GILTI Is Now NCTI: What It Means If You Own a China or Hong Kong Company
If you own a mainland China or Hong Kong company from the U.S., you have probably heard of GILTI. For tax years beginning in 2026 it is renamed NCTI, and if the company is a controlled foreign corporation (CFC) you still include its active earnings in U.S. income each year. What changes is the math: the tax-free return on tangible assets is gone, the corporate §250 deduction is smaller, and the foreign tax credit is larger. Companies with heavy fixed assets and low foreign tax may see higher inclusions.
Short answer
If you are a U.S. shareholder of a Chinese or Hong Kong company that is a controlled foreign corporation (CFC), you will still include its active earnings in U.S. income each year starting with 2026 tax years. What changes is the math: no more tax-free return on tangible assets, a smaller §250 deduction, and a larger foreign tax credit. Companies with heavy fixed assets and low foreign tax can see higher inclusions.
Key facts and figures
- For tax years beginning after December 31, 2025, GILTI is renamed net CFC tested income (NCTI) and the QBAI exemption is repealed (§70323, verified Oct 13, 2026).
- Corporate U.S. shareholders: §250 deduction falls to 40% and deemed-paid credits rise to 90% (§250, §960, verified Oct 13, 2026).
- Individuals who own a CFC directly still face ordinary rates unless a §962 election is made (§962).
- California does not conform to §951A, or to §951(a) for individuals, and SB 711 does not pick up OBBBA (Schedule CA (540) instructions; FTB conformity, verified Oct 15, 2026).
Who this applies to
A U.S. shareholder generally owns 10% or more of a foreign corporation's vote or value, and a CFC is generally more than 50% owned by U.S. shareholders, including through attribution (Form 5471 instructions, verified Oct 15, 2026). Attribution has limits for family members abroad. Under §958(b)(1), stock held by a nonresident alien individual is not attributed to a U.S. citizen or resident, so shares held by parents in China do not count toward a U.S. child's ownership (§958(b)). OBBBA also restored §958(b)(4), which blocks attribution from a foreign person down to a U.S. person, and added §951B for foreign-corporation tax years beginning after 2025 (Pub. L. 119-21 §70353; §951B, verified Oct 15, 2026). Section 951B can still reach a U.S. person who would own more than 50% if §958(b)(4) were ignored, and family attribution among U.S. persons still applies, so each case needs a careful count. See our Form 5471 guide.
What OBBBA changed
| Item | Before (2018 to 2025) | 2026 tax years onward |
|---|---|---|
| Name | GILTI | Net CFC tested income (§951A) |
| Deemed tangible return (QBAI) | Partly exempt | Repealed (§70323) |
| §250 deduction (C corps) | 50% | 40% (§70321) |
| Deemed-paid credit | 80% | 90% (§70312) |
| Expense allocation to the basket | Broad | Interest and R&E not allocated (§70311) |
All of these apply to tax years beginning after December 31, 2025 (Pub. L. 119-21, verified Oct 13, 2026).
Illustrative examples (illustrative numbers)
Assume a U.S. C corporation owns 100% of a foreign subsidiary with $1,000,000 of pre-tax tested income and no other items. The §78 gross-up equals the full foreign tax (§78, verified Oct 13, 2026). The calculation ignores expense allocation and other limits.
Example A: foreign tax of 10%
Foreign tax $100,000. Inclusion plus gross-up $1,000,000, §250 deduction $400,000, U.S. tax at 21% $126,000. Credit 90% of $100,000 = $90,000. Residual U.S. tax $36,000.
Example B: foreign tax of 15%
Foreign tax $150,000. U.S. tax before credit $126,000; 90% credit would be $135,000 but is limited to $126,000. Residual U.S. tax $0.
The local rates here are illustrative assumptions. Actual Chinese and Hong Kong effective rates depend on incentives, the two-tier regime in Hong Kong, and local adjustments, so model your own numbers.
