Net CFC Tested Income (NCTI): Definition, Calculation, and 2026 Rules

Net CFC Tested Income (NCTI) is a U.S. tax rule that requires certain Americans who own foreign corporations to pay U.S. tax each year on their share of the company’s profits, even if they don’t take any money out of the corporation. The rule applies to owners of controlled foreign corporations and took effect in 2026, replacing the old GILTI system.

Net CFC Tested Income (NCTI) replaced Global Intangible Low-Taxed Income (GILTI) on January 1, 2026. If you own 10% or more of a foreign corporation, NCTI requires you to pay US taxes on that foreign business income annually—whether you distribute profits or not—with a 12.6% effective rate under the One Big Beautiful Bill Act.

This guide explains what NCTI is, how it’s calculated, who must pay it, and the three main strategies expats use to minimize their tax liability.

What is NCTI (Net CFC Tested Income)?

NCTI applies when you own at least 10% of a controlled foreign corporation (CFC). A CFC is a foreign business where US shareholders collectively own more than 50% of the voting power or value.

In plain English: if you’re an American expat who owns a significant stake in a foreign company, the IRS wants to tax your share of that company’s profits each year, even if you leave the money in the business.

The goal of NCTI is to make sure U.S. shareholders pay U.S. tax on low-taxed foreign business income, rather than deferring it by keeping profits inside foreign companies.

Check Your NCTI Tax Exposure for 2026

You can confirm whether Section 962 or the high-tax exception can eliminate your U.S. tax.

Who Must Pay NCTI?

You’re subject to NCTI if you’re a US person owning at least 10% of a controlled foreign corporation. This applies regardless of where you live. Your US tax status matters, not your residence location.

You must report NCTI if:

You’re a US citizen or resident alien
You own (directly or indirectly) at least 10% of a foreign corporation
US shareholders collectively own more than 50% of the corporation
Your CFC has tested income during the tax year

Important: The same 10% ownership threshold that triggers NCTI also requires Form 5471 filing, so if you’re already filing this form, you’re likely aware of your obligations.

How NCTI Works: What Income Gets Taxed

NCTI captures almost all foreign corporation income. Starting in 2026, the elimination of the Qualified Business Asset Investment (QBAI) deduction means all business income is potentially subject to NCTI, not just intangible income.

Income included in NCTI:

Active business profits
Service income
Sales revenue
Investment income not already taxed under Subpart F

Income excluded from NCTI:

Subpart F income (already taxed separately)
Income taxed under the high tax exception
Effectively connected income to the US
Dividends from other CFCs, in certain cases

The NCTI Calculation

Under prior law, shareholders could exclude a Net Deemed Tangible Income Return (DTIR), equal to 10% of Qualified Business Asset Investment (QBAI), but this exclusion was eliminated under OBBBA effective 2026.

The NCTI calculation is straightforward:

Step 1: Add up all “tested income” from your CFCs (generally the company’s net profit)
Step 2: Subtract any “tested losses” from other CFCs you own
Step 3: The result is your Net CFC Tested Income

Unlike the old GILTI rules, there’s no deduction for tangible assets starting in 2026. This means more income is potentially subject to US tax.

Example: Sarah owns 100% of a Portuguese consulting company that earned $180,000 in profit in 2026. Her NCTI is $180,000. How much she actually pays in US tax depends on which strategy she uses (covered below).

Key Changes from GILTI to NCTI

The One Big Beautiful Bill Act made several important changes:

Name change: GILTI is now called Net CFC Tested Income (NCTI)
Higher effective rate: Increased from 10.5% to 12.6% for corporations using Section 962
Reduced Section 250 deduction: Dropped from 50% to 40%
Improved foreign tax credit: Increased from 80% to 90% of foreign taxes paid
QBAI eliminated: No more 10% deduction for tangible business assets
Foreign tax threshold changed: Now need approximately 14% foreign tax rate to eliminate US tax (up from 13.125%)

Your NCTI Tax Rate Options

You have several options for how your NCTI is taxed, each with a different effective rate.

Option 1: Default Individual Treatment (Least Favorable)

Your CFC’s NCTI gets taxed at your regular individual income tax rates (up to 37%).

When this works:

Your foreign corporation pays minimal taxes
You’re in a lower US tax bracket

Example: David owns a Dubai company (0% corporate tax) generating $100,000. In the 24% tax bracket, he pays $24,000 in US tax on NCTI.

