Understanding GILTI: Impacts on Global Subsidiaries

Mechanics, High-Tax Exception, and U.S. Tax Implications of Low-Taxed Subsidiaries

The first time I ran a full GILTI analysis across our foreign subsidiaries, I expected complexity. What I did not expect was how conceptually misaligned it felt with the reality of our operations. We were not shifting profits to tax havens. We were not evading U.S. tax. We were building globally, responsibly—an engineering team in India, a back-office center in Eastern Europe, and a growing product pod in Singapore. But none of that nuance seemed to matter when the numbers flowed into the GILTI model. From a compliance lens, what we had was a Controlled Foreign Corporation generating tested income with little tangible asset base—therefore, subject to GILTI inclusion. In that moment, I realized that GILTI is not just a tax rule. It is a litmus test for whether your global structure can withstand the scrutiny of a U.S. hybrid tax system that remains anchored in suspicion.

I write this not as a tax theorist, but as an operational CFO who has worked across multiple scaling companies—each expanding globally, each eventually colliding with the realization that GILTI was going to become a permanent feature of our tax posture. The name itself—Global Intangible Low-Taxed Income—is both revealing and misleading. It implies that this is about taxing profits derived from intangibles, like IP. But in practice, GILTI is a catch-all inclusion regime that captures the earnings of Controlled Foreign Corporations beyond a routine return on tangible assets, regardless of whether intangibles are even involved.

GILTI was born in 2017, part of the sweeping Tax Cuts and Jobs Act that sought to modernize the U.S. international tax framework. The intent was to discourage U.S. companies from shifting income to low-tax jurisdictions. Instead of waiting for repatriation, GILTI forces U.S. shareholders to recognize income earned by their CFCs annually, even if that income is not distributed. In theory, this aligns the timing of tax with the economic activity. In practice, for companies like those I have led—companies building real operations abroad—it creates friction, modeling complexity, and, often, unexpected tax liabilities.

Here is how GILTI works at a high level. It applies to U.S. shareholders of CFCs. The shareholder must include in gross income its pro-rata share of the CFCs’ tested income, which is broadly defined as gross income excluding Subpart F, ECI, and a few other narrow categories. From this tested income, we subtract tested losses of other CFCs and a deemed 10 percent return on Qualified Business Asset Investment (QBAI), which is a proxy for tangible assets—plant, property, and equipment. What remains is GILTI, which is then subject to U.S. tax at an effective rate that varies based on whether the shareholder is a corporation or an individual and whether foreign tax credits or the high-tax exception applies.

For a domestic C corporation, the tax rate on GILTI is mitigated by a 50 percent deduction under IRC §250, subject to taxable income limitations, which brings the effective rate to 10.5 percent before credits. This deduction drops to 37.5 percent in 2026, raising the effective rate. Foreign tax credits can be used to offset this inclusion, but only up to 80 percent of foreign taxes paid, and only on a pooled basis across all CFCs. This pooling, known as “basket blending,” means that low-taxed and high-taxed CFCs must be aggregated, reducing the precision of crediting and making it difficult to surgically mitigate exposure. To make matters more complex, no carryforward or carryback of excess credits is allowed. Once a credit is unused, it is lost. In my experience, this has made modeling GILTI one of the most sensitive variables in foreign tax planning, particularly in years of volatile earnings or one-time restructuring events.

Individuals and pass-through entities are treated worse. They do not benefit from the §250 deduction or foreign tax credits without electing to be treated as corporations via a §962 election. I have worked with founders and family office LPs who were blindsided by this distinction. Their K-1s reflected GILTI inclusions that they did not anticipate, triggering tax bills with no corresponding cash distributions. In one such case, we had to redesign the equity structure of a foreign holding company and introduce a blocker corporation simply to normalize the tax treatment. It took six months and three legal opinions. And it taught me a lasting lesson: GILTI is not a passive rule. It is an architectural force. It determines how you structure equity, finance subsidiaries, and model global after-tax returns.

One of the most important planning tools available is the GILTI High-Tax Exception (HTE). Introduced through final Treasury Regulations, this allows companies to exclude income from GILTI if the effective foreign tax rate on that income exceeds 90 percent of the U.S. corporate rate—currently about 18.9 percent. In practice, if your foreign subsidiary pays an effective rate of 19 percent or more on a tested income item, that income can be excluded from the GILTI computation. This exception is elective and must be applied on a tested-unit basis. It requires precise mapping of income, taxes, and legal ownership structures. But for many of the companies I’ve worked with—particularly those with operations in countries like Germany, France, or India—the HTE has been a game changer.

