Subpart F income vs GILTI: Key differences every US shareholder must know in 2026

Both Subpart F and GILTI force US shareholders of controlled foreign corporations to recognize CFC income currently – even if the CFC has not distributed any cash.

Subpart F income vs GILTI is a distinction every CFC owner needs to understand, because the two regimes target different types of income, apply different tax rates and credits, and require different planning strategies.

• Subpart F, originally codified at IRC Sections 951 through 964 under the Revenue Act of 1962 (Section 965 was added later), targets specific categories of passive or easily movable income: foreign personal holding company income, foreign base company sales income, and foreign base company services income.
• GILTI, added by the Tax Cuts and Jobs Act in 2017 under IRC Section 951A, is a broader residual catch-all that sweeps in most active CFC earnings exceeding a routine return on the CFC’s tangible business assets.

Both regimes require current-year inclusion on the US shareholder’s return regardless of whether the CFC distributes any of the income.

What is Subpart F income? Definition, history, and scope

Subpart F income is the original anti-deferral mechanism in US international tax law. Congress enacted Subpart F under the Revenue Act of 1962, originally codified at IRC Sections 951 through 964, to prevent US shareholders from deferring tax on passive and easily-shifted income earned through foreign corporations.

Section 965 was added later, first in 2004 by the American Jobs Creation Act, then substantially rewritten by the Tax Cuts and Jobs Act (TCJA) in 2017.

Subpart F income has two main components: insurance income and foreign base company income.

The key categories of foreign base company income are:

• Foreign personal holding company income. Dividends, interest, rents, royalties, and certain gains from property transactions. This is the most common Subpart F category encountered by individual expat business owners.
• Foreign base company sales income. Income from buying or selling property involving a related person, where the property is manufactured and sold for use outside the CFC’s country of incorporation.
• Foreign base company services income. Income from services performed for or on behalf of a related person, where the services are performed outside the CFC’s country of incorporation.

Insurance income, certain insurance and reinsurance premiums earned by a CFC, is a separate category of Subpart F income under IRC Section 953, not a form of foreign base company income.

The de minimis exception provides some relief. If the CFC’s total foreign base company income and insurance income are less than the lesser of 5% of gross income or $1,000,000, then Subpart F income is treated as zero – IRC Section 954(b)(3)(A).

Conversely, a full-inclusion rule applies when those amounts exceed 70% of gross income.

 

For a deeper look at each category, sourcing tests, and exceptions, read our guide to Subpart F income.

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What is GILTI? Global intangible low-taxed income explained

GILTI was introduced by the Tax Cuts and Jobs Act of 2017 under IRC Section 951A as a new anti-deferral category designed to limit profit-shifting to low-tax jurisdictions.

Unlike Subpart F, which targets specific enumerated income categories, GILTI is a residual catch-all for active CFC earnings that exceed the QBAI routine-return floor.

The GILTI formula starts with “tested income” – gross income minus allocable deductions, excluding Subpart F income, effectively connected income, certain related-party payments, and high-taxed income that is excluded.

From that, subtract a 10% routine return on Qualified Business Asset Investment – the CFC’s average adjusted basis in depreciable tangible property.

GILTI inclusion equals net tested income minus net deemed tangible income return.

Key characteristics of GILTI for tax year 2025:

• Scope: Covers most active CFC earnings above the QBAI routine-return floor – not limited to specific income categories.
• Section 250 deduction: C-corporations may claim a deduction equal to 50% of the GILTI inclusion plus 50% of the associated foreign tax credit gross-up for tax year 2025, effectively reducing the corporate rate on GILTI to 10.5%.
• Individual shareholders: GILTI inclusions for individuals are taxed at ordinary income rates – up to 37% for tax year 2025 – unless the shareholder makes a Section 962 election to be taxed at the 21% corporate rate.

Unlike Subpart F, GILTI is not limited to passive or mobile income – it sweeps in most active CFC earnings that exceed the QBAI routine-return floor.

For most service-based CFCs owned by US expats with little tangible property, the QBAI routine return is near zero – meaning nearly all tested income becomes a GILTI inclusion.

 

For the full formula and multi-CFC aggregation rules, read our GILTI tax guide – tested income and tested losses aggregate across all CFCs before the NDTIR is subtracted.

