By Jessica Irving Marschall, CPA, ISA AM
President and CEO, Marschall Accounting Services LLC | September 2026
For eight years, U.S. shareholders of controlled foreign corporations have lived with the Global Intangible Low-Taxed Income regime created by the Tax Cuts and Jobs Act of 2017. Beginning with foreign corporation tax years that start after December 31, 2025, that regime has a new name, a broader base, a different rate structure, and a fundamentally different rule for deciding who must pick up the income. The One Big Beautiful Bill Act (OBBBA) renamed GILTI as Net CFC Tested Income, or NCTI, and in doing so rewrote several of the assumptions that international tax workpapers have relied on since 2018.
This article walks through the substantive changes, the compliance consequences for Form 5471 and Form 8992, the proposed regulations Treasury released in late August 2026, and the audit exposures that are most likely to surface on 2026 returns. It closes with a practical documentation request list and a penalty model for a representative NCTI error.
1. The Substantive Changes Under OBBBA
GILTI Becomes NCTI, and the Base Gets Wider
The most visible change is the name. For tax years beginning after December 31, 2025, IRC Section 951A no longer refers to global intangible low-taxed income. The inclusion is now net CFC tested income. The renaming is not cosmetic and reflects the elimination of the qualified business asset investment (QBAI) exclusion, which previously removed a deemed 10 percent return on the CFC’s tangible depreciable property from the inclusion base. Under the prior formula, GILTI equaled net CFC tested income less net deemed tangible income return. Under OBBBA, the second term is gone and NCTI is simply the U.S. shareholder’s aggregate pro rata share of tested income in excess of its aggregate pro rata share of tested loss across all of its CFCs.
The practical result is that capital-intensive CFCs with substantial tangible asset bases will see their U.S. inclusion rise. A manufacturing subsidiary that previously sheltered a meaningful share of its earnings through the QBAI return now has that shelter removed entirely. Legacy QBAI schedules and tested interest expense schedules should not be requested for the 2026 inclusion computation, because the proposed regulations would remove the rules for pro rata QBAI, tested interest expense, and tested interest income.
The Rate Structure for Corporate Shareholders
Three levers moved at once for domestic corporate U.S. shareholders. The IRC Section 250 deduction for NCTI is reduced from 50 percent to a permanent 40 percent. At a 21 percent corporate rate, that produces a 12.6 percent effective U.S. rate on NCTI before foreign tax credits, up from 10.5 percent under GILTI. Partially offsetting the higher rate, the IRC Section 960(d) haircut on deemed-paid foreign taxes is reduced from 20 percent to 10 percent, so 90 percent of foreign income taxes properly attributable to tested income are now creditable, compared with 80 percent under prior law.
In addition, OBBBA limits the expenses that may be allocated against foreign-source NCTI for foreign tax credit limitation purposes. Only directly allocable items, such as the Section 250 deduction itself and certain taxes, reduce the NCTI basket. Interest expense and research and experimental expenditures are no longer apportioned against it. Taken together, these changes substantially reduce the likelihood of residual U.S. tax where NCTI is subject to a sufficiently high foreign effective tax rate. The precise breakeven rate depends on the taxpayer’s foreign tax credit limitation and expense profile, but the post-OBBBA framework generally produces a substantially more favorable foreign tax credit result than would otherwise follow from the higher 12.6% pre-credit NCTI rate.
Individual U.S. shareholders generally remain subject to ordinary individual income tax rates on their Section 951A inclusions unless they make an IRC Section 962 election. A Section 962 election can permit the individual to be taxed on the inclusion using corporate-rate mechanics and, subject to the applicable requirements and limitations, obtain the benefit of the Section 250 deduction and Section 960 deemed-paid foreign tax credits. The election can also create a second level of U.S. tax when previously taxed earnings are subsequently distributed, making the analysis highly fact-specific.