Individuals: the §962 decision
Many families hold a Hong Kong or mainland company directly as individuals. Without an election, the inclusion is generally taxed at ordinary individual rates, and individuals do not get the §960 deemed-paid credit. Under §962, an individual can elect to be taxed at the §11 corporate rate with §960 credits (§962, verified Oct 13, 2026). Regulations also allow the §250 deduction for electing individuals (Reg. §1.962-1), though they still refer to GILTI, and later Treasury guidance for NCTI may change the details.
The trade-off: when the company later distributes those earnings, the distribution is taxed to the extent it exceeds the U.S. tax already paid (§962(d)). Dividend rates then matter. Qualified dividend treatment depends in part on a comprehensive income tax treaty (§1(h)(11)); China appears on the IRS treaty list and Hong Kong does not (IRS treaty list, verified Oct 13, 2026).
High-taxed income
The regulations allow an election to exclude income subject to an effective foreign rate above 90% of the maximum §11 rate, 18.9% (Reg. §1.951A-2(c)(7), verified Oct 13, 2026). Whether a particular Chinese unit qualifies is a calculation, not a label.
California
The FTB's 2025 Schedule CA instructions say California does not conform to §951(a) inclusions or §951A (GILTI) for individuals, who subtract them on lines 8n and 8o (Schedule CA (540) instructions), and the Form 100 booklet says the same for §951A for corporations (Form 100 booklet, verified Oct 15, 2026). SB 711 moved California's conformity date from January 1, 2015 to January 1, 2025, but it does not include later federal law such as OBBBA, and the FTB says California generally does not conform to OBBBA, so NCTI, the §250 change and §951B are not picked up (FTB conformity; FTB Tax News, verified Oct 15, 2026). California corporate groups may be in a worldwide or water's-edge combined report instead. For other 2026 federal and state differences, see OBBBA 2026: federal vs California.
What to do before year end
- Confirm U.S. shareholder and CFC status using the attribution rules, remembering that stock held by nonresident alien relatives is not attributed to U.S. family members under §958(b)(1).
- Gather local financial statements and tax paid, by entity.
- Model inclusion with and without a §962 election, and with the high-tax election.
- Review intercompany pricing (transfer pricing basics) and your year-end close.
Frequently asked questions
Is GILTI gone?
The name is. OBBBA renamed it net CFC tested income (NCTI) and removed the tax-free return on tangible assets (QBAI), for tax years beginning after December 31, 2025 (Pub. L. 119-21 §70323, verified Oct 13, 2026). The annual inclusion itself remains.
What is the new corporate effective rate?
For a domestic C corporation, the §250 deduction is 40%, so the rate before credits is generally 21% x 60% = 12.6%, and deemed-paid credits rise to 90% of foreign taxes (§250, §960(d), verified Oct 13, 2026). Simplified math suggests little or no residual U.S. tax at a foreign rate of about 14%, but expense allocation can change that.
I own a Hong Kong company personally. What applies?
Without an election, the inclusion is generally taxed at individual ordinary rates with no deemed-paid credit. A §962 election lets an individual be taxed at corporate rates with §960 credits (§962, verified Oct 13, 2026); later distributions are taxed to the extent they exceed the tax paid (§962(d)).
Does California tax NCTI?
No, not under current California law. The FTB's Schedule CA instructions say California does not conform to §951A or to §951(a) for individuals, and SB 711 does not adopt OBBBA (Schedule CA (540) instructions; FTB conformity, verified Oct 15, 2026). Individual and corporate California treatment differ; get specific advice.
Is the high-tax exclusion still available?
The regulations allow an election to exclude income taxed at an effective foreign rate above 90% of the §11 rate, which is 18.9% at 21% (Reg. §1.951A-2(c)(7), verified Oct 13, 2026). The regulations still use GILTI terminology, and Treasury may update them for NCTI.
Talk it through
If you own or are planning a China or Hong Kong company, you are welcome to book a consultation. Our cross-border business services cover Form 5471, NCTI modeling and §962 analysis.
Primary sources
General information, not tax advice or legal advice. Results depend on full facts, foreign tax computations and forthcoming guidance.