Controlled foreign corporation and US shareholder: Shared definitions

Both Subpart F and GILTI apply only when a foreign corporation qualifies as a CFC and the taxpayer qualifies as a US shareholder.

A CFC is a foreign corporation in which US shareholders own more than 50% of the total combined voting power or total value on any day during the tax year (IRC Section 957(a)).

A US shareholder is a US person who owns, directly, indirectly, or constructively, 10% or more of the total combined voting power or value of the CFC (IRC Section 951(b)).

If the foreign corporation does not meet the CFC definition, neither Subpart F nor GILTI applies. This makes the CFC determination the critical first step.

The Tax Cuts and Jobs Act expanded constructive ownership attribution rules, which unexpectedly created CFC status for some foreign corporations for tax years beginning before January 1, 2026.

NOTE! The One Big Beautiful Bill Act reverses part of that expansion for CFC tax years beginning after December 31, 2025, by restoring IRC Section 958(b)(4) and its limit on downward attribution. To prevent that restoration from opening a new gap, the same law adds IRC Section 951B, a parallel Subpart F and GILTI regime for foreign-controlled foreign corporations, effective on the same date.

The following conditions must be met for both regimes to apply:

1. The foreign corporation is a CFC. More than 50% US shareholder ownership by vote or value.
2. The taxpayer is a US shareholder. 10% or more ownership by vote or value.
3. For tax year 2025, the US shareholder generally must hold stock on the last day of the CFC’s tax year on which it was a CFC, for both Subpart F and GILTI purposes. The One Big Beautiful Bill Act moves both regimes to an any-day-during-the-tax-year standard, but only for CFC tax years beginning after December 31, 2025.

Read more about CFC classification rules. The CFC determination also triggers Form 5471 filing obligations and the Section 965 transition tax rules for pre-TCJA accumulated earnings.

Subpart F vs GILTI: Side-by-side comparison table

The single biggest structural difference between GILTI and Subpart F is that Subpart F targets specific enumerated income categories while GILTI acts as a residual catch-all for CFC earnings above a tangible-asset return floor.

Subpart F and GILTI both start with Form 5471 – get yours filed right.

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The most common Subpart F income TFX sees among individual expat CFC owners is foreign personal holding company income – particularly dividends, interest, and royalties flowing between related entities.

How GILTI is calculated: The tested income and QBAI formula

Based on a common TFX client scenario, here is how the GILTI calculation works in practice:

1. Aggregate all CFC tested income – gross income minus allocable deductions, after excluding Subpart F income, effectively connected income (ECI), related-person dividends, and high-taxed income excluded under the GILTI high-tax exclusion.
2. Subtract tested losses from other CFCs.
3. Calculate net deemed tangible income return: 10% multiplied by aggregate QBAI minus specified interest expense.
4. GILTI inclusion equals net tested income minus NDTIR – with a floor of zero. If NDTIR exceeds net tested income, the GILTI inclusion is zero.

Based on the TFX client scenario: a US expat owns a CFC providing consulting services with $200,000 in tested income and $50,000 in QBAI.

The NDTIR is $5,000 – that is 10% of $50,000. The GILTI and Subpart F income calculation produces a GILTI inclusion of $195,000 – that is $200,000 minus $5,000. Because the CFC is a services business with minimal tangible assets, almost all the income is included.

 

The high-tax exclusion: A key planning tool for both regimes

Both Subpart F and GILTI have high-tax exclusion provisions that allow taxpayers to elect out of inclusion when the CFC’s income is subject to a sufficiently high foreign effective tax rate.

For Subpart F, the high-tax exclusion under IRC Section 954(b)(4) applies when the effective foreign tax rate exceeds 90% of the US corporate tax rate – that is, exceeds 18.9% based on the 21% rate.

For GILTI, final regulations allow a similar high-tax exclusion election when the effective foreign tax rate on tested income exceeds the same 18.9% threshold.

Making the GILTI high-tax exclusion election is an annual decision that must be applied consistently to every CFC in the same CFC group – you can’t elect it for one profitable CFC while leaving another out. It requires careful modeling, since electing GILTI HTE also forfeits the associated foreign tax credits.