From Last-Day Ownership to Any-Day Ownership
The change with the widest compliance footprint is the replacement of the last-day ownership rule. Under prior law, a U.S. shareholder generally included its pro rata share of Subpart F income and GILTI only if it owned stock in the CFC on the last day of the CFC’s tax year on which the corporation was a CFC. That rule invited planning around mid-year transfers and required Treasury to build elaborate anti-abuse provisions, including the extraordinary reduction rules under Section 245A.
For CFC tax years beginning after December 31, 2025, a U.S. shareholder that owns IRC Section 958(a) stock in a CFC on any day during the CFC’s tax year must include its pro rata share of Subpart F income and NCTI for the period of ownership. The inclusion is reported in the shareholder’s tax year that includes the last day on which it owned the stock during the CFC’s year. IRC Section 956 investment in U.S. property remains tied to stock held on the last day of the CFC’s year, so the two regimes now diverge on timing.
The consequences for mergers and acquisitions are immediate. A seller who disposes of CFC stock in July 2026 may have a Subpart F and NCTI inclusion attributable to its ownership period during the year, rather than avoiding the inclusion merely because it did not own the CFC on the last relevant day of the CFC’s taxable year.
Downward Attribution Is Restored, and Section 951B Arrives
OBBBA reinstates IRC Section 958(b)(4) for foreign corporation tax years beginning after December 31, 2025. That provision, repealed by the TCJA, prohibits attributing stock owned by a foreign person downward to a U.S. person for purposes of determining CFC status. The TCJA repeal had caused thousands of foreign-parented groups to treat their foreign subsidiaries as CFCs solely because a U.S. affiliate was deemed to own stock held by the foreign parent, and it generated Form 5471 Category 5b and 5c filings that Congress never intended.
In its place, OBBBA adds new IRC Section 951B, a targeted regime for foreign controlled United States shareholders and foreign controlled foreign corporations. A U.S. person is a foreign controlled U.S. shareholder only if it is attributed more than 50 percent of a foreign corporation, a far higher threshold than the 10 percent test for an ordinary U.S. shareholder. Downward attribution continues to apply for the limited purpose of determining whether the Section 951B regime is triggered, but actual Subpart F and NCTI inclusions under that regime are based only on the shareholder’s direct and indirect Section 958(a) ownership, not on stock owned solely by constructive attribution.
The Form 5471 consequence is significant. Category 5b and 5c filing obligations tied solely to TCJA-era downward attribution generally apply only to foreign corporation tax years beginning after December 31, 2017, and before January 1, 2026, including late or amended returns for those years. For post-2025 years, foreign-controlled corporations that were CFCs solely because of downward attribution generally cease to be CFCs, and the related filing burden should decline sharply. Every foreign-parented structure with a U.S. subsidiary should be retested for CFC status under the restored rule.
Other Provisions Worth Noting
- The IRC Section 954(c)(6) look-through rule for related-party dividends, interest, rents, and royalties between CFCs is now permanent.
- The one-month deferral election for CFC tax years is repealed. Calendar-year majority shareholders whose CFCs used a November 30 year-end will experience a 13-month inclusion as those CFCs conform to December 31.
- Foreign-Derived Intangible Income is renamed Foreign-Derived Deduction Eligible Income, with the deduction reduced from 37.5 percent to 33.34 percent and the QBAI return removed from the computation.
- The Base Erosion and Anti-Abuse Tax rate increases from 10 percent to 10.5 percent.
2. The Proposed Regulations of August 2026
On August 26, 2026, Treasury published proposed regulations under REG-115646-25 implementing the new pro rata share rules of Sections 951 and 951A. The comment period closes on October 26, 2026. Treasury published proposed regulations under REG-115646-25 in August 2026 implementing the revised pro rata share rules under Sections 951 and 951A. Taxpayers may rely on the proposed regulations before they are finalized, provided the taxpayer and its related parties apply the rules in their entirety and consistently. Taxpayers may rely on the proposed regulations as interim guidance provided they apply them fully and consistently. Four features deserve attention.
