Thought Leadership - HORAN Wealth (and the OBBBA)

OBBBA Impact on Foreign Derived Intangible Income (FDII)



The recently enacted One Big Beautiful Bill Act (OBBBA) made several changes to the tax rules around income that U.S. companies earn from foreign markets. In particular, the OBBA modifies the Foreign-Derived Intangible Income Deduction (FDII), which has now been renamed the Foreign-Derived Deduction Eligible Income (FDDEI) deduction. This change in name also comes with important changes to the tax code, specifically for closely held business owners that operate within international markets.

The first change is to the effective tax rate on qualifying foreign income. Under the old FDII rules, this income was taxed at an effective rate of 13.125% after the effect of a deduction under section 250. This effective rate was scheduled to jump to 16.4% in 2026 after the Tax Cuts and Jobs Act expired, but OBBBA lessened the jump to 14% in 2026. While the rate is increasing, U.S. companies subject to the foreign income tax are in a better position than they would have been if the rates had been adjusted as scheduled.

The more substantial change involves how intellectual property (IP) transactions are treated. Deduction Eligible Income (DEI) is the starting point to calculate the special deductions mentioned above (FDII pre-OBBBA/ FDDEI post- OBBBA). Beginning on June 16, 2025, any sale, transfer, or license of IP to a related foreign affiliate will no longer qualify as deduction eligible income under FDDEI. This includes transactions under Section 367(d) of the Internal Revenue Code. Section 367(d) applies when a U.S. company transfers IP such as patents, trademarks, or technology to a foreign subsidiary. Instead of treating the transfer as a one-time sale, section 367(d) provides that the U.S. company is considered to receive annual royalty payments. The rationale behind section 367(d) is to deter patents being developed in the United States and transferred to a country with lower tax rates.

This change could have a significant impact on business owners, especially those with closely held companies that operate internationally. In the past, companies could transfer IP offshore while still receiving the FDDEI tax benefit. Going forward, those strategies may no longer work. Congress is incentivizing companies to retain IP in the U.S. Corporation and directly license to foreign customers. This structure would likely continue to qualify as DEI and receive the benefits of the revised FDDEI deduction. By pushing IP to foreign customers, such favorable treatment is likely lost.

In summary, OBBBA provides a modest rate increase on FDDEI income, while significantly minimizing the benefits of IP transfers. Businesses with international operations will need to carefully review their structures to make sure they understand the new rules and the potential tax costs associated with them. Please be sure to consult your own tax advisors regarding the impact of these changes, as the final regulations under OBBBA are expected to provide additional clarity and remain forthcoming.