The elections are made on Form 8992 and the relevant Form 5471 schedules.

Read more about the GILTI high-tax exception – it becomes especially valuable for expats with CFCs in countries whose corporate tax rate exceeds the 18.9% threshold.

The UK’s main rate of 25%, Germany’s combined effective rate of approximately 30%, and Japan’s combined effective rate of approximately 30% all clear the bar.

Ordering rules: How Subpart F and GILTI interact

The interaction between the two regimes follows a set of 4 ordering principles. Because Subpart F income is carved out of tested income, a CFC with large Subpart F inclusions will typically have a smaller GILTI inclusion – the two regimes are mutually exclusive at the income-item level.

1. Subpart F income is determined and excluded from tested income first – the same dollar of CFC income cannot be both Subpart F and GILTI.
2. Tested income for GILTI is gross income minus allocable deductions, after removing Subpart F inclusions, ECI, related-person dividends, and other excluded amounts.
3. Previously taxed earnings and profits from Subpart F inclusions reduce the E&P available for future GILTI inclusions.
4. When a CFC distributes earnings, distributions are traced to PTEP accounts in a specific ordering sequence, affecting whether the distribution is taxable and whether any foreign tax credit is available.

Because Subpart F income is carved out of tested income, a CFC with large Subpart F inclusions will typically have a smaller GILTI inclusion – the two regimes are mutually exclusive at the income-item level.

Form 5471 Schedule J tracks PTEP categories and their ordering. Our Form 5471 Schedule J guide walks through E&P and PTEP reporting step by step.

Section 962 election: The individual expat’s tool for GILTI relief

The Section 962 election allows an individual US shareholder to be taxed on Subpart F and GILTI inclusions as if they were a domestic C-corporation.

That unlocks the 21% corporate rate, the Section 250 deduction on GILTI, and the 80% foreign tax credit under Section 960(d).

Key mechanics for tax year 2025:

1. The election is made annually on the individual’s Form 1040 with a statement attached.
2. The election applies to all CFCs in which the individual is a US shareholder for that year – it cannot be made selectively for one CFC.
3. A second layer of tax may apply when the CFC later distributes earnings that were previously taxed under the 962 election.

Based on a common TFX client scenario, an individual with a profitable foreign services company can reduce their effective GILTI and Subpart F rate from 37% to approximately 10.5% by making a timely Section 962 election and claiming the Section 250 deduction and foreign tax credits.

 

Read our detailed guide to the Section 962 election.

It covers the second layer of tax on previously taxed earnings and multi-year modeling considerations.

Tax rate treatment: How Subpart F and GILTI are taxed differently

Individual US shareholders face a significant tax disadvantage on GILTI and Subpart F income compared to corporations unless they make a timely Section 962 election to be taxed as if they were a domestic corporation.

For individuals – tax year 2025:

• Subpart F inclusions are taxed at ordinary income rates – up to 37% for tax year 2025.
• GILTI inclusions are also taxed at ordinary rates unless a Section 962 election is made.

For C-corporations – tax year 2025:

• Subpart F inclusions are taxed at the 21% corporate rate.
• GILTI inclusions benefit from the Section 250 deduction. For tax year 2025, that deduction equals 50% of the GILTI inclusion plus 50% of the associated foreign tax credit gross-up, effectively reducing the corporate rate on GILTI to 10.5% before foreign tax credits.

The Section 250 deduction percentage changed under the One Big Beautiful Bill Act

For tax years beginning after December 31, 2025, the deduction drops from 50% to 40%, and GILTI is renamed to Net CFC Tested Income. The effective corporate rate rises from 10.5% to approximately 12.6%. The QBAI routine return is also eliminated – meaning the full net tested income is included starting in tax year 2026.

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Foreign tax credits: How they apply differently to Subpart F vs GILTI

Subpart F inclusions are assigned to the general limitation basket – or passive basket for passive-category Subpart F income – for foreign tax credit purposes under IRC Section 904.

GILTI inclusions are assigned to a separate Section 951A basket, and only 80% of the foreign taxes allocable to tested income may be credited against the US tax on GILTI.

That 80% haircut under IRC Section 960(d) applies for tax year 2025.

The GILTI foreign tax credit basket cannot generate an excess credit that carries over to other years – unused GILTI foreign tax credits are permanently lost, making high-tax CFC planning critical.

