New Tax Rules for Multinational Companies: FDDEI, NCTI Changes

Newly released proposed regulations explain how certain expenses are treated under the 2025 tax law when companies calculate the foreign-derived deduction-eligible income (FDDEI) deduction and the foreign tax credit limitation for net CFC tested income (NCTI), formerly known as global intangible low-taxed income (GILTI).

For many multinational companies, the changes may produce a larger FDDEI deduction and more capacity to use foreign tax credits. However, the benefit depends on each company’s expense profile, U.S. and foreign income, existing tax attributes, and long-term structure.

While the changes come from the 2025 tax law and generally apply to tax years beginning after December 31, 2025, companies may rely on the proposed regulations before they’re finalized if they apply each applicable set of rules in its entirety and consistently.

And there are potential benefits to explore now — if you wait to model the new FDDEI and NCTI foreign tax credit models until your next tax return, you could miss opportunities for your 2026 estimated tax payments and planning.

Discover newly proposed rules and tax planning considerations you can start now.

Interest and research costs may no longer reduce the FDDEI benefit

Under the proposed rules, companies would calculate deduction-eligible income and FDDEI without reducing those amounts for interest expense or research and experimental expenditures. In practical terms, companies with debt or significant research spending may have more income eligible for the Section 250 deduction.

The result is generally favorable, but the definition matters. The exclusion applies to costs meeting specific tax classifications. Financing-related charges not treated as interest for tax purposes and research costs deducted as ordinary business expenses rather than treated as research and experimental expenditures may not receive the same benefit.

CLA observation: The tax treatment depends on how the expense is classified, not simply on how the company describes it operationally. Middle market companies may not have historically separated every research or financing-related cost in the detail needed for this calculation.

Suggested action: Review the tax classification of interest, financing charges, and research costs before estimating the benefit. Confirm supporting records align with the treatment claimed.

More foreign taxes may be available for credit under the NCTI rules

The proposed regulations would narrow deductions reducing foreign source NCTI category income when calculating the foreign tax credit limitation. Interest expense wouldn’t be assigned to this category, and many shared or indirect U.S. costs — such as certain overhead and professional fees — generally would be moved to U.S. source income instead.

Because the foreign tax credit limitation is based in part on the amount of foreign source income in the category, assigning fewer expenses to NCTI may increase the amount of foreign taxes a company can use as a credit. This could be especially important for groups with foreign subsidiaries in higher-tax jurisdictions.

CLA observation: For a company with one or two foreign operating subsidiaries, U.S.-parent interest and shared-services costs may have significantly reduced the NCTI foreign tax credit limitation under prior rules. The proposed approach may improve credit capacity.

Suggested action: Revisit debt placement and intercompany financing decisions. If debt was moved to a foreign subsidiary primarily to protect foreign tax credit capacity, determine whether that structure still supports the company’s broader tax and business goals. The incentive may be significantly reduced, but interest assigned to U.S. source income can still affect foreign tax credit capacity if it creates a U.S. source loss.

A current-year benefit may create a future-year tradeoff

Expenses no longer reducing NCTI category income don’t disappear. Instead, many would be assigned to U.S. source income. If those deductions exceed U.S. source income, the company could create or increase a U.S. source loss.

That loss reduces foreign source income in every tax category in the current year on a proportional basis, including categories the new rules don’t otherwise affect. As a result, part of the NCTI benefit may be given back through lower foreign tax credit capacity in other categories.

The loss also creates an overall domestic loss balance. In later years, that balance can recharacterize U.S. source income as foreign source income, subject to limitations, which may help restore foreign tax credit capacity. The value of that future benefit depends on the company earning enough U.S. income in later years.

A simplified example

Assume a company has $60 of NCTI category income, $20 of other foreign source income, and $30 of U.S. source income before reallocating $50 of interest and overhead. Under prior rules, those deductions would have reduced NCTI category income to $10. Under the proposed rules, they move to U.S. source income instead, so the NCTI category keeps its $60.

