Foreign-derived deduction-eligible income

What is FDDEI?

Income a domestic C corporation earns from qualifying sales and services to foreign customers is called foreign-derived deduction-eligible income. FDDEI replaced foreign-derived intangible income (FDII) under the 2025 One Big Beautiful Bill Act (OBBBA), which simplified the calculation by eliminating the former QBAI-based deemed intangible income rules.

To claim the deduction, corporations must demonstrate that the income is derived from qualifying foreign transactions and satisfy applicable foreign-person and foreign-use requirements. As a result, maintaining sufficient documentation remains an important part of FDDEI compliance.

Who is eligible to claim the FDDEI deduction?

The FDDEI deduction is generally available only to domestic C corporations. Partnerships, S corporations, and sole proprietorships generally cannot claim the deduction directly.

What qualifies as FDDEI?

FDDEI generally includes qualifying income earned from serving foreign markets. Common examples include:

• Foreign sales of property. Income from selling, leasing, licensing, exchanging, or otherwise transferring property to a foreign person for use outside the United States
• Services provided abroad. Income from services provided to persons located outside the United States or with respect to property located outside the United States

Certain related-party transactions may also qualify, provided the applicable foreign-use requirements are met, and the taxpayer maintains sufficient documentation to support the deduction.

What qualifies as foreign use for FDDEI purposes?

Foreign use is one of the most important requirements for qualifying for the FDDEI deduction. In general, property is for foreign use when it is sold, leased, licensed, or otherwise transferred to a foreign person and is ultimately used outside the United States.

For services, qualification generally depends on the location of the customer or the property receiving the service. In many cases, services provided to customers outside the United States may qualify for FDDEI treatment.

Certain related-party transactions may also qualify, but additional rules apply. In those situations, taxpayers must be able to demonstrate that the property is ultimately used outside the United States and satisfy any applicable foreign-use requirements.

Because the IRS requires taxpayers to substantiate foreign use, businesses should maintain supporting documentation such as contracts, invoices, shipping records, purchase orders, and customer certifications. Without sufficient documentation, otherwise qualifying income may not be eligible for the FDDEI deduction.

Can service businesses qualify for FDDEI?

Yes. Service businesses may qualify if they provide services to persons located outside the United States or with respect to property located outside the United States and meet the applicable foreign-use requirements.

Can related-party export sales qualify for FDDEI?

Yes. Related-party transactions may qualify, but special rules apply. In many cases, the taxpayer must establish that the related foreign party either resells the property to an unrelated foreign person for foreign use or uses the property in a manner that produces qualifying foreign-derived income.

What documentation is required to substantiate foreign use for FDDEI purposes?

Taxpayers should maintain records demonstrating both foreign person status and foreign use, such as contracts, invoices, shipping records, purchase orders, customer certifications, and other documentation supporting the transaction.

Can foreign royalty income qualify for FDDEI?

Yes, foreign royalty income can qualify for FDDEI, but eligibility depends on the nature of the transaction and whether the foreign-use requirements are satisfied.

Royalties may qualify for FDDEI if they are derived from the licensing of intellectual property to a foreign person for foreign use and otherwise satisfy the applicable statutory and documentation requirements.

The taxpayer must be able to establish that the royalty income is foreign-derived and meets the foreign-use rules. Certain gains or income from dispositions of intangible property may be excluded from deduction-eligible income (DEI) and therefore may not qualify.

When does an otherwise qualifying transaction fail the FDDEI rules?

Even if income is not excluded from deduction-eligible income, it will not qualify as FDDEI unless the corporation can satisfy the applicable foreign-use requirements.

For example, FDDEI generally does not apply when:

• Property sold to a foreign person is ultimately used, consumed, or disposed of within the United States.
• The taxpayer cannot substantiate that the property is intended for foreign use under the applicable documentation rules.
• Services are provided to a person located in the United States or with respect to property located in the United States.
• Related-party transactions fail to satisfy the special rules governing foreign use and resale requirements.

What income is excluded from FDDEI?

Because FDDEI is a subset of deduction eligible income, income that is excluded from DEI cannot be treated as FDDEI.

Examples include:

• Subpart F income
• Net CFC tested income (NCTI), the income category that replaced GILTI under OBBBA
• Dividends received from controlled foreign corporations (CFCs)
• Foreign branch income
• Financial services income
• Domestic oil and gas extraction income
• Certain gains or other income from the sale, disposition, or transfer of intangible property
• Certain gains from the disposition of depreciable, amortizable, or depletable property

If income falls into one of these categories, it is excluded before FDDEI is calculated.

Does a U.S. parent company include FDDEI from a foreign branch?

Generally, no. Foreign branch income is excluded from DEI, meaning it cannot be treated as FDDEI.

