Understanding Foreign Derived Intangible Income (FDII)

Foreign Derived Intangible Income (FDII) is a tax provision established by the Tax Cuts and Jobs Act (TCJA) of 2017 (§250(b)) to incentivize U.S. companies to earn income from exporting goods and services, while discouraging profit shifting to lower-tax jurisdictions.

What Constitutes FDII?

Contrary to its name, FDII encompasses income not necessarily derived from intangible assets alone. Under TCJA, it assumes a fixed return on a corporation’s tangible assets; any surplus is deemed generated from intangible assets. FDII includes income from:

  • Sales of property (including intangible property licenses) to foreign persons for use outside the U.S.
  • Services provided to foreign persons or regarding foreign property.

Tax Benefits of FDII

For domestic C corporations, TCJA allows a 37.5% deduction on FDII, reducing to 21.875% post-2025. This deduction results in an effective federal tax rate of 13.125% on qualifying FDII (16.4% post-2025).

Calculating FDII

Determining FDII involves a multi-step process:

  1. Determine Deduction Eligible Income (DEI): Gross income excluding certain items, less deductions.
  2. Identify Foreign-Derived DEI (FDDEI): Portion of DEI from foreign sources.
  3. Calculate Deemed Intangible Income (DII): Excess of DEI over 10% of qualified business asset investment (QBAI).
  4. Compute FDII: Multiply DII by the ratio of FDDEI to DEI.

Example Calculation

Consider a hypothetical scenario where a U.S. corporation (USP) sells $400 in gross income ($100 to U.S., $300 to foreign), with $80 in total deductions. After calculations, USP determines $150 as FDII, qualifying for a $56.25 FDII deduction, resulting in a 13.125% effective tax rate.

Considerations for Businesses

FDII applies to sales/services to related foreign entities, provided they are resold or used with unrelated foreign transactions. Special rules apply, such as substantiating foreign use and avoiding related party restrictions.

Industries Benefiting from FDII

Industries with minimal QBAI (e.g., services, technology, software, medical devices) benefit most from FDII, enhancing tax efficiency for businesses serving global markets.

Maximizing FDII Benefits

Businesses with foreign income streams should explore FDII eligibility thoroughly, ensuring compliance with related party rules and substantiating foreign use claims.

For expert guidance on identifying FDII opportunities and optimizing tax benefits, Transglobal Tax Solutions offers tailored support to companies engaged in global operations.

For more information on FDII or to determine your eligibility,, please feel free to contact us at mmiller@tglobaltax.com. 

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