFC groups. An election may also be revoked under the regulatory procedures, so it is not irrevocable for the tax year in the manner stated here.
The catch: When the CFC actually distributes the earnings that were previously included under IRC 951A, a second layer of tax may apply. The distribution is treated as a dividend to the extent it exceeds the tax already paid at the corporate-equivalent rate.
IRC 951A tax minimization strategies for expat business owners
Maximizing QBAI is often the single most effective strategy for reducing an IRC 951A inclusion – every dollar of qualifying tangible asset basis reduces the taxable GILTI amount.
Five strategies expat business owners should evaluate with their tax advisor:
- Maximize QBAI by investing in tangible depreciable property within the CFC. Equipment, machinery, and buildings qualify. Cash, financial instruments, and inventory do not. For tax year 2025, every $1 of QBAI generates a $0.10 reduction in the GILTI inclusion via the NDTIR. This strategy loses its effect for tax year 2026+ when the QBAI exemption is repealed.
- Elect the high-tax exclusion for CFCs paying foreign tax above 18.9%. The threshold is 90% of the 21% US corporate rate. If a CFC's tested unit has an effective foreign tax rate above this level, you can elect to exclude that unit's income from tested income entirely. The election is made annually, and it must be applied consistently to every CFC you and your related parties commonly control, not just to the one CFC you'd like to exclude.
- Make a Section 962 election to access the Section 250 deduction and deemed paid foreign tax credits. This is the most common strategy for individual expat CFC owners.
- Use the check-the-box election to restructure entity classification. Electing to treat a foreign entity as a disregarded entity or partnership can change how income flows for IRC 951A purposes. This is particularly relevant for specified foreign corporations where the default classification may not be optimal.
- Consider CFC grouping to offset tested income with tested losses across multiple CFCs. If you own multiple foreign entities, a loss in one CFC directly reduces the taxable NCTI from profitable CFCs.
High-tax exclusion election under the final NCTI regulations
The high-tax exclusion election is a powerful tool for CFCs operating in high-tax jurisdictions – but it requires careful annual analysis because it is irrevocable once made for the year.
The final 951A regulations allow a US shareholder to elect to exclude from tested income any item of a CFC's gross income that was subject to foreign income tax at an effective rate above 18.9%. The election:
- Is made annually on the US shareholder's tax return.
- Is measured on a tested-unit basis, not item-by-item.
- Must be applied consistently across every CFC commonly controlled by the same US shareholders, not just CFCs that file a consolidated corporate return together.
- Is irrevocable once made for that tax year.
The effective rate test uses actual taxes paid by the CFC, not the statutory rate of the foreign country. Deductions, credits, and incentive regimes in the foreign jurisdiction can push the effective rate below the statutory rate, disqualifying income that appears to be high-taxed on paper.
For expats with CFCs in countries like Germany – effective corporate rate around 30% – Japan – around 30% – or France – 25% – the high-tax exclusion often eliminates the IRC 951A inclusion entirely on operating income.
NCTI tax under the One Big Beautiful Bill Act: 2025 legislative changes
The One Big Beautiful Bill Act, signed July 4, 2025, made the most significant changes to IRC 951A since the TCJA enacted it in 2017. It is the largest reform to the CFC inclusion regime since the Section 965 transition tax.
The NCTI tax rebranding signals a policy shift toward treating the IRC 951A inclusion as a standalone minimum tax rather than an anti-deferral add-on.
The changes take effect for tax years beginning after December 31, 2025 – meaning they first apply to tax year 2026 returns filed in 2027. For tax year 2025 returns filed in 2026, the pre-OBBBA rules still apply.
Key changes for tax year 2026+:
- GILTI renamed to NCTI. The inclusion is now officially "Net CFC Tested Income Tax."
- QBAI exemption repealed. There is no longer a deemed tangible income return. The full NCTI amount is subject to the inclusion, regardless of how much tangible property the CFC owns.
- Section 250 deduction reduced from 50% to 40%. The effective corporate rate on NCTI rises from 10.5% to 12.6%.
- IRC 960 haircut improved from 20% to 10%. Corporations and Section 962 electors can now credit 90% of foreign taxes paid on tested income, up from 80%.
IRC 951A and the effective tax rate: The NCTI effective tax rate explained
Without a Section 962 election, an individual expat can face an effective US tax rate on IRC 951A income that is significantly higher than the rate a C-corporation pays on the same income.
The NCTI effective tax rate depends on three variables: the gross inclusion amount, the Section 250 deduction, and available foreign tax credits. Here is how the rates compare:
For tax year 2025:
- C-corporation: 21% statutory rate, reduced by the 50% Section 250 deduction to an effective 10.5%. With sufficient foreign tax credits, the effective rate can reach zero.
- Individual without Section 962: Up to 37% ordinary income rate. No Section 250 deduction and no deemed paid foreign tax credits. This is the worst-case scenario for an expat CFC owner.
- Individual with Section 962: Taxed at the corporate-equivalent 10.5% rate, with access to deemed paid credits. The OB3 NCTI effective tax rate concept – the blended rate after all offsets – is most favorable in this scenario.
