The 90% Rule: Navigating the OBBBA’s New Foreign Tax Credit Landscape in 2026

For U.S. multinationals and high-net-worth investors with global operations, the passage of the One Big Beautiful Bill Act (OBBBA) in mid-2025 has redefined the cost of doing business abroad. While the legislation introduced several complexities, it also delivered a significant strategic win, the 90% Rule for foreign tax credits. This provision, which became effective for tax years beginning after December 31, 2025, represents a fundamental shift in how the U.S. taxes foreign earnings.

Specifically, the OBBBA rebranded the Global Intangible Low-Taxed Income (GILTI) regime as Net CFC Tested Income (NCTI) and, in doing so, reduced the haircut applied to foreign tax credits from 20% down to 10%. For a global tax strategist, this 90% allowance is not just a rate change; it is a catalyst for a total re-evaluation of where capital is deployed and how foreign taxes are structured.

The End of the 80% Era: Understanding the Haircut Reduction

Under the previous GILTI regime, U.S. shareholders faced a structural disadvantage known as the 20% haircut. Even if a company paid high taxes in a foreign jurisdiction, only 80% of those taxes could be used to offset the U.S. tax liability on that same income. This frequently resulted in residual U.S. tax even when the foreign tax rate was significantly higher than the U.S. effective rate.

The OBBBA’s transition to the 90% rule (officially codified as an amendment to Section 960(d)) sharply reduces this friction. As noted in the Ryan, LLC analysis of OBBBA international provisions, this change allows taxpayers to capture a much larger portion of the taxes they already pay to foreign governments. By allowing 90% of foreign taxes to flow through as a credit, the break-even foreign tax rate required to eliminate U.S. residual tax has dropped significantly.

Calculating the New Effective Tax Rate Threshold

With the OBBBA setting the permanent Section 250 deduction for NCTI at 40%, the effective U.S. tax rate on foreign income is now approximately 12.6% ($21\% \times (1 – 40\%) = 12.6\%$). Under the new 90% credit rule, a foreign effective tax rate (ETR) of roughly 14% is generally sufficient to fully shield that income from U.S. federal taxation.

According to SingerLewak’s technical summary of the OBBBA, this 14% threshold is a much more attainable target for businesses operating in mid-to-high tax jurisdictions. Previously, under the 80% rule, an ETR of over 16% was often required. This 2% spread might seem minor, but for an enterprise generating $50 million in NCTI, it represents $1 million in annual tax savings that can now be reinvested into global growth.

Beyond the Haircut: The Benefit of Direct Expense Allocation

Perhaps more impactful than the 90% rule itself is a secondary change the OBBBA made to the Section 904 foreign tax credit limitation. Historically, U.S. companies were forced to allocate and apportion domestic expenses (such as interest and R&D) against their foreign income. This often artificially lowered the FTC limitation, preventing companies from using credits they had technically earned under the haircut rules.

The OBBBA has largely eliminated this requirement for NCTI and the new Foreign-Derived Deduction Eligible Income (FDDEI). Expenses are now only allocable if they are directly attributable to the foreign income. This cleaner credit calculation, combined with the 90% rule, means that high-leverage companies will see a dramatic increase in their ability to utilize foreign credits. This synergy is a major reason why QBI Aggregation Rules and other domestic strategies must be coordinated with international planning to prevent over-optimization in one area at the expense of another.

Planning for PTEP: The 90% Rule on Distributions

One nuance of the 90% rule that requires careful attention is its application to Previously Taxed Earnings and Profits (PTEP). When a Controlled Foreign Corporation (CFC) distributes cash that has already been taxed under the NCTI regime, any withholding taxes paid on that distribution are also subject to the 10% haircut.

As detailed in the Alvarez & Marsal guidance on OBBBA implementation, new Section 960(d)(4) ensures that this 90% limitation applies consistently across both the initial income inclusion and the subsequent distribution of that income. For high-net-worth individuals using Section 962 elections to be taxed as corporations, this makes the timing of offshore dividends a critical component of their 2026 tax strategy.

Strategic Pivot: Moving From Low-Tax to Mid-Tax Jurisdictions

The OBBBA’s removal of the 10% Qualified Business Asset Investment (QBAI) exemption has removed the tax incentive for holding massive tangible assets in ultra-low-tax jurisdictions. Since all foreign income is now taxed from the first dollar, the strategic focus has shifted from tax avoidance in 0% zones to credit optimization in 14-15% zones.

Operating in a jurisdiction with a 15% corporate tax rate now essentially buys you a zero-tax result in the U.S. because of the 90% rule. This allows businesses to prioritize operational efficiency, infrastructure, and talent in stable European or Asian markets without the penalty of residual U.S. tax that existed under the old 80% regime.

Key Considerations for 2026 FTC Optimization:

• Jurisdictional Blending: The U.S. still allows global blending for NCTI, meaning credits from a 25% tax jurisdiction can offset income from a 5% jurisdiction.
• Direct Allocation Review: Conduct a deep dive into your expense ledger to ensure no indirect domestic expenses are being incorrectly pushed into the foreign tax basket.
• Section 962 Modeling: For individual shareholders, the value of the 90% credit is only available if a Section 962 election is made. This must be modeled against the eventual tax on the actual dividend distribution.

Optimize Your Global Tax Footprint

The shift to the 90% rule is a landmark development that rewards U.S. companies for being active participants in the global economy. However, the elimination of QBAI and the new rules regarding PTEP mean that the autopilot strategies used since 2017 are now obsolete. Successfully navigating the international provisions of the OBBBA requires a meticulous, jurisdiction-by-jurisdiction analysis of your effective tax rates and credit capacity.

Find an International Tax Specialist Today

Navigating the complexities of Section 960, the new NCTI regime, and the 90% FTC rule requires specialized expertise that goes beyond domestic accounting. At Top Tax Planners, we connect successful individuals and global business owners with the nation’s most elite international tax strategists. Our vetted professionals are experts in OBBBA compliance and are already helping clients model the impact of the 90% rule on their 2026 global tax liability. Don’t let residual U.S. taxes erode your international profits. Visit the Top Tax Planners Directory today to find a qualified tax professional who can help you optimize your foreign tax credits and protect your global wealth.