Last Updated 5 months ago

The One Big Beautiful Bill brought the end of GILTI, but that doesn’t mean it’s gone. Actually, it is more permanent than ever. Now, it has a new name and some new tweaks that may impact U.S. citizens in Israel more than ever. 

For years, American citizens living in Israel who owned companies here had to navigate the complex rules of Global Intangible Low-Taxed Income (GILTI). These rules were introduced under the 2017 Tax Cuts and Jobs Act* and quickly became one of the most complicated areas of U.S. international taxation. Many clients came to us feeling overwhelmed, unsure how the calculations worked, and worried about being taxed twice on the same income.

In July 2025, Congress passed the One Big Beautiful Bill Act (OBBBA). Among its many sweeping changes, it rewrote the GILTI rules. Beginning in 2026, GILTI will no longer exist in its current form. It has been renamed, recalculated, and adjusted. These changes carry significant implications for U.S. citizens in Israel, especially those who own or plan to own Israeli companies.

Key Takeaways

• GILTI has been renamed Net CFC Tested Income (NCTI) and will apply to all earnings of your Israeli company starting in 2026.
• The 10% asset exclusion that once sheltered profits tied to tangible assets such as real estate, factories, or equipment is now gone.
• The Section 250 deduction has been reduced from 50% to 40%, raising the effective U.S. tax rate on NCTI from 10.5% to 12.6%.
• The foreign tax credit haircut shrinks: instead of only 80% of Israeli corporate taxes being creditable, 90% will now be allowed.
• If your Israeli company pays at least 14% in Israeli corporate tax (the standard rate is 23%), you should owe no additional U.S. tax on those profits.

A Quick Refresher – What Was GILTI?

GILTI was a U.S. tax regime created under the 2017 Tax Cuts and Jobs Act that targeted the profits of controlled foreign corporations (CFCs). The intent was to discourage U.S. taxpayers from shifting profits into low-tax jurisdictions to minimize or eliminate U.S. taxes. To achieve this, the law required U.S. CFC shareholders to include specific categories of foreign earnings in their U.S. taxable income each year, even when those profits were reinvested abroad and never distributed as dividends.

This framework meant that ordinary business operations in Israel could trigger U.S. tax obligations for American owners. For example, a U.S.-Israeli lawyer opened an Israeli company earning income in Israel. Their goal was to build up reserves in their company to expand or hire more staff.  Unfortunately, because they are a U.S. citizen, their corporate annual income could still generate immediate U.S. tax liability through GILTI for the individual owner.

The rules also included complex calculations such as the 10% asset exclusion and foreign tax credit limitations, which made compliance daunting. Many taxpayers were caught off guard by how quickly GILTI pulled in income they assumed would be deferred until an actual distribution occurred.

For Americans in Israel, the result was a new layer of reporting, unexpected complexity, and frequent concerns about double taxation. Business owners suddenly had to coordinate both U.S. and Israeli rules carefully, often discovering that while Israel taxed their profits at one rate, the U.S. might impose a second layer of tax on the same income. 

The U.S. has changed how GILTI works and what it is called going forward. Whether this hurts or helps you depends on your Israeli company’s tax rate.

How GILTI Worked Before 2026

The system had several important features. First, companies could benefit from a 10% asset exclusion, which meant that profits equal to a 10% return on tangible assets such as buildings or machinery were excluded from U.S. tax.

In addition, a Section 250 deduction for U.S. corporations allowed for a 50% reduction of GILTI, bringing the effective U.S. tax rate down to 10.5%. Finally, there was a limitation of foreign tax credit (FTC), where only 80% of foreign taxes paid could be credited against U.S. tax. As a result, U.S. taxpayers often owed residual tax unless foreign rates exceeded 13.125%.

The high Israeli taxes usually offset any U.S. liability for Israeli companies taxed at the standard 23% rate. But for many U.S. citizens in Israel, there were still issues when the GILTI tax would apply.  

The Problem with NOLs Under GILTI

One of the most frustrating aspects of the old GILTI regime was the treatment of Net Operating Losses (NOLs). In many cases, NOLs caused the biggest issue for taxpayers, often resulting in unexpected U.S. tax liability. Unlike in the domestic U.S. and Israeli tax systems, where prior year losses can generally be used to offset taxable income of future years, GILTI did not allow for a carryforward of excess losses. 

For Americans in Israel who owned an Israeli company, this rule created significant distortions. A company with heavy losses can have a positive year and offset its income with those prior year losses.  For Israeli tax purposes, they would pay no tax. 

Enter GILTI, and the U.S. tax system takes its tax bite at the individual level as if the company never had those prior year losses.  Why? Because GILTI looks at each year as a stand-alone event without any look back at previous years.  If there is income and no foreign taxes in the current year, then GILTI will apply. 

You’d be right to think this sounds unfair. The inability to carry forward those NOLs meant that taxpayers frequently paid U.S. tax on income that, on a long-term basis, might not have existed at all. This mismatch left many clients confused and frustrated, which was one of the primary reasons GILTI felt punitive rather than fair. So, did people have to pay 37% tax on their Israeli corporate income?  Not precisely, because of something called a Sec. 962 election.

Section 962 Elections and Individual Benefits

While Section 250 (that 50% deduction of GILTI) was written primarily for U.S. corporations, individuals who owned foreign companies were not entirely left out. Under Section 962, an individual shareholder could elect to be taxed as if they were a corporation for purposes of Subpart F and GILTI. By doing so, the individual could claim the Section 250 deduction and foreign tax credits in a manner similar to a corporate shareholder.

For U.S. citizens in Israel, this election often made a significant difference. Without it, GILTI inclusions were taxed at the individual’s ordinary income tax rates, which could be much higher than the 10.5% corporate rate after the Section 250 deduction. By using Section 962, individuals could reduce their effective U.S. tax burden on Israeli company profits and align their treatment more closely with that of U.S. corporations.