Daily proration. A U.S. shareholder’s pro rata share is determined by reference to the portion of the CFC’s tax year during which the shareholder owned the stock, qualified as a U.S. shareholder, and the corporation qualified as a CFC. The formula is the CFC’s annual income, multiplied by the shareholder’s ownership percentage, multiplied by the ratio of qualifying ownership days to total days in the CFC’s year. The seller is treated as owning the stock through the date of transfer, and the buyer’s ownership begins the following day.
Mandatory year closings on status change events. A foreign corporation would be required to close its tax year for all purposes when it becomes or ceases to be a CFC. This prevents income earned during periods when the corporation was not a CFC from entering a U.S. shareholder’s pro rata share, but it also creates a hard compliance event that must be identified contemporaneously.
Elective year closings on significant ownership variances. Controlling U.S. shareholders may elect to close the CFC’s books when transfers made pursuant to a plan reduce a U.S. shareholder’s ownership by more than 50 percentage points. Increases in ownership by related U.S. persons generally offset any decrease, so the election is effectively unavailable for related-party transfers.
Expanded Form 5471 disclosure. Form 5471 would require U.S. persons to report detailed information about each class of CFC stock, changes in outstanding shares, and all direct and indirect ownership changes during the annual accounting period. Multi-class capital structures would be handled through a hypothetical distribution framework with daily proration within each class. A transition rule addressing certain dividends paid during CFC years that include June 28, 2025, requires a Pro Rata Share Transition Rule Statement attached to Form 5471.
The proposed regulations are silent on how the new pro rata rules interact with previously taxed earnings and profits under Sections 959 and 961, and on coordination with Section 1248 gain on CFC stock dispositions. Treasury has indicated that separate guidance may follow. Until then, PTEP rollforwards and 1248 computations should be prepared with explicit reference to the fact that the underlying regulations have not yet been conformed to OBBBA.
3. Form 5471 and Form 8992 Reporting Mechanics
Form 8992 remains the vehicle for the Section 951A inclusion, and Form 5471 Schedule I-1 continues to report tested items at the CFC level. Both forms and their instructions are expected to be revised for tax years beginning after 2025 to replace GILTI terminology with NCTI, remove the QBAI and tested interest lines, and add the ownership-change detail contemplated by the proposed regulations. Practitioners should retain enough granularity in 2026 workpapers to map to the updated forms once released.
The penalty framework under IRC Section 6038 has not changed. Failure to timely furnish the information required on Form 5471 carries a $10,000 penalty per foreign corporation per annual accounting period, with an additional $10,000 for each 30-day period, or fraction thereof, that the failure continues beyond 90 days after IRS notice, capped at an additional $50,000. Separately, Section 6038(c) reduces foreign tax credits by 10 percent, with a further 5 percent reduction for each three-month period after the 90-day post-notice window, limited to the greater of $10,000 or the foreign corporation’s income for the period and reduced by any Section 6038(b) penalty imposed for the same period. Reasonable cause relief is available, but the showing must be made in writing under penalties of perjury. Failure to furnish required international information can also extend the statute of limitations under IRC Section 6501(c)(8). Depending on the circumstances, the extended limitations period may apply to items related to the information-reporting failure or more broadly to the return, subject to the statutory reasonable-cause rules.
4. Key Audit Risks on 2026 Returns
Incorrect Subpart F or NCTI inclusion. Because inclusions now follow ownership periods rather than last-day status, a taxpayer without a daily proration schedule cannot demonstrate that the inclusion was assigned to the correct shareholder, for the correct period, in the correct amount. In my view, this will be one of the most significant examination risks on 2026 returns involving CFC ownership changes.
Form 5471 and Form 8992 exposure. Form 8992 requires tested item, pro rata share, and allocation-ratio information for each CFC. If ownership changes are not supported by daily schedules, the amounts reported on Form 8992 and Schedule I-1 may be treated as unsupported or inconsistent with the Section 951A inclusion on the return.
