Subpart F gets computed first, and tested income is whatever Subpart F did not take. Owners of a foreign corporation almost always ask whether a given dollar is Subpart F income or GILTI, and that ordering rule answers the question before any choice comes up. Most people get the ordering wrong, & that's below. Full mechanics for each regime sit in the Subpart F income guide and the net CFC tested income guide.
Why Do Subpart F and GILTI Get Confused?
Both regimes force a US shareholder to include a CFC's income currently, in the year it is earned, whether or not the CFC ever distributes it. That shared feature, current inclusion without a dividend, explains most of the confusion, because on the surface both look like one mechanism applied to foreign corporate income.
Subpart F income is defined by IRC 952(a), and IRC 951(a) requires the US shareholder to include its pro rata share of that income currently. The bulk of it is foreign base company income under IRC 954, which breaks into foreign personal holding company income (dividends, interest, rents, royalties), foreign base company sales income, and foreign base company services income, plus insurance income under IRC 953. GILTI, under IRC 951A and restructured and renamed net CFC tested income by the One Big Beautiful Bill Act (OBBBA) for tax years beginning after December 31, 2025, works from a different starting point. It captures the CFC's tested income, which is gross income after excluding several categories, Subpart F income among them, and income excluded under the high-tax exception.
What Does Subpart F Actually Capture?
Subpart F reaches a defined list only. Foreign base company income under IRC 954 covers foreign personal holding company income, meaning dividends, interest, rents and royalties, plus foreign base company sales income and foreign base company services income. Insurance income under IRC 953 is the other main piece.
Congress limited the regime to passive and mobile items a CFC should not be able to shelter by booking them offshore, plus insurance income the CFC earns directly. Our Subpart F income guide covers the full mechanics of each category. Below I stay on the boundary against net CFC tested income.
If a dollar of CFC income fits none of the IRC 952(a) categories, Subpart F has no mechanism to reach it, and net CFC tested income exists to catch exactly that gap. The list is short and it is longer than most summaries admit. IRC 952(a) covers insurance income under 953, foreign base company income under 954, international boycott income, illegal bribes and kickbacks within the meaning of section 162(c), and income from a country while section 901(j) applies to it. The last three almost never come up, and they are why a blanket description of Subpart F as passive and mobile income is wrong.
What Is Tested Income Under GILTI (Now NCTI)?
Tested income is the CFC's gross income with several categories carved out, and Subpart F income is the first thing removed. OBBBA did more than rename the result. It struck the old definition of global intangible low-taxed income along with the net deemed tangible income return, the 10% QBAI offset that used to reduce the inclusion.
A US shareholder now includes net CFC tested income itself under IRC 951A(a), for tax years beginning after December 31, 2025. The per-CFC tested income build is largely intact, but the amount that reaches income is bigger on the same facts, the Section 250 deduction dropped from 50% to 40%, and 90% of deemed-paid foreign taxes are now creditable, up from 80%. On the corporate side that moves the effective rate on the inclusion from 10.5% to 12.6% before credits. Our net CFC tested income guide walks through the full build.
Tested income and net CFC tested income are two different figures, and the distinction matters as soon as you own more than one foreign corporation. Tested income is measured per CFC under IRC 951A(b)(2). Net CFC tested income is a shareholder-level number, the excess of the aggregate pro rata share of tested income of every CFC over the aggregate pro rata share of tested loss.
Because tested income is defined by subtraction, starting from the CFC's gross income and backing out Subpart F income and the other excluded items, it scoops up the CFC's remaining active foreign earnings. Manufacturing profit, active services income that does not meet a foreign base company services test, and ordinary operating income typically end up in tested income, because none of it fits the narrow IRC 954 or IRC 953 categories.
Why Does Subpart F Apply First?
Subpart F applies first because IRC 951A defines tested income by excluding Subpart F income, so the Subpart F computation has to be finished before tested income can be measured at all. A CFC's income passes through a sorting step every year, and the order is fixed by statute.
First, everything that fits the IRC 952(a) categories gets pulled out and taxed under IRC 951(a). Whatever is left, after that carve-out and the other exclusions in the tested income definition, becomes tested income and feeds the shareholder's NCTI inclusion under IRC 951A.
That ordering has a practical consequence. You cannot correctly compute NCTI without first finishing the Subpart F analysis for the same CFC and year. Skipping straight to an NCTI number, without confirming what already left the pool as Subpart F income, produces a wrong tested income figure.
How Do the De Minimis and Full Inclusion Rules Move Income Between the Two Regimes?
Two rules inside IRC 954(b)(3) reassign income between Subpart F and tested income at the margins. Each is measured off the CFC's gross foreign base company income plus gross insurance income, against its total gross income for the year. Both are annual tests, so a CFC can fall on a different side from one year to the next.
