Overview
On July 4, 2025, US President Donald Trump signed the One Big Beautiful Bill Act (OBBBA) into law. The legislation introduces significant changes to both international and domestic business tax rules for US taxpayers. While some provisions reflect long-anticipated reforms, others represent major departures from prior law and potential traps for the unwary. In this article, we summarize the most consequential changes affecting multinational enterprises and domestic corporations, including modifications to the foreign tax credit (FTC) regime, the foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI) regimes’ new looks, and changes to interest expense deductions. We also note key proposals that were considered but ultimately excluded from the OBBBA’s final version.
Unless otherwise noted, all provisions described below are effective for taxable years beginning after December 31, 2025, and are permanent.
In Depth
(Mostly) helpful changes to foreign tax credit rules
The OBBBA makes several welcome changes to the FTC rules, making it more likely that US companies will be able to use credits.
First, the Section 960(d) haircut that applies to FTCs for foreign taxes imposed on tested income subject to the GILTI regime of Section 951A is reduced from 20% to 10%.
Second, research and experimental (R&E) and interest expenses – and other expenses that are not directly related to Section 951A income – will no longer be allocated to Section 951A income for purposes of Section 904.
The Section 78 gross-up for foreign taxes deemed paid under Section 960(b) with respect to previously taxed earnings and profits (PTEP) distributions is also eliminated.
In a less welcome change, the OBBBA extends the Section 960(d) haircut to foreign taxes imposed on distributions of PTEP attributable to Section 951A inclusions, effective for amounts included after June 28, 2025.
GILTI becomes NCTI and bears more tax
The OBBBA introduces a rebranded version of the prior GILTI regime, now known as net CFC tested income (NCTI). Differentiating NCTI from GILTI, the 10% deemed return on tangible property is eliminated. Elsewhere, the Section 250 deduction is reduced from 50% under prior law to 40%, resulting in an effective tax rate (ETR) of 12.6%, rather than 10.5%.
When factoring in the 10% FTC haircut noted above, the ETR on NCTI will now be up to 14%, an increase from the 13.125% ETR when factoring in the 20% FTC haircut under prior law. These changes increase the residual US tax burden on non-Subpart F controlled foreign corporation (CFC) income but simplify the calculation by eliminating the 10% deemed return on tangible property.
FDII becomes FDDEI in a mixed bag for taxpayers
As a result of the OBBBA, the Section 250 deduction that previously applied to FDII now applies to foreign derived deduction eligible income (FDDEI) and is modified to provide a 14% effective rate.
Two key changes expand the scope of income eligible for the deduction. First, unlike FDII, FDDEI is not reduced by a deemed 10% return on tangible property. Second, interest and R&E expenses are no longer allocated to FDDEI.
In a less welcome change aimed at discouraging offshoring intangible property, FDDEI now excludes any income and gain from the sale or other disposition (including pursuant to a transaction subject to Section 367(d)) of Section 367(d)(4) intangible property and any other property subject to depreciation, amortization, or depletion by the seller. This new exclusion is effective for any sale or other disposition that occurs after June 16, 2025.
Other international provisions
BEAT rate increase to 10.5%
The OBBBA increases the Base Erosion and Anti-Abuse Tax (BEAT) rate from 10% to 10.5%, reversing the scheduled increase to 12.5% for taxable years beginning after December 31, 2025. The legislation also retains the add-back of general business credits under Section 38 for BEAT purposes, which had been scheduled to sunset for taxable years beginning after December 31, 2025.
Elimination of CFC tax year election
The OBBBA eliminates the ability of foreign corporations to elect under Section 898 a US tax year beginning one month earlier than the majority US shareholder’s year. This change, effective for foreign corporation tax years beginning after November 30, 2025, may require short-year filings and could affect FTC allocation.
Changes to pro rata share determinations for Subpart F and NCTI
In a notable change to Subpart F and NCTI inclusion rules, a US shareholder must now include its pro rata share of income for any portion of the year it owns CFC stock, regardless of whether it held the stock on the last day of the CFC’s tax year. Pre-OBBBA law looked at the US shareholder only as of the end of the last day of the CFC’s tax year. Regulations may permit or require a closing of the CFC’s tax year to facilitate compliance.
Elimination of prohibition on downward attribution
After its elimination as part of the Tax Cuts and Jobs Act, Section 958(b)(4) is back and prevents the downward attribution rule of Section 318(a)(3) from causing foreign corporations to be CFCs by way of attribution of stock from a foreign person to a US person. In certain limited fact patterns (particularly with respect to foreign parented groups), downward attribution still could be relevant in situations under the new Section 951B regime if a US corporation has direct or indirect ownership of a foreign corporation that would be a CFC applying downward attribution.