As a result, income earned through a foreign branch generally does not qualify for the FDDEI deduction, even if the branch serves foreign customers.

Does FDDEI shield dividends from tax?

No. FDDEI does not provide a special exemption for dividend income.

Instead, FDDEI provides a deduction for qualifying foreign-derived income earned directly by a domestic C corporation from foreign sales and services. In fact, certain dividends received from controlled foreign corporations (CFCs) are excluded from DEI and therefore generally cannot qualify as FDDEI.

FDDEI reduces the tax rate on qualifying foreign-derived business income, not on dividend income.

What is the FDDEI deduction rate?

For tax years beginning after December 31, 2025, the Section 250 deduction for qualifying FDDEI is 33.34%. This permanent deduction from OBBBA results in an effective federal corporate tax rate of approximately 14% on qualifying FDDEI, compared with the general 21% federal corporate tax rate.

Prior to OBBBA, the FDII deduction rate was 37.5% but was scheduled to decrease to 21.875% beginning in 2026. OBBBA replaced that structure with a permanent 33.34% deduction rate, providing greater certainty for long-term tax planning.

How is FDDEI calculated?

FDDEI is generally determined through the following steps:

1. Calculate deduction-eligible income. Start with the corporation's gross income and exclude items that are not treated as deduction-eligible income, such as:

• Subpart F income
• NCTI, the income category that replaced GILTI under OBBBA
• Dividends received from controlled foreign corporations
• Foreign branch income
• Financial services income
• Domestic oil and gas extraction income

Then subtract deductions and expenses that are properly allocable to the remaining income under the applicable rules.

2. Identify the foreign-derived portion of DEI. Determine the amount of DEI derived from qualifying transactions, including:

• Sales, leases, licenses, exchanges, or other dispositions of property to a foreign person for foreign use; and
• Services provided to a person located outside the United States or with respect to property located outside the United States, provided the applicable foreign-use requirements are satisfied.

3. Calculate the Section 250 deduction. For tax years beginning after December 31, 2025, OBBBA amended Section 250 to replace the prior FDII calculation with a deduction based on FDDEI and eliminated the QBAI-based deemed return reduction. As a result, the deduction attributable to FDDEI is calculated more directly:

FDDEI deduction = FDDEI × 33.34%

For qualifying FDDEI, this results in an effective federal corporate tax rate of approximately 14% on qualifying FDDEI, compared with the general 21% federal corporate tax rate.

What is Form 8993?

The IRS Form 8993 is used to calculate and claim the Section 250 deduction related to FDDEI and NCTI. Domestic C corporations that are eligible for these tax benefits generally use Form 8993 to determine the amount of deduction they can claim and report it on their federal income tax return.

The form is used to:

• Calculate the corporation's FDDEI deduction
• Calculate any deduction related to NCTI
• Apply any taxable income limitations that may reduce the allowable deduction
• Determine the final Section 250 deduction amount reported on the return

The IRS may continue to update Form 8993 and its instructions to reflect terminology changes enacted by OBBBA.

Do you need to calculate QBAI for FDDEI?

No. Under the rules enacted by OBBBA, Qualified Business Asset Investment (QBAI) is no longer part of the FDDEI calculation.

The OBBBA restructured and renamed the deduction from FDII to FDDEI. The revised rules completely eliminated the QBAI tangible income carve-out, simplifying the deduction.

What expenses reduce FDDEI?

FDDEI is calculated from deduction-eligible income, which is determined after subtracting deductions and expenses that are properly allocable to the income. These may include costs such as cost of goods sold, compensation, depreciation, and other ordinary business expenses.

Does NOL affect FDDEI calculation?

Yes. Net operating losses (NOLs) can affect the amount of FDDEI deduction a corporation can claim, because the Section 250 deduction is ultimately limited by taxable income.

While FDDEI is calculated by identifying the portion of a corporation's DEI that is derived from qualifying foreign sales and services, NOL deductions can reduce taxable income and therefore affect the amount of Section 250 deduction available in a given year.

The exact impact depends on the corporation's facts and circumstances, including:

• The amount of available NOL carryforwards
• The corporation's taxable income for the year
• The interaction between the Section 250 deduction and other tax attributes
• Any applicable limitations on NOL utilization

Corporations with significant NOL carryforwards should model the interaction between NOLs and the Section 250 deduction to determine the potential effect on their FDDEI benefit and overall effective tax rate.

In short, NOLs do not change which income qualifies as FDDEI, but they can affect the amount of Section 250 deduction that a corporation is ultimately able to use by reducing taxable income and triggering applicable deduction limitations.

What is the difference between FDDEI and NCTI?

FDDEI and NCTI are both addressed under Section 250, but they apply to different types of income.