Moving the $50 deduction to U.S. source income creates a $20 U.S. source loss. That loss is then spread across the foreign income categories, reducing final NCTI category income from $60 to $45 and other foreign source income from $20 to $15.

Compared to prior rules, NCTI category income increases from $10 to $45, but other foreign source income decreases from $20 to $15. The $20 U.S. source loss also becomes an overall domestic loss that may help restore foreign tax credit capacity in later years.

CLA observation: A deduction improving this year’s NCTI foreign tax credit calculation can also create an overall domestic loss affecting future years. For companies with uneven U.S. earnings or foreign subsidiary results, the timing of that future impact may be important.

Suggested action: Model the proposed rules across multiple years, including the creation and expected use of any overall domestic loss. Don’t evaluate the current-year foreign tax credit benefit in isolation.

Pre-2026 and post-2025 net operating losses require separate tracking

The proposed rules also affect how net operating losses, or NOLs, are associated with the NCTI category. Losses generated after 2025 would reflect the new expense-allocation approach when they arise. Older NOL carryforwards would retain their prior treatment when used.

This creates two pools that may have different value in the foreign tax credit calculation. Older NOLs were calculated under prior rules, when interest and overhead reduced NCTI category income, so they may carry a larger NCTI category component.

When used, that component reduces NCTI category income and isn’t shifted to U.S. source income, which may reduce foreign tax credit capacity in the year the loss is used. Companies with acquisition-related losses, startup losses from foreign expansion, or losses from a prior downturn should understand which years created their NOLs and how those amounts were assigned.

CLA observation: Legacy NOL schedules may not contain the detail needed to distinguish the two pools. The issue can be especially significant when tax attributes are tracked manually or have moved between systems following an acquisition.

Suggested action: Separate pre-2026 and post-2025 NOLs in tax attribute schedules. Review older workpapers to identify the portion associated with the NCTI category and preserve supporting documentation.

Multinational companies can consider early reliance, but the decision should be modeled

Companies may rely on the proposed rules, published September 11, 2026, for tax years beginning after December 31, 2025, before final regulations are issued. Early reliance isn’t a pick-and-choose exercise: Each applicable set of rules must be followed consistently and in its entirety. Comments on the proposed rules are due November 10, 2026, and Treasury has requested comments, including on whether additional guidance is needed for other types of deductions.

For calendar-year companies, the decision can affect 2026 estimates, year-end provision work, return planning, and documentation. Modeling now can help identify whether early reliance produces a meaningful benefit and whether related structural or accounting changes should be considered.

CLA observation: Companies don’t need to wait until filing their 2026 returns to evaluate the potential benefit. Waiting until return preparation may limit the ability to coordinate estimated taxes, financial reporting, expense classification, and broader international tax planning.

Suggested action: Document the early-reliance analysis, assumptions, and method. Coordinate the conclusion with quarterly estimates, year-end tax provision work, and the 2026 return process.

Tax planning strategies multinational companies should consider now

• Update 2026 FDDEI and NCTI foreign tax credit calculations using the proposed rules
• Identify interest, research, overhead, professional fees, and other shared costs that may be treated differently
• Test whether reallocated deductions create a U.S. source loss or an overall domestic loss
• Run a multiyear forecast to evaluate current benefits and future recapture effects
• Separate and validate pre-2026 and post-2025 NOL attributes
• Reassess debt placement and intercompany financing structures in light of the new rules
• Coordinate tax modeling with estimated payments, year-end provision work, and documentation for early reliance

How CLA can help with proposed FDDEI, NCTI changes

The proposed regulations are generally favorable, but the outcome will be highly dependent on each company’s facts. The most meaningful opportunities may come from combining improved foreign tax credit capacity, a larger FDDEI deduction, accurate expense classification, and better coordination between current-year and multiyear planning.

CLA’s international tax services team can help quantify the potential benefit, review expense classifications and tax attributes, assess debt placement, and evaluate whether early reliance makes sense for your organization. Contact us for assistance.

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