The de minimis rule, IRC 954(b)(3)(A), says that if a CFC's gross foreign base company income plus gross insurance income for the year is less than the lesser of 5% of gross income or $1,000,000, no part of the gross income is treated as foreign base company income or insurance income. That income is not lost. It never becomes Subpart F income, and it falls into the tested income computation. A CFC with a small amount of passive interest income sitting under that threshold ends up with that interest taxed as tested income for the year.
The full inclusion rule, IRC 954(b)(3)(B), works in the opposite direction. If that same gross foreign base company income plus gross insurance income exceeds 70% of the CFC's total gross income, the entire gross income of the CFC is treated as foreign base company income or insurance income, clean income included. The 954(b)(4) high-tax election can still pull high-taxed items back out after full inclusion applies. Gross income excluded under IRC 952(b) also sits outside the sweep.
A CFC sitting near either threshold needs a fresh computation every filing year.
How Does the High-Tax Exception Interact With Both Regimes?
The high-tax exception sits on both sides of the ordering rule, and it runs off one idea, foreign income already taxed hard abroad. Under IRC 954(b)(4), income taxed abroad at an effective rate above 90% of the maximum US corporate rate, which is 18.9% while that rate stands at 21%, can be excluded from Subpart F income by election.
A parallel high-tax exclusion for tested income runs off the same 18.9% threshold under Treas. Reg. 1.951A-2(c)(7). Both figures move only if Congress changes the 21% corporate rate, and OBBBA left that rate alone.
Electing the high-tax exception on the Subpart F side and electing it on the tested income side are separate decisions, made against separate income, and one election does not carry over to the other regime. A CFC can have high-taxed foreign base company income excluded from Subpart F while its tested income, taxed at a lower effective foreign rate, stays fully subject to NCTI.
How Does Ownership Structure Change the Result?
A US individual shareholder of a CFC is taxed on both Subpart F inclusions and tested income at ordinary rates. That individual does not get the corporate-level Section 250 deduction and generally gets no indirect foreign tax credit for the foreign taxes the CFC paid, unless the individual makes a Section 962 election.
The election lets the individual be taxed on the year's Subpart F and tested income inclusions as if a domestic corporation had received them, which opens up the deemed-paid credit under IRC 960 on both pieces.
The Section 250 deduction reaches less far. Under IRC 250(a)(1)(B) it applies only to the net CFC tested income inclusion and its Section 78 gross-up, at 40% for tax years beginning after December 31, 2025, down from 50%, so a 962 election does nothing to reduce the Subpart F piece. The deemed-paid credit under IRC 960(d) is allowed at 90% of the foreign taxes attributable to that inclusion, raised from 80% by the same law. The election also has a back end. Under IRC 962(d), when the CFC actually distributes those earnings, the shareholder picks them up in income again to the extent the distribution exceeds the tax already paid under the election, so 962 buys a lower rate today against a second layer later. Whether that trade works depends on how soon the money comes out and what the foreign tax rate is, and it is a fresh decision every year.
Every CFC analysis starts one step earlier, with the US shareholder and attribution rules that decide who counts as a US shareholder in the first place. Get that threshold question wrong & both computations that follow are wrong too. The broader CFC ownership rules settle whether a foreign corporation is a CFC at all.
Where Does This Get Reported?
Both regimes flow through Form 5471, the annual information return for US persons with interests in certain foreign corporations. The Subpart F computation runs through Worksheet A in the instructions and reaches Schedule I as the shareholder's pro rata share, with Schedules J and P tracking E&P and previously taxed E&P.
The NCTI computation is then made on Form 8992, which pulls data from Form 5471 for each CFC and combines it across all of a shareholder's CFCs to arrive at the net amount taxed under IRC 951A. A shareholder with multiple CFCs needs a Form 5471 for each one before Form 8992 can be completed correctly, because the tested income and tested loss of every CFC in the group feed the same aggregate. Missing one of those returns is its own exposure, and the Form 5471 penalty and reasonable cause rules run separately from the tax.
Nothing about the NCTI number is right until the Subpart F sort is done, & that sort is a year-by-year job. Contact TS CPA for a free consultation. We respond within the same day.
Official IRS and Government Sources
- IRS About Form 5471
- IRS About Form 8992
- IRC Section 951, Amounts Included in Gross Income of United States Shareholders
- IRC Section 951A, Net CFC Tested Income Included in Gross Income of United States Shareholders
- IRC Section 952, Subpart F Income Defined
- IRC Section 954, Foreign Base Company Income
- IRC Section 953, Insurance Income
- IRC Section 962, Election by Individuals to Be Subject to Tax at Corporate Rates
- Treas. Reg. 1.951A-2, Tested Income and Tested Loss