For tax year 2025, if the effective foreign tax rate on GILTI income exceeds approximately 13.125%, the 80% creditable foreign taxes may fully offset the US GILTI tax for C-corporations after the Section 250 deduction.

Starting in tax year 2026 under the OBBBA, the FTC limitation increases from 80% to 90%, and the breakeven foreign tax rate rises to approximately 14%.

Our Form 1116 guide walks through the foreign tax credit mechanics for individuals claiming the credit directly. Corporations use Form 1118 – and so does an individual who makes the Section 962 election, since the deemed-paid credit on the Subpart F or GILTI inclusion is claimed on Form 1118, not Form 1116.

Is GILTI Subpart F income? Clearing up the confusion

No. GILTI is a separate anti-deferral inclusion created by IRC Section 951A, while Subpart F income is defined under IRC Section 951.

Both are reported by US shareholders of CFCs, and both result in current-year income inclusions. The IRS and tax practitioners sometimes group them together as “anti-deferral regimes” or refer to GILTI inclusions as “Section 951A inclusions” to distinguish them from Section 951 inclusions.

GILTI is legally distinct from Subpart F income – they arise under different Code sections, apply to different income categories, and carry different deduction and credit rules – but both require current-year recognition by US shareholders.

On Form 5471, Subpart F income appears on Schedule I line 1, while GILTI-related data appears on Schedule I-1 – the separate schedules reflect their distinct legal status.

Practical examples: When Subpart F applies, when GILTI applies, and when both apply

Based on a common TFX client scenario, here are three worked examples illustrating how the regimes interact:

• Example 1 – Subpart F only: A US expat owns a CFC that earns interest and royalty income primarily. This is foreign personal holding company income under Subpart F, and because it is excluded from tested income, there is no GILTI on these amounts.
• Example 2 – GILTI only: A US expat owns a CFC providing consulting services with minimal tangible assets and low QBAI. The active service income is not Subpart F income but is fully tested income for GILTI, resulting in a large GILTI inclusion.
• Example 3 – Both apply: A CFC earns both passive royalty income and active manufacturing income above the QBAI floor. The royalty income is included under Subpart F and carved out of tested income, while the excess manufacturing profit generates a GILTI inclusion.

Service-based CFCs with little tangible property are the most common GILTI exposure scenario TFX sees among expat clients, because low QBAI means almost all tested income flows through to the US shareholder.

Section 965 transition tax: The bridge between the old and new regimes

When the TCJA introduced GILTI in 2017, it also enacted the Section 965 transition tax – the “repatriation tax” – to bring previously deferred CFC earnings into US tax.

Section 965 was a one-time inclusion of accumulated post-1986 deferred foreign earnings at reduced rates. While Section 965 installment payments may still be ongoing for some taxpayers, it is not an annual regime like Subpart F or GILTI.

It taxed the historical stock of deferred CFC earnings so that going-forward earnings would be subject to the new GILTI regime rather than continuing to accumulate tax-free.

Section 965 was a transitional bridge – it taxed the historical stock of deferred CFC earnings so that going-forward earnings would be subject to the new GILTI regime.

Any remaining installment obligations are tracked on the Form 965 series.

Common mistakes US expats make with Subpart F and GILTI

The following 6 mistakes are the most costly errors TFX sees in Subpart F and GILTI compliance:

1. Assuming no distribution means no US tax. Both Subpart F and GILTI require current-year inclusion regardless of whether the CFC distributes any cash.
2. Failing to file Form 5471 because the CFC is “just a small business.” The $10,000 per-form penalty applies regardless of the CFC’s size – IRC Section 6038(b). (This is distinct from IRC Section 6038B, which covers reporting transfers of property to foreign corporations on Form 926.)
3. Not making the Section 962 election as an individual. Without it, GILTI is taxed at up to 37% instead of the effective 10.5% corporate rate.
4. Overlooking the GILTI high-tax exclusion election when the CFC pays substantial foreign taxes.
5. Misclassifying active service income as non-Subpart F without checking whether it meets the foreign base company services income definition.
6. Failing to track PTEP accounts on Form 5471 Schedule J, leading to double taxation when the CFC later distributes earnings.