However, applying the HTE is not for the faint of heart. It requires extensive documentation, legal entity mapping, and calculations of adjusted effective tax rates that reconcile local GAAP to U.S. tax definitions. We once spent over 100 hours building out the data stack to support the HTE election across four subsidiaries. But the result was worth it. We reduced our U.S. GILTI inclusion to near zero and aligned our reporting with how the business actually paid taxes globally. More importantly, we demonstrated to our board and auditors that our global tax structure had integrity. The CFO’s job is not merely to optimize for cash. It is to uphold the legitimacy of the enterprise in the eyes of regulators, investors, and the markets it serves.

The HTE also raised deeper strategic questions. Should we centralize IP ownership in a low-tax jurisdiction to minimize GILTI? Or should we align IP ownership with R&D activity, even if it meant higher local taxes? Should we use intercompany licensing or cost-sharing? Should we capitalize or expense intangibles? These questions do not arise in a vacuum. They touch on product strategy, engineering culture, legal risk, and future exit planning. I have seen founders attempt to engineer tax-driven IP shifts only to find themselves in conflict with product roadmaps or national regulators. My advice has evolved over time: tax strategy should enable, not dictate, operational reality. But it must be present in the room when those realities are being shaped.

There is also the issue of cash flow. GILTI inclusions are book-to-tax timing mismatches. The income is taxed in the U.S. even if the cash remains offshore. For many companies, especially those with capital controls or limited repatriation capacity, this creates a strain. You are effectively taxed on phantom income. In one of my roles, we had to forecast GILTI liability across four years, model the delta between U.S. tax and foreign earnings, and plan dividend pathways to avoid cash traps. We engaged in earnings and profits tracking, surplus accounting, and modeled local legal reserve requirements. These are not front-page topics in startup finance. But they matter deeply. A company’s ability to move capital efficiently—without triggering tax leakage—is what separates scaling companies from structurally constrained ones.

From an accounting standpoint, GILTI has also changed the way ASC 740 calculations are performed. Initially, the SEC and FASB allowed companies to either treat GILTI as a period cost or to include it in deferred tax modeling. Most companies I’ve worked with chose to expense it as incurred, given the complexity of modeling deferred taxes under GILTI’s moving parts. But as operations stabilize and forecasting improves, it becomes important to revisit this election. Inaccurate modeling of GILTI exposure can distort effective tax rates, lead to surprises in quarterly tax provision reviews, and undermine investor confidence. In one audit, our effective tax rate moved five points due to unanticipated GILTI exposure tied to a foreign operating lease that had not been properly depreciated under U.S. standards. It took three weeks to unwind the error, explain the variance, and revise the disclosures. We survived, but we learned.

Finally, GILTI is not static. Its rules, thresholds, and interaction with foreign tax regimes are constantly evolving. OECD’s Pillar Two, which I will discuss in a later essay, introduces a global minimum tax that may, over time, reduce the relative sting of GILTI. But for now, U.S. multinationals must operate within the existing framework. And that means planning, documenting, modeling, and defending their positions.

GILTI has become a proving ground for CFOs. It tests whether you understand your global structure, whether you can translate complexity into action, and whether you can build cross-functional alignment across tax, legal, treasury, and operations. I have had to sit down with engineering leaders to explain why entity location affects our cash tax liability. I have had to tell a founder that a 10 percent stake in a European JV triggers U.S. filing. I have had to rewrite board decks to reconcile book income with GILTI inclusions. None of this appears on the surface of a P&L. But it shapes the narrative that investors, auditors, and acquirers ultimately believe.

Understanding GILTI is not optional. It is a core competency for global finance leadership. It forces you to ask whether your global footprint is efficient, whether your compliance processes are sound, and whether your capital strategy can scale. It turns tax from a cost center into a strategic function. And for those of us who operate in that space—who blend systems thinking with legal architecture, finance fluency with operational insight—it becomes not just a regulation to follow, but a lens through which to build better companies.

Disclaimer
This essay is for informational purposes only and does not constitute tax, legal, or accounting advice. Please consult your tax advisors and legal counsel before making decisions related to GILTI, foreign subsidiaries, or U.S. tax planning.