Penalties and open statutes. A Form 5471 that fails to furnish information required under Section 6038 may be subject to the $10,000 penalty even if a Form 5471 was physically attached to the return. Continuing failures after IRS notice escalate exposure, and substantial non-compliance can trigger the Section 6038(c) foreign tax credit reduction.
Foreign tax credit misstatement. Subpart F and NCTI allocations drive the assignment of CFC income and taxes to income groups under Section 960. Unsupported ownership periods can cascade into misstated tested foreign taxes, Section 78 gross-up, basket allocation, and the amount of taxes attributable to the shareholder’s NCTI inclusion.
Missed mandatory or elective year closings. The proposed regulations require a year closing when a corporation becomes or ceases to be a CFC and permit an elective closing after a significant ownership variance. Without daily ownership support, a taxpayer may miss a required closing or be unable to substantiate an elective one.
Developing guidance. The term “attributable to” in the revised pro rata rules is not fully defined, and Reg. Section 1.951-1(f) had not been updated for OBBBA at the time the proposed regulations were released. Contemporaneous documentation of the allocation methodology is the best defense against a challenge to an estimate made under incomplete guidance.
5. A Penalty Model for a Representative NCTI Error
Consider a single amended 2026 Form 5471 for one CFC where the issue is an erroneous or omitted NCTI amount of $1.2 million. The Section 6038 fixed-dollar penalty is not computed as a percentage of the misstatement. The exposure is a function of whether the original filing was timely and substantially complete, whether the IRS has issued notice, and how long the failure persists after notice.
| Scenario | Estimated IRC Section 6038(b) exposure |
| Proactive amendment before IRS notice: Potential exposure to the initial $10,000 penalty if the original filing constituted a failure to furnish the required information; reasonable-cause relief may eliminate the penalty where the applicable requirements are satisfied. | $0 to $10,000 |
| IRS treats the original Form 5471 as incomplete for one CFC and year | $10,000 |
| Failure continues more than 90 days after IRS notice | $20,000 to $60,000 |
| Maximum fixed-dollar exposure for one CFC and year | $60,000 |
The $60,000 ceiling reflects the initial $10,000 penalty plus up to $50,000 of continuation penalties under Section 6038(b)(2). The separate Section 6038(c) foreign tax credit reduction, and the underlying tax on the $1.2 million inclusion itself with interest, are additional to these figures. Where the original Form 5471 was timely filed but contained the NCTI error, the mitigating position is a written reasonable cause statement, signed under penalties of perjury, that explains the facts giving rise to the misstatement, the corrective steps taken, and why the original reporting position was reasonable when filed.
6. The 2026 Documentation Request List
The following categories represent the minimum file that a U.S. shareholder of one or more CFCs should assemble to model NCTI and support updated Form 5471 and Form 8992 reporting for 2026.
Entity and ownership. A full organizational chart showing direct, indirect, and constructive ownership; cap tables for each foreign corporation with vote and value percentages, stock classes, and preferred rights; all acquisition, disposition, contribution, redemption, recapitalization, and liquidation documents; and, above all, the dates of every ownership change during the year. Support for CFC status on each day of the year is now essential. Support for CFC status throughout the year is now essential because the revised pro rata share rules can require inclusions attributable to periods during which the foreign corporation is a CFC and the U.S. shareholder holds the relevant Section 958(a) stock, even where the shareholder does not own the stock at year-end.
CFC financial and tax-basis data. Local statutory financial statements, trial balances, general ledger detail, U.S. tax-basis conversion workpapers, book-to-tax adjustments, functional currency translation support, and gross income detail by category sufficient to isolate the exclusions from tested income under Section 951A(c)(2), including effectively connected income, Subpart F income, high-tax exception income, related-party dividends, and foreign oil and gas extraction income. Deductions properly allocable to gross tested income under principles similar to Section 954(b)(5) must be separately identified.