Option 2: Section 962 Election (Most Common for Expats)

You can elect to be taxed at the corporate rate (21%) instead of the individual rate. This is often the most effective strategy for expat business owners.

Benefits:

Effective tax rate: 12.6% on NCTI in 2026 (21% × 60%)
Can claim foreign tax credit for 90% of foreign corporate taxes paid
Often eliminates US tax entirely in higher-tax countries

Trade-off: Future dividends are taxable as regular income, not previously taxed income.

Example: Mark owns a German corporation paying 26% corporate tax. With a Section 962 election, the foreign tax completely eliminates his US NCTI tax since it exceeds the 14% threshold needed.

Option 3: Check-the-Box Election (Best for Smaller Operations)

Available only for single-owner CFCs, this treats your corporation as a disregarded entity for US tax purposes.

Primary benefit: Can use the Foreign Earned Income Exclusion to exclude up to $132,900 (2026 tax year) and avoid NCTI entirely.
Downside: Subject to 15.3% self-employment tax unless protected by a totalization agreement.

Example: Maria’s Irish company earns $90,000. With disregarded entity status, she excludes the full amount with the Foreign Earned Income Exclusion and owes $0 in US income tax.

The High Tax Exception: Your Best Friend in High-Tax Countries

If your foreign corporation pays substantial taxes abroad, you may qualify to exclude that income from NCTI entirely through the high tax exception.

2026 Requirements:

Foreign effective tax rate must exceed 90% of the US corporate rate
Election applies consistently to all your CFCs
Must be made annually

Countries where expats frequently qualify:

United Kingdom (25% corporate tax)
Canada (26.5% combined federal/provincial)
Germany (30% combined corporate tax)
France (25% corporate tax)
Australia (30% corporate tax)
Japan (30% combined corporate tax)

This is an all-or-nothing election. If you qualify, your entire CFC income is excluded from NCTI calculations, eliminating US tax on that income.

Required Forms and Filing Deadlines

If you have NCTI, you’ll need these forms:

Form 5471 (Information Return for Foreign Corporations)

Required for all CFC shareholders
Comprehensive reporting of your foreign corporation
Due with your personal tax return

Form 8992 (Calculation of Net CFC Tested Income)

Calculates your specific NCTI inclusion amount
Required if you have tested income or tested loss
Due with your personal tax return

Form 8993 (Section 250 Deduction) – if making Section 962 election

Calculates your 40% NCTI deduction
Reduces your effective rate to 12.6%
Must be filed with Form 8992

Filing deadline for expats: June 15 (automatic extension), which can be extended to October 15 if needed.

Critical: Form 5471 carries penalties up to $60,000 for late filing. Don’t risk the penalties by filing late or incorrectly.

Strategies to Reduce or Eliminate NCTI Tax

Here are proven strategies our CPAs use to help expat business owners minimize NCTI:

1. Pay Yourself a Reasonable Salary

If your foreign business pays you a reasonable salary, that salary can qualify for the Foreign Earned Income Exclusion (up to $132,900 for the 2026 tax year). The salary also reduces your company’s taxable income, lowering NCTI.

2. Make a Section 962 Election

For most expat business owners in moderate-tax countries, this election reduces your effective rate to 12.6% and allows you to claim 90% of foreign taxes paid as a credit.

3. Qualify for the High Tax Exception

If your foreign corporation pays at least 14% in foreign taxes, you may completely avoid NCTI through the high tax exception election.

4. Structure Ownership Carefully

Consider check-the-box elections for smaller operations or holding structures for larger businesses. Each situation is unique.

5. Coordinate with Foreign Tax Credit

The 90% foreign tax credit (up from 80% pre-2026) means you need foreign taxes of at least 14% to completely offset the US NCTI tax.

Common NCTI Mistakes to Avoid

Mistake 1: Not Filing at All

The penalties for missing Form 5471 are severe. Even if you owe no tax, you must file the information return.

Mistake 2: Assuming FEIE Covers Everything

The Foreign Earned Income Exclusion doesn’t apply to NCTI. You need separate strategies for corporate income.

Mistake 3: Taking Large Dividends After Section 962 Election

Future dividends are taxed as ordinary income after making a Section 962 election. Plan your distribution timing carefully.