However, Section 962 elections were not always straightforward. They required careful modeling because, while they allowed use of the deduction and credits, they also changed how later distributions from the company were taxed. If not appropriately planned, taxpayers could face double taxation when profits are eventually repatriated. Nonetheless, for many individual shareholders in Israel, Section 962 provided an important tool to minimize unnecessary U.S. tax exposure during the GILTI years. It limited their tax exposure to 10.5% per year on company income.  The OBBB Act, though, changes this and increases the taxes that these U.S.-Israelis and all U.S. citizens living abroad will pay in taxes.

The OBBB Reforms – From GILTI to NCTI

OBBB killed GILTI, but only in name.  Some government officials felt this acronym was too on the nose, so they decided to change the name. They also changed some other facts about it, but the spirit of GILTI is still alive.  The OBBB Act replaces GILTI with Net CFC Tested Income (NCTI) beginning in 2026. While the concept is similar, taxing U.S. citizens on foreign company profits, the details have shifted significantly.

What Changed

The OBBB Act reshaped the rules in many important ways, each affecting how much U.S. tax exposure an Israeli company owner may face. For our purposes, we can focus on three changes highlighting the continued issue that U.S. citizens living in Israel will face.

First, the familiar 10% asset exclusion has been repealed. Under the old rule, if your company owned physical assets like buildings, equipment, or machinery, you could exclude a notional 10% return on those assets from the U.S. tax calculation. In simple terms, the law pretended that those tangible investments generated a modest, tax-free return, and only profits above that level were pulled into GILTI. For example, if a company had $2 million invested in factories, the first $200,000 of profits could be ignored when running the GILTI calculation.

With the repeal of this exclusion, that protective buffer disappears. Now, every dollar of profit generated by heavy physical investment or service-based activity will be considered U.S. taxable income under NCTI. 

Reduced Section 250 Deduction

Second, the Section 250 deduction has been scaled back. Under GILTI, U.S. taxpayers could deduct 50% of their inclusion, which reduced the effective U.S. tax rate to 10.5%. Starting in 2026, that deduction drops to 40%, pushing the effective rate to 12.6%. This seemingly small percentage change adds up quickly over years of accumulated profits. Consider an Israeli business generating $1 million in annual profit. Under the prior law, the effective U.S. rate was 10.5% after the deduction, translating into a $105,000 potential liability before credits. Now at 12.6%, the liability rises to $126,000, a difference of $21,000 per year. For an individual owner to shoulder another $21,000 on a tax they don’t want to pay can be crushing.

Higher Foreign Corporate Tax Credits

Third, there is a more favorable rule for foreign tax credits. The foreign tax credit limitation has eased, allowing 90% of Israeli corporate taxes to offset U.S. tax, compared to only 80% under prior law. For most Israeli companies paying the full 23% rate, this will continue to eliminate any additional U.S. liability. The higher credit also means businesses paying at least 14% in Israel can avoid double taxation altogether. This subtle change means that the system is more forgiving and aligns more closely with the practical reality of Israeli tax rates. It also reduces the margin of error for companies operating close to the break-even exposure threshold, giving owners more breathing room.

Putting the Two Changes Together

The effect is apparent in the Section 250 deduction and the 90% foreign tax credit together. The U.S. has set a minimum tax floor of 12.6% on your company’s profits. If your Israeli company is paying 14% or more in local corporate tax, then the 90% credit wipes out the U.S. liability, and no top-up is due. But if your company’s rate is below that level, the U.S. system requires you to make up the difference. This is why the number to watch is 14%. Falling below triggers U.S. tax; staying above it means you remain fully shielded.  

Looking back at the NOL example, the difference is easy to see. When no Israeli corporate tax is paid due to prior year losses, U.S. shareholders will no longer face a 10.5% tax but instead a 12.6% liability.

Another example where GILTI, or now NCTI, applies is with reduced tax rates. Companies benefiting from Israel’s 7.5% or 12% special incentive rates will almost certainly find themselves writing a check to the IRS under these new rules. The reforms effectively set a global floor under U.S. taxation, aligning with broader international trends where countries seek to impose minimum effective tax rates on multinational activity.

In sum, the OBBB Act may exacerbate the problem people have been dealing with. It increases the prior-year loss issue we’ve been facing for the past few years and the minimum tax burden to 12.6% instead of the old 10.5%.

Does Israel Have GILTI (or NCTI) Tax?

Israel has recently implemented trapped profit rules while making the chevrat arnak rules more strict. Many Israeli rules mimic and align to some degree with NCTI, making it harder for people to keep money in their company. The main difference is that Israel doesn’t penalize people for having prior-year losses. We are not delving into the new 2025 rules for Israeli taxes here. Still, it is certainly something that people worried about GILTI should look at.

What Should Business Owners Do Now?

1. Review your company’s Israeli tax rate. This is the single most significant driver of your U.S. exposure.
2. Recalculate where you are holding with prior year losses. Past outcomes may not predict future results, especially without the 10% exclusion.
3. Coordinate with advisors. U.S. and Israeli tax advisors should work together to ensure you are not caught off guard. This is especially true with all the new laws that Israel recently put into place.
4. Use 2025 as a planning year. With the rules taking effect in 2026, you have a short period to adjust your structure or operations.

The Bottom Line

For U.S. citizens in Israel, the shift from GILTI to NCTI represents more than a name change. It marks a new balance between preventing tax avoidance and avoiding double taxation. The U.S. has raised the minimum effective rate to 12.6% while ignoring some significant gaps in the law.

If you want to ensure you are protected from NCTI, get in touch. 

*https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-a-comparison-for-businesses