NCTI modeling schedules. Tested income and tested loss by CFC; an aggregated NCTI schedule across all CFCs; a pro rata share schedule by shareholder and CFC; a daily ownership proration schedule for every 2026 ownership change; a tested loss utilization schedule; and, where relevant, tested-unit support for the high-tax exception election at an effective foreign rate of at least 90 percent of the top U.S. corporate rate.
Subpart F schedules. Foreign base company income detail, insurance income, Section 954(b)(4) high-tax analysis, current-year E&P and prior-year deficit schedules, and Schedule I support.
Foreign tax credit and Section 250. Foreign returns and assessments, tax ledgers by jurisdiction and currency, allocation of taxes among tested income, Subpart F, PTEP, and residual groups, Section 78 gross-up support, Section 960 deemed-paid workpapers reflecting the 90 percent creditable amount, Section 250 support at the 40 percent deduction, taxable income limitation workpapers, and Form 1118 or 1116 support.
E&P, PTEP, and distributions. Current and accumulated E&P by CFC, PTEP rollforwards by Section 959 category, distribution detail by date and currency, withholding support, and prior-year Schedule J and Schedule P workpapers.
Prior-year consistency files. 2023 through 2025 Forms 5471, 8992, 8993, and 1118 or 1116 with supporting workpapers; prior GILTI tested income and loss files; prior Section 956 workpapers; and documentation of any Rev. Proc. 2019-40 alternative-information filings or downward-attribution-based Category 5b and 5c positions.
7. Practical Takeaways
- Retest CFC status for every foreign corporation for years beginning after December 31, 2025. The restoration of Section 958(b)(4) may eliminate CFC status that existed solely by downward attribution, and Section 951B may apply instead.
- Build a daily ownership tracking system now. The any-day inclusion rule and the proposed daily proration formula make contemporaneous ownership records the foundation of every 2026 international workpaper.
- Model NCTI from scratch rather than rolling GILTI forward. The QBAI exclusion is gone, the Section 250 deduction is 40 percent, and the deemed-paid credit is 90 percent. A legacy GILTI model will produce the wrong answer on all three variables.
- Revisit Section 962 elections for individual shareholders under the new parameters.
- Review every 2026 CFC stock transaction, pending or closed, for tax covenant and indemnity exposure under the period-based inclusion model.
- Identify status change events and significant ownership variances during the year and document the mandatory or elective year closing position at the time of the event, not at return preparation.
- Retain workpapers at a level of detail that can be mapped to the revised Form 8992 and Form 5471 Schedule I-1 once the 2026 forms and instructions are released.
Sources
One Big Beautiful Bill Act international tax provisions, Holthouse Carlin & Van Trigt LLP
Proposed Treasury Regulations under REG-115646-25, Venable LLP
Global Intangible Low-Taxed Income overview and OBBBA changes, Thomson Reuters
Instructions for Form 5471, Internal Revenue Service
IRC Sections 250, 951, 951A, 951B, 954, 956, 958, 959, 960, 6038, and 6501(c)(8), as amended by Pub. L. 119-21.
About the Author
Jessica Irving Marschall, CPA, ISA AM, is President and CEO of Marschall Accounting Services LLC, a tax advisory firm serving more than 400 clients annually, and of The Green Mission Inc., Probity Appraisal Group, and GM-ESG. She is a frequent author and presenter on advanced federal tax topics, including Opportunity Zones, Section 351 transactions, and charitable contribution valuation. Connect with her on LinkedIn or visit www.marschalltax.com, thegreenmissioninc.com, www.probityappraisal.com, and www.gm-esg.com.
This article is provided for general informational purposes and does not constitute tax, legal, or accounting advice. The proposed regulations discussed above are not yet final and may change. Taxpayers should consult their own advisors regarding the application of these rules to their specific facts.