For tax year 2026+ under the OBBBA:
- C-corporation: Effective rate rises to 12.6% – calculated as 21% x 60%.
- Individual with Section 962: Effective rate rises accordingly, but the improved 90% FTC haircut partially offsets the increase.
IRC 951A for expat business owners: Common scenarios and pitfalls
Cash and financial assets held by a CFC do not qualify as QBAI – meaning investment-heavy CFCs receive no tangible asset exemption and face the maximum IRC 951A inclusion.
Based on TFX client scenarios:
Scenario 1 – German GmbH with no dividend. A US expat in Berlin owns 100% of a German GmbH earning EUR 200,000 in operating income. The GmbH pays no dividend.
The absence of a dividend does not prevent a Section 951A inclusion. For tax year 2025, however, the amount included is not automatically the GmbH's full tested income. The calculation must account for the shareholder's net CFC tested income, the applicable QBAI and NDTIR rules, and any valid high-tax exclusion election. A Section 962 election combined with deemed paid credits on German corporate tax – approximately 30% – would likely eliminate the US tax entirely.
Scenario 2 – Singapore holding company with cash. A US shareholder owns 60% of a Singapore holding company with $2 million in tested income and $5 million in cash and securities.
None of the cash or securities qualifies as QBAI. The NDTIR is based only on depreciable tangible property, which in this case is minimal. The full tested income is included under IRC 951A.
Scenario 3 – Below the 10% threshold. A US person owns 8% of a foreign corporation. Because ownership is below the 10% US shareholder threshold, IRC 951A does not apply. Subpart F also does not apply at the shareholder level. The US person reports only actual dividends received.
Scenario 4 – Failure to file Form 5471. A US expat fails to file Form 5471 for three years. The $10,000-per-form penalty applies to each year.
More significantly, the statute of limitations on the entire tax return can remain open indefinitely until the forms are filed. If the IRS doesn't accept a reasonable-cause explanation for the delay, it can audit any item on those returns, not just the international information, with no time limit.
This extension isn't automatic, though: when the missed filing was due to reasonable cause and not willful neglect, only the items tied to that filing stay open, not the whole return. Proving reasonable cause takes documentation, so work with a tax professional if this applies to you.
Aggregate vs. per-CFC approach: How NCTI is computed across multiple CFCs
Owning multiple CFCs can be advantageous under IRC 951A – tested losses in one CFC directly reduce the taxable NCTI from profitable CFCs, unlike Subpart F which is computed CFC-by-CFC.
The IRC 951A inclusion is computed at the US shareholder level by aggregating tested income and tested losses across all CFCs. If CFC A has $500,000 in tested income and CFC B has a $200,000 tested loss, the net CFC tested income is $300,000 – not $500,000.
QBAI is also aggregated across all CFCs. A CFC with significant tangible assets but low income contributes to the overall NDTIR, potentially shielding income from a different CFC with fewer tangible assets.
This aggregation mechanic creates planning opportunities. Structuring new foreign ventures as separate CFCs rather than branches can create tested loss offsets that reduce the overall IRC 951A inclusion.
FAQs about net CFC tested income
IRC 951A requires US shareholders who own 10% or more of a controlled foreign corporation to include their share of the CFC's low-taxed profits in US income each year – even if the CFC does not pay a dividend. It is the Code section behind the GILTI/NCTI regime.
Any US person – citizen, green card holder, or resident alien – who directly, indirectly, or constructively owns at least 10% of a CFC's voting power or value. Partnerships and S corporations that own CFC stock pass the inclusion through to their partners or shareholders.
NCTI – net CFC tested income – is the computational input: total tested income minus tested losses. GILTI is the inclusion amount after subtracting the net deemed tangible income return from NCTI. The OBBBA renamed the regime to NCTI, so both terms now refer to the same IRC 951A framework.
QBAI is the average of a CFC's aggregate adjusted tax bases in depreciable tangible property – specifically, IRC 167 property – used in a trade or business, measured quarterly. Cash, financial assets, and inventory are excluded. For tax year 2026+, the QBAI exemption is repealed.
Yes. The Section 962 election allows individuals to be taxed at the corporate rate – effectively 10.5% for tax year 2025 – instead of the individual rate of up to 37%. The election also unlocks deemed paid foreign tax credits under IRC 960.
Form 5471 for each CFC and Form 8992 to compute the inclusion. Both attach to your Form 1040 or Form 1120. If you make a Section 962 election, attach the election statement to the same return.
The IRC 6038 penalty for failure to file Form 5471 is $10,000 per form per year. Additional penalties of $10,000 per 30-day period apply after a notice of failure, up to $50,000 additional per form. The statute of limitations on your entire return remains open until all required international information returns are filed. There's a carve-out for reasonable cause: if the missed filing wasn't due to willful neglect, the extended period covers only the related items rather than the full return, though you'll need to substantiate that with a tax professional.
Not necessarily. If the CFC's effective foreign tax rate on specific items of income exceeds 18.9% – that is, 90% of the 21% US corporate rate – you can elect to exclude that income from tested income under the high-tax exclusion. The election is annual and irrevocable for the tax year.
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