Permanent extension of CFC look-through rule
After several decades of suspense, the OBBBA permanently extends the Section 954(c)(6) CFC look-through rule, providing taxpayers welcome certainty.
Sourcing of certain income from the sale of inventory produced in the United States
The OBBBA extends a new sourcing rule for inventory produced in the US and sold through a foreign branch, which allows up to 50% of such income to be foreign sourced for purposes of the Section 904 foreign tax credit limitation.
Domestic tax provisions
Full expensing for domestic R&E expenditures
On the domestic front, the OBBBA introduces Section 174A, which allows full expensing of domestic R&E expenditures incurred in taxable years beginning after December 31, 2024. Taxpayers may alternatively elect to amortize such expenses over five years. R&E balances from 2022 to 2024 may be amortized under the original five-year schedule, fully deducted in 2025, or split across 2025 and 2026, providing options for taxpayers based on their current tax profile.
The return of the “DA” and some less favorable Section 163(j) changes
The OBBBA also makes significant changes to the prior Section 163(j) interest deduction limitation. Depreciation and amortization (the “DA”) have now returned to the Section 163(j)(8) definition of adjusted taxable income (ATI), which forms the basis for calculating a taxpayer’s business interest expense limitation. Accordingly, ATI is now based on earnings before interest, taxes, depreciation, and amortization rather than earnings before interest and taxes for taxable years beginning after December 31, 2024, with the Section 163(j) business expense limitation remaining 30% of that updated ATI.
However, effective for taxable years beginning after December 31, 2025, Subpart F, GILTI, Section 78, and related deductions will be excluded from Section 163(j) ATI. The OBBBA also introduces coordination rules that subject capitalized interest (under Sections 263 and 263A) to the Section 163(j) business interest expense limitation before any noncapitalizable business interest expense can be deducted. Any Section 163(j) deferred business interest expense carryforward will be treated as not subject to capitalization in future years, resulting in future capitalized interest still being offset prior to any noncapitalized interest carryforward.
100% bonus depreciation extended permanently with temporary bonus depreciation domestic factory property
Elsewhere, under Section 168(k), the OBBBA restores 100% bonus depreciation for property acquired after January 19, 2025. Taxpayers may elect 40% (or 60% for long production property) expensing for the first tax year ending after that date. The OBBBA also introduces a new deduction under Section 168(n) for investments in domestic factory property, though further guidance will be needed to determine its exact scope and interaction with other provisions. For Section 168(n) to apply, construction of the domestic factory property must begin after January 19, 2025, and prior to January 21, 2029, and must be placed in service before January 1, 2031.
Research credit restrictions
On the research credit front, the OBBBA updates the language in Section 280C(c)(1) in a manner that appears to foreclose the opportunity for a double benefit through Section 59(e) amortization with respect to domestic R&E. Similarly, the OBBBA clarifies that R&E expenses must, rather than the prior may, qualify as Section 174A expenses to be creditable for research credit purposes.
New charitable contribution cliff and executive compensation control group
Other notable changes include a 1% floor on corporate charitable contribution deductions and an expansion of the Section 162(m) $1 million executive compensation deduction limit to apply on an aggregated controlled group basis. The 1% floor on corporate charitable contributions could create a harsh cliff effect for corporations falling just shy of the 1% mark in any taxable year, though other deductions may be available.
Proposals not included
Likely as significant as what the OBBBA does is what it does not do. Several high-profile proposals were considered but ultimately excluded from the final version of OBBBA, including:
- The Section 899 retaliatory tax
- A high-tax exception to BEAT
- Anti-roundtripping rules
- An increased stock buyback excise tax
- A corporate state and local tax deduction cap
- A preferential 15% rate for manufacturing income.
The exclusion of the Section 899 retaliatory tax comes as a result of the Trump administration’s ongoing negotiations with foreign countries and the Organisation for Economic Co-operation and Development, which had either enacted digital services taxes (DSTs) or Pillar 2 qualified domestic top-up taxes (QDMTTs) that could have applied to US multinational corporations (US MNCs). On the tentative basis that such regimes will not be applied to US MNCs, Congress removed the Section 899 retaliatory tax from the OBBBA. It remains to be seen what the exact scope and mechanisms will be for the exemption of US MNCs from foreign DSTs and QDMTTs.
