How OBBBA’s New Section 163(j) Rules Affect CFC Group Elections

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In this article, we discuss one of the most consequential changes that Congress made to the business interest expense rules as part of the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. For tax years beginning after December 31, 2025, Subpart F income, net CFC tested income (formerly known as GILTI), and § 78 gross-up amounts are excluded from a U.S. shareholder’s adjusted taxable income (ATI) under § 163(j).

This change has important implications for two groups of taxpayers. First, those who have already made a CFC group election and early-adopted the 2020 proposed regulations; because those taxpayers previously enjoyed an ATI roll-up benefit that allowed their foreign income inclusions to support larger interest deductions at the U.S. level, and that benefit is now gone. For that group, the change is not merely academic: it may require a review of where the worldwide group’s leverage currently resides – both in terms of third-party borrowings and intercompany debt arrangements – and whether repositioning that leverage within the group structure can minimize the negative impact of this provision.

Second, taxpayers currently considering making a CFC group election need to understand that a key historical benefit of that election is no longer available before they commit to it.

How Section 163(j) Works: A Brief Overview

To understand why this change matters, it helps to briefly review how § 163(j) works. Under this provision, a taxpayer’s deduction for business interest expense is capped at the sum of three items:

(1) the taxpayer’s business interest income for the year; (2) 30% of the taxpayer’s adjusted taxable income (ATI); and (3) any floor plan financing interest.

The 30% of ATI figure is the key variable for most companies; it determines how much interest expense they can actually deduct. Any business interest that cannot be deducted in a given year is carried forward to the next year.

When the Tax Cuts and Jobs Act (TCJA) was enacted in 2017, it defined ATI on an EBITDA basis (i.e., earnings before interest, taxes, depreciation, and amortization). Beginning in 2022, however, the law shifted to an EBIT basis, significantly reducing deductible interest for capital-intensive industries. The OBBBA permanently restores the EBITDA framework beginning in 2025, which is welcome news. But it simultaneously removes foreign income inclusions from ATI, which works in the opposite direction.

For any given taxpayer, the net effect of these two changes depends entirely on their specific facts: How much depreciation and amortization they have, how large their foreign income inclusions are, and how much U.S. interest expense they are trying to deduct. Careful modeling of both changes together is essential before drawing any conclusions about whether the OBBBA is a net positive or net negative for a particular company’s § 163(j) position.

Prior Law: Treasury Regulations and the ATI Roll-Up

Before the OBBBA, the treatment of foreign income inclusions in the ATI calculation was governed by Treasury regulations. Under those regulations, a U.S. shareholder’s ATI was computed without regard to amounts included in income under the Subpart F rules, the net CFC tested income rules, and the § 78 gross-up, net of the related § 250 deduction. Treasury’s rationale was to avoid double-counting, since the CFC’s income had already been taken into account in computing the CFC’s own § 163(j) limitation. As a result, for the vast majority of U.S. shareholders, foreign income inclusions did not increase their ATI or help support larger interest deductions at the U.S. level. This was the general rule.

The exception arose under proposed Treasury Regulation § 1.163(j)-7(j), issued in September 2020. A U.S. shareholder that had made a CFC group election and chose to early-adopt those proposed regulations was permitted to increase its own ATI by a portion of the Subpart F and net CFC tested income inclusions flowing from its CFC group; the so-called roll-up provision. The roll-up amount was the CFC group’s excess taxable income multiplied by the proportion of the CFC group’s total taxable income that was actually included in the U.S. shareholder’s income as Subpart F or net CFC tested income. The § 78 gross-up was not included.

This ATI boost was exclusively available to those who had made a CFC group election and early-adopted the 2020 proposed regulations. For highly leveraged multinationals with substantial foreign earnings, it was often the primary reason to make and maintain the election. Companies that structured their worldwide leverage specifically to take advantage of this benefit now find themselves in a materially different position. We should also note that legislation has been introduced in both the House and the Senate to reverse this change, but prospects for standalone passage are uncertain, and taxpayers should not plan around it at this stage.

OBBBA’s Changes to § 163(j)(8)(A): What’s New

The OBBBA amended § 163(j)(8)(A) by adding clause (vi), which codifies and expands the exclusion of foreign income inclusions from ATI. Effective for tax years beginning after December 31, 2025, ATI must be computed without regard to: (1) Subpart F income, including § 956 inclusions; (2) net CFC tested income (formerly GILTI); and (3) § 78 gross-up amounts. The related deductions; the 40% net CFC tested income deduction under § 250 and § 245A dividends received deductions from certain CFC stock sales are excluded as well.

The exclusion is symmetric: both the income and the deductions are removed. A U.S. shareholder’s ATI base is therefore reduced to the extent of its net foreign income inclusions, narrowing the § 163(j) limitation and increasing the amount of interest expense that may be disallowed.

It is also worth emphasizing that whereas this exclusion was previously a Treasury regulation subject in principle to regulatory reversal or legal challenge. It is now written into the statute itself, so only Congress can undo it. That permanence makes it all the more important for affected taxpayers to take action now rather than wait and hope for a regulatory fix.

Impact on the CFC Group Election and Key Planning Considerations

Under the prior rules, a U.S. shareholder that had made a CFC group election and early-adopted the 2020 proposed regulations could include a portion of its Subpart F and net CFC tested income inclusions in its ATI through the roll-up. That benefit is gone for tax years beginning after December 31, 2025. What remains is the CFC-level netting benefit, i.e., the ability to offset CFC-level business interest expense against CFC-level ATI across the CFC group. But for groups that made the election primarily for the ATI boost, the loss of the roll-up fundamentally changes the calculus.

Recommended Action Steps for Affected Companies

1. Quantify the ATI impact. Model the reduction that results from stripping out Subpart F income, net CFC tested income, and § 78 gross-up amounts for tax years beginning after December 31, 2025. For companies with substantial CFC earnings and significant domestic interest expense, this number could be material.
2. Address the CFC group election. If you have already made the election, understand that the ATI roll-up benefit is gone going forward, and assess how this affects your overall § 163(j) position. If you are currently considering making the election, carefully weigh the remaining benefit; CFC-level interest netting; against the compliance burden and the 60-month binding period, without factoring in the ATI boost that is no longer available.
3. Review your debt placement strategy. Consider whether debt currently held at the U.S. parent level remains optimally placed and model the transfer pricing and foreign tax implications of any restructuring.
4. Model the EBITDA restoration alongside this change. Understand the net effect for your specific facts, the interaction between EBITDA restoration and the ATI exclusion of foreign income will vary significantly by company.
5. Monitor legislative developments and assess state conformity. Bills have been introduced in both chambers of Congress to reverse this change, but their prospects are uncertain. Do not plan around a potential reversal at this stage. The impact of this change will vary by state depending on whether the state automatically conforms to the federal rules or follows an earlier version of the law.

Summary

The One Big Beautiful Bill Act has permanently eliminated one of the core benefits of the CFC group election; the ability to roll up a portion of foreign income inclusions into a U.S. shareholder’s ATI; and has done so at the statutory level, meaning only Congress can reverse it. The change is effective for tax years beginning after December 31, 2025. The immediate priority for all affected companies is to model the full impact of these changes and to assess whether any adjustments to debt placement, capital structure, or election strategy are warranted. KBF is here to assist with that analysis. Connect with our international tax team.

Disclaimer

This article is intended for informational purposes only and does not constitute legal or tax advice. This communication was not written or intended to be used, and it cannot be used, for the purpose of avoiding United States federal tax penalties. Please consult your KBF advisor to discuss how these changes may apply to your specific circumstances. If you would like written advice for this purpose, please contact us.