• FDDEI applies to qualifying foreign-derived income earned directly by a domestic C corporation from foreign sales and services.
• NCTI applies to certain income earned by a corporation's controlled foreign corporations (CFCs) and included in the U.S. shareholder's taxable income.

A key distinction is that NCTI is excluded from DEI. As a result, income included in the NCTI calculation generally cannot also qualify as FDDEI.

In short, FDDEI applies to qualifying foreign-derived income earned by a domestic corporation, while NCTI applies to certain income earned through foreign subsidiaries. Because NCTI is excluded from DEI, the same income generally cannot qualify for both benefits. Companies with both domestic export activities and CFCs should evaluate how the two regimes interact when planning their international tax strategy.

What is the difference between FDDEI and FDII?

FDDEI replaced foreign-derived intangible income (FDII) under OBBBA. While both provisions provide a Section 250 deduction for qualifying foreign-derived income, FDDEI simplifies the calculation and removes the focus on deemed intangible income.

The most significant change is the elimination of the QBAI reduction, which previously reduced the amount of income eligible for the deduction based on a corporation's tangible business assets.

Why did OBBBA rename FDII to FDDEI?

The OBBBA changed FDII to FDDEI because the deduction no longer relies on a deemed intangible income calculation. Instead, it focuses more directly on qualifying foreign-derived income, simplifying the rules and making the name better reflect how the deduction works.

Which businesses benefit most from the switch from FDII to FDDEI?

The elimination of the QBAI reduction particularly benefits asset-intensive domestic businesses, including manufacturers and companies with substantial investments in machinery, equipment, and production facilities. Under the previous rules, these businesses often received a smaller benefit because tangible assets reduced the amount of income treated as "intangible." OBBBA removes that limitation, allowing a broader range of exporters to maximize the deduction.

Is FDDEI more favorable than the old FDII deduction?

It depends. Companies with significant U.S. tangible assets often benefit from the elimination of the QBAI reduction, even though the deduction percentage decreased. Businesses with little QBAI under the old rules may see a different outcome. Modeling both the old and new approaches can help determine the overall impact on a corporation's effective tax rate and tax planning strategy.

Does FDDEI reduce earnings and profits (E&P)?

The Section 250 deduction may affect a corporation's current or accumulated earnings and profits (E&P), but the impact depends on the corporation's specific facts and the applicable E&P adjustment rules. Taxpayers should evaluate the effect as part of their overall E&P computation.

What is included in FDDEI compliance?

FDDEI compliance involves identifying qualifying foreign-derived income, calculating the allowable Section 250 deduction, maintaining supporting documentation, and reporting the deduction on the corporation's federal income tax return. Although OBBBA simplified the calculation by eliminating the QBAI component, corporations must still satisfy detailed eligibility and substantiation requirements.

Key components of FDDEI compliance include:

• Identifying qualifying foreign-derived income from eligible sales, leases, licenses, and services provided to foreign customers or for foreign use
• Determining deduction-eligible income and excluding items that do not qualify, such as foreign branch income, NCTI, Subpart F income, and certain dividends from CFCs
• Applying expense allocation rules to determine the amount of income eligible for the deduction
• Documenting foreign person status of customers and counterparties
• Substantiating foreign use of property and services through contracts, invoices, shipping records, customer certifications, and other supporting evidence
• Reviewing related-party transactions to ensure compliance with the special foreign-use and resale rules
• Calculating the Section 250 deduction and any applicable taxable income limitations
• Preparing and filing Form 8993 with the corporation's federal income tax return
• Maintaining audit-ready records to support the deduction in the event of an IRS examination

Because FDDEI compliance often involves export transactions, transfer pricing considerations, and complex documentation requirements, many multinational corporations rely on specialized international tax software to help automate calculations, track supporting data, and reduce compliance risk.

What is a good international tax software platform for managing FDDEI?

When evaluating an international tax software platform, businesses should look for capabilities such as:

• Automated FDDEI and Section 250 calculations
• Integration with ERP and financial systems
• Foreign-use documentation management
• Expense allocation and apportionment capabilities
• Support for NCTI and other U.S. international tax provisions
• Audit trails and reporting tools
• Scenario modeling and tax planning capabilities

These capabilities help tax teams manage FDDEI requirements more efficiently while supporting accuracy, consistency, and audit readiness. A strong platform should also make it easier to connect calculation, documentation, and reporting workflows across the broader international tax function.

Our ONESOURCE Income Tax helps tax teams streamline corporate income tax compliance, including complex federal and international filings, while ONESOURCE International Tax Calculator supports modeling and calculations for FDDEI, NCTI, Subpart F, foreign tax credits, BEAT, and other U.S. international tax provisions. Together, these solutions can help multinational businesses improve accuracy, reduce manual work, and manage FDDEI-related tax obligations with greater confidence.

We last updated this information on 07/07/2026.