Mistake 4: Missing the High Tax Exception Deadline

The high tax exception election must be made by your tax return due date (including extensions). Missing it means paying NCTI when you might not have needed to.

Mistake 5: Ignoring State Tax Implications

Some states don’t conform to federal NCTI rules. You may have different state reporting requirements.

Frequently Asked Questions About NCTI

How is the net CFC tested income calculated?

Net CFC tested income is calculated by adding up all tested income from your controlled foreign corporations, subtracting any tested losses, and excluding income that qualifies for the high tax exception. Starting in 2026, there is no longer a deduction for tangible assets (QBAI), so more income is included than under the old GILTI rules.

What is net income from a CFC?

Net income from a controlled foreign corporation (CFC) generally refers to the corporation’s profits after allowable deductions, before dividends are paid. For U.S. tax purposes, this income may be subject to U.S. tax each year under NCTI, even if the profits remain within the foreign company.

What is the difference between NCTI and GILTI?

NCTI replaced GILTI starting in 2026. While both tax U.S. owners on foreign corporate profits, NCTI removed the 10% QBAI exclusion, reduced the Section 250 deduction from 50% to 40%, and increased the foreign tax credit to 90%. As a result, more income is subject to U.S. tax, but relief is still available in higher-tax countries.

What is CFC tainted income?

CFC-tainted income generally refers to income that receives unfavorable U.S. tax treatment, such as Subpart F income or low-taxed earnings subject to NCTI. This often includes passive or mobile income, but under NCTI, even active business income can be taxed if foreign taxes are too low.

Is there an example of net CFC tested income?

Yes. If a U.S. person owns 100% of a foreign company that earns $200,000 in profit and pays $50,000 in foreign tax, the full $200,000 is included in NCTI before credits. Depending on elections under Section 962 or the high-tax exception, U.S. tax may be reduced or eliminated.

Is there a net CFC tested income calculator?

There is no official IRS calculator for NCTI. The calculation depends on detailed corporate financials, foreign taxes paid, ownership percentages, and elections made. Most taxpayers rely on specialized tax software or a CPA experienced in expat and international tax rules.

Does net CFC tested income apply at the state level?

It depends on the state. Some states conform to federal NCTI rules, while others do not. California, in particular, may treat foreign income differently, so state-level analysis is important if you maintain U.S. state tax ties.

If You’re Behind on Filing

If you’re behind on CFC reporting or worried about getting it wrong, the IRS offers Delinquent International Information Return Submission Procedures. You may qualify for penalty relief with reasonable cause.

Many Americans who formed legitimate businesses abroad without realizing they needed to file Form 5471 successfully use our Streamlined Filing package to catch up.

How Greenback Can Help

The IRS estimates Form 5471 takes over 30 hours to prepare correctly, and NCTI calculations add another layer of complexity. For most business owners, that time is better spent growing their business.

Greenback is an American company founded in 2009 by US expats for expats. We focused exclusively on expat taxes and always have. Many of our CPAs and Enrolled Agents are expats themselves, and because they live in 14 time zones, they experience firsthand the challenges of living abroad.

Our team can help you:

Determine your optimal NCTI strategy (Section 962, high tax exception, or check-the-box)
Complete Form 5471 and Form 8992 accurately
Calculate your NCTI inclusion and available deductions
Make timely elections to minimize your tax burden
Coordinate NCTI with other expat tax benefits
Catch up on late filings through streamlined procedures

No matter how late, messy, or complex your return may be, we can help. You’ll have peace of mind, knowing that your taxes were done right.

Next Steps

If you own a foreign corporation and need help with NCTI:

Gather your documentation: Foreign corporation financial statements, ownership percentages, foreign taxes paid
Assess your situation: What’s your foreign corporation’s country and effective tax rate?
Determine your strategy: Will Section 962, high tax exception, or check-the-box work best?
File on time: Don’t risk the significant penalties for late filing

If you’re ready to be matched with a Greenback accountant, click the Get Started button below. For general questions on US expat taxes or working with Greenback, contact our Customer Champions.

Get Expert Help Filing NCTI the Right Way

You can file Form 5471 and Form 8992 correctly and avoid costly penalties.

Disclaimer: This article is intended for informational purposes only and should not be construed as tax advice. Tax laws are complex and subject to change. Individual circumstances vary, and what works for one taxpayer may not be appropriate for another. Always consult with a qualified tax professional before making decisions about your tax situation.