The current fate of FDII is unclear. Some lawmakers call for expansion; some, on the contrary, want it eliminated. However, without any further legislation, the deduction is set to go from 37.5%, as it is right now, to 21.875% in 2026.
Under IRC Code 250, domestic corporations may deduct 37.5% of FDII (Foreign-Derived Intangible Income). This was put in place under the 2017 Tax Cuts and Jobs Act (“TCJA”) to incentivize U.S. Corporations to keep their Intellectual Property in the U.S. and generate foreign sales. The reward is a special tax deduction on this foreign-sourced income.
At the time of its enactment, the FDII provision included a reset of the deduction going from 37.5% to 21.875% for tax years beginning after December 31, 2025. Recently, Representative Michelle Steel (R-CA) introduced a law to repeal the scheduled reduction of FDII and instead proposed an increase of the deduction to 50%. Her reasoning was that the “competitive FDII rate ensures that American companies are encouraged to invest their profits here at home, creating jobs and developing new technologies that grow our economy.”
Under President Biden’s “General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals”, FDII is set to be eliminated for tax years after 12/31/2024. This is being proposed for a number of reasons. Mainly because FDII “provides large tax breaks to companies with excess profits – who are already reaping the rewards of prior innovation – rather than incentivizing new domestic investment.” Another reason cited by the President’s proposal is related to GILTI in particular: “There is a strong incentive for companies to offshore plants and equipment, since moving equipment offshore both increases the tax-free return under GILTI and increases the tax deduction under FDII.” According to the proposal, the revenue received as the result of FDII elimination “can be deployed to incentivize R&D in the United States directly and more effectively.”
The International Services Team at Withum is keeping a close eye on all the new developments related to FDII and will post further updates once those are available.
Authors: Julia Kudinova | [email protected] and Chaya Siegfried, Partner and Lead, International Business Tax | [email protected]
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