The most costly mistake TFX sees is an individual expat with a profitable foreign company who has never heard of GILTI and has been filing only a basic Form 1040 for years – the cumulative underpayment can be substantial.

The Form 5471 penalty starts at $10,000 per form per year and can reach $60,000 per form (the $10,000 initial penalty plus up to $50,000 in additional penalties) if the failure continues more than 90 days after the IRS mails a notice. It applies even when no tax is owed.

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Subpart F and GILTI for expats with Canadian, UK, or other common foreign corporations

The anti-deferral rules apply regardless of where the CFC is incorporated. Here is how the most common expat business structures are affected:

• Canadian Controlled Private Corporations – CCPCs: The CCPC’s passive investment income is often foreign personal holding company income under Subpart F, and its active business income above the QBAI floor generates GILTI. CCPCs are the most common dual-regime trigger for US-Canadian dual citizens.
• UK limited companies: Active trading profits generate GILTI for the US shareholder. The UK’s 25% corporate rate often qualifies for the high-tax exclusion.
• Australian Pty Ltd companies and other common expat business structures follow the same analysis – the CFC rules look at ownership and income type, not the country of incorporation.

The US-Canada tax treaty does not exempt CFC income from Subpart F or GILTI – treaty benefits generally do not override the anti-deferral regime rules for US shareholders.

The foreign tax credit is the primary mechanism for avoiding double taxation on CFC income, but the GILTI basket limitation and the 80% haircut mean that full credit is not always available.

A Canadian Controlled Private Corporation held by a US citizen triggers both anti-deferral regimes simultaneously when it earns a mix of passive and active income.

Planning strategies: reducing Subpart F and GILTI exposure

The following 6 strategies can help reduce your combined Subpart F and GILTI tax burden:

1. Increase CFC tangible asset investment to raise the GILTI routine-return floor – applicable for tax year 2025; the QBAI deduction is eliminated starting tax year 2026 under the OBBBA.
2. Make the Section 962 election if you are an individual with significant GILTI exposure and the foreign effective tax rate is moderate.
3. Elect the GILTI high-tax exclusion if the CFC’s effective foreign tax rate exceeds 18.9%.
4. Restructure passive income streams to reduce foreign personal holding company income subject to Subpart F.
5. Consider check-the-box elections for lower-tier entities to consolidate tested income and tested losses across a CFC group.
6. Ensure foreign taxes are properly documented and creditable to maximize the 80% GILTI foreign tax credit for tax year 2025 – this increases to 90% for tax year 2026 under the OBBBA.

The most powerful GILTI planning lever for individual expats is the Section 962 election combined with the Section 250 deduction – but it must be modeled carefully because it creates a second layer of tax on future distributions.

Form 5471 and Form 8992: Reporting requirements compared

US expats with foreign corporations face complex overlapping reporting obligations for Subpart F and GILTI.

Form 5471 – Information Return of US Persons With Respect to Certain Foreign Corporations – is required for US shareholders of CFCs. It reports Subpart F income on Schedule I and GILTI-related data on Schedule I-1.

Form 8992 – US Shareholder Calculation of Global Intangible Low-Taxed Income – is filed separately to calculate the GILTI inclusion amount. Both forms attach to the US shareholder’s Form 1040 or Form 1120.

Failure to file Form 5471 carries a penalty of $10,000 per form per year. If the failure continues more than 90 days after the IRS mails a notice, an additional $10,000 penalty applies for each 30-day period the failure continues, capped at $50,000 in additional penalties, for a total of up to $60,000 per form. This makes timely filing critical.

The IRS requires Form 5471 from certain taxpayers related to foreign corporations – the filing thresholds and category rules are detailed on the IRS website.

Catch up on unfiled CFC returns through the streamlined procedure

Many US expats discover years after the fact that they should have been filing Form 5471 and reporting Subpart F or GILTI income.

The IRS Streamlined Foreign Offshore Procedure may allow them to catch up with reduced penalties.

If you have missed years of Form 5471 filings or unreported Subpart F and GILTI income, TFX can help you come into compliance through the Streamlined Filing Compliance Procedures.

Act before the IRS contacts you.

Missed years of CFC filings? The streamlined procedure can help

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