The United States taxes its persons on their worldwide income, and it does not wait for the money to arrive. A founder who moved to Amsterdam a decade ago and holds his operating company through a Dutch besloten vennootschap has not left the American system. His share of the company’s profit can be taxed in the United States in the year the company earns it, whether or not a single euro is distributed.
The mechanism has a new name. What everyone still calls GILTI is now, in the statute, net CFC tested income, and the section that carries it was substantially rewritten by the 2025 amendments in Public Law 119-21, with effect for taxable years beginning after 31 December 2025. For a calendar-year taxpayer the new version is the one that applies to the current year. The article that follows describes the rules as they now read, because the older explanations circulating in memoranda no longer describe the charge correctly.
Who is caught, and by what test
Two definitions do the work. A United States shareholder, under section 951(b) of the Internal Revenue Code and its implementing regulation, is a United States person who owns 10 per cent or more of the total combined voting power of all classes of voting stock of a foreign corporation, or 10 per cent or more of the total value of its shares. The threshold is low, and the value limb catches holdings that carry no votes at all.
Under section 957(a) and its defining regulation, a foreign corporation is a controlled foreign corporation if United States shareholders own, on any day of its taxable year, more than 50 per cent of the combined voting power or more than 50 per cent of the value. The test aggregates the United States shareholders; it does not require any one of them to control anything. Three unrelated American investors with 20 per cent each will do it.
Two consequences follow that surprise people. The first is that a Dutch company with a minority of American shareholders can become a controlled foreign corporation without any of them intending it, and the constructive ownership rules make the counting wider than the share register suggests. The second is that a single day is enough. A corporation that meets the test on one day of its taxable year is within the regime for that year.
Residence is not a defence. The regime attaches to United States persons wherever they live, so an American founder who is tax resident in the Netherlands remains a United States shareholder for this purpose.
What the 2025 amendments changed
The former structure charged the excess of tested income over a deemed return on tangible assets. That return, computed by reference to qualified business asset investment, has been removed: the 2025 Act struck subsections (b) and (d) of the section outright. Section 951A now requires each United States shareholder of any controlled foreign corporation to include in gross income its net CFC tested income, defined as the excess of its aggregate pro rata share of tested income from each controlled foreign corporation over its aggregate pro rata share of tested loss. The Treasury regulations under section 951A have not been conformed to the 2025 Act, so the text served by the Code of Federal Regulations still describes the old computation, with the tangible return subtracted.
Tested income itself is broadly the corporation’s gross income, computed without the enumerated exclusions, less the deductions properly allocable to it. The exclusions matter in practice: items already within subpart F, income effectively connected with a United States trade or business, high-taxed income excluded under the section 954(b)(4) election, dividends from related persons, and foreign oil and gas extraction income.
Removing the tangible return changed the character of the charge. It was designed as a tax on returns above a routine level; it is now a minimum tax on foreign earnings without regard to how much plant the business owns. For a capital-intensive group that relied on the tangible return to absorb most of its tested income, the arithmetic is materially worse. For a software business that never had much tangible investment, very little has changed.
The arithmetic of the charge
Three verified percentages produce the answer. The federal corporate rate under section 11(b) of the Code is 21 per cent. Section 250(a), as amended in 2025, allows a corporate shareholder a deduction of 40 per cent of the net CFC tested income amount and the associated section 78 dividend, for taxable years beginning after 31 December 2025. Section 960(d) deems the corporation to have paid 90 per cent, raised from 80 per cent, of the product of the inclusion percentage and the aggregate tested foreign income taxes.
Take those together on 100 of foreign pre-tax profit. The section 250 deduction leaves 60 in the base, and 21 per cent of 60 is 12.6. Against that stands a credit of 90 per cent of the foreign tax. The two are equal where the foreign effective rate is 14 per cent. Below roughly that level there is residual American tax; at or above it, on these components alone, there is not. The 12.6 and the 14 are arithmetic from the cited rates, not figures found in the statute, and the exact break-even sits a little below 14 per cent because tested income is already net of the foreign tax and the section 78 gross-up restores only 90 per cent of it.
The credit is not as generous as the percentage suggests, because it is capped by the limitation in section 904, which applies separately to amounts included under section 951A. What eases that constraint is a rule added in 2025 restricting which deductions may be allocated to that separate category: the section 250 deduction attributable to the inclusion, and otherwise only deductions directly allocable to the income, with interest expense and research and experimental expenditures kept out. Allocation of a leveraged shareholder’s interest expense to the category used to be one of the principal reasons the credit failed. That obstacle is much reduced.
The credit also cannot be carried. Excess credits in the section 951A category are used in the year or lost, so a year of high foreign tax does not shelter a later year of low foreign tax.
Why a Dutch company usually survives it
The Dutch corporate rate is the reason most Dutch structures pass the test comfortably. Article 22 of the Wet op de vennootschapsbelasting 1969, in the text in force in 2026, charges 19 per cent on taxable profit up to 200,000 euro and 38,000 euro plus 25.8 per cent on the excess. Both figures sit well above the 14 per cent break-even, and a Dutch operating company paying tax on its commercial profit will generally leave no residual American charge.
That is a statement about the effective rate, not the headline rate. The comparison that matters is foreign tax actually paid against tested income actually computed under American rules, and the two bases are not the same. Dutch timing differences, the participation exemption, loss utilization and the earnings-stripping limitation all move the effective rate away from the statutory one, sometimes far enough to matter.
The most common way a Dutch company falls below the line is the innovation box. Under article 12b of the Wet op de vennootschapsbelasting 1969, qualifying benefits from a self-developed qualifying intangible asset are taken into account for a fraction of nine over the highest rate in article 22, which produces an effective rate of 9 per cent. That is a genuine Dutch incentive and it is well below the break-even. A company that has successfully claimed it may find part of the saving collected in the United States instead.
Losses cause the other common failure. A company with an accumulated Dutch loss can pay little or no Dutch tax in a profitable year while still generating tested income. The effective rate in that year is low precisely because the loss relief worked.
The individual shareholder
None of the corporate arithmetic is available to an individual as of right. An individual United States shareholder includes net CFC tested income at ordinary rates, without the section 250 deduction and without the deemed paid credit under section 960, which is granted to domestic corporations. The result can be a substantially higher charge on the same underlying profit than a corporate shareholder would bear.
Section 962 is the response. An individual United States shareholder may elect, under the section 962 regulation, to have the tax on amounts included under section 951(a) determined as it would be under section 11 rather than under the individual rate schedule, and to have those amounts treated as received by a domestic corporation for purposes of the deemed paid credit under section 960. Section 951A treats the inclusion as subpart F income for specified purposes, which is what carries the election across to it.
The election is not free. It changes the treatment of later distributions of the earnings concerned, and the amount that escapes a second charge is limited to the tax actually paid under the election. It is also made year by year, on a return, which means it has to be considered at the point the return is prepared rather than discovered afterwards.
For an American individual resident in the Netherlands there is a further layer. Dutch personal taxation of the shareholding sits on top of the American computation, and the two systems relieve each other only imperfectly where the income is deemed rather than received.
Distributions and the second layer
An inclusion under section 951A is not a dividend, and it does not remove the company’s cash. When the earnings are later distributed, the previously taxed earnings and profits rules prevent the same profit being taxed twice in the shareholder’s hands, and the shareholder’s basis in the shares is adjusted to keep the arithmetic consistent. That relief is not complete. Section 960(d)(4), added by the 2025 Act, denies the credit for 10 per cent of the foreign income taxes borne on amounts excluded from income under section 959(a) by reason of a section 951A inclusion, and it applies to taxes paid or accrued after 28 June 2025 rather than to years beginning after 31 December 2025.
Getting that right requires records. Previously taxed earnings have to be tracked by year, by category and by shareholder, alongside basis, and the tracking has to survive changes in the shareholder group. Where it has not been kept, the group is left arguing about which distributions were already taxed, and the burden of showing it falls where the records are.
What to do about it in the structure
The first step is factual and unglamorous: establish whether the company is a controlled foreign corporation at all, on the value test as well as the vote test, with the constructive ownership rules applied properly. A surprising number of structures are inside the regime and reporting as though they were outside it, which is a filing problem before it is a tax problem.
The second is to measure the effective rate rather than assume it. Foreign tax paid over tested income, computed each year, is the only number that answers the question. Where the result sits close to 14 per cent, the high-tax exclusion under section 954(b)(4) and the interaction with the section 904 limitation are worth modelling properly, because small changes move the answer.
The third is to decide the shareholder’s own form. A holding held personally, a holding held through a domestic corporation and a holding subject to a section 962 election produce three different charges on identical company profits. That decision belongs at the front of the structure, not at the end of the filing season.
The regime punishes inattention more than it punishes structure. A Dutch operating company paying Dutch corporate income tax on its real profit is, on current rates, in a good position. What creates the charge is a low effective rate somewhere in the chain, and what creates the penalty is a shareholder who did not know the regime applied.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.