The Verdict is In. The Texas Franchise Tax is GILTI, Raising New Questions and Potential Issues

By David E. Colmenero, J.D., CPA-Dallas, and Alex J. Pilawski, J.D.

One the eve of Christmas week, while all else was presumably quiet and not even a mouse was stirring, the Texas Comptroller’s office released a memo announcing that, beginning with the 2026 report year, the Texas franchise tax will conform to the current version of the Internal Revenue Code (IRC).¹ For those taxpayers affected by this announcement, several questions arise. For simplicity, we refer to that announcement herein as the “Texas Comptroller Conformity Memo.”

The Texas Comptroller Conformity Memo states that total revenue, along with other components of the Texas franchise tax, will now be determined based on amounts taken from the federal tax return under the federal tax law in effect for that federal tax year rather than by reference to the 2007 version of the IRC, unless the applicable statute or rule references the IRC. For those categories of income or expense that specifically reference the IRC, such income or expense is determined under the 2007 IRC. This reflects a change in Texas Comptroller policy, which has historically required an entity to use the IRC in effect for the federal tax year beginning Jan. 1, 2007, to compute amounts taken from the applicable federal return.

According to the announcement, the Texas Comptroller is changing the policy because, after reexamining the Texas Tax Code, the Texas Comptroller has determined that not all amounts taken from the applicable federal tax return used to compute the Texas franchise tax are tied to the 2007 version of the IRC.

The memo goes on to provide an example of a provision in the Texas Tax Code that references the 2007 IRC, Tex. Tax Code Section 171.1011(c)(1)(B)(ii) that permits a subtraction in arriving at total revenue for “foreign royalties and foreign dividends including amounts determined under Section 78 or Sections 951-964 [of the] Internal Revenue Code.” The memo states that while “foreign royalties and foreign dividends are determined under current federal tax law … [b]y contrast, amounts under Section 78 and Sections 951-964 are determined under the 2007 IRC and do not include the current IRC Section 951A global intangible low-taxed income (GILTI) as GILTI was added to the IRC after Jan. 1, 2007.”

As such, the newly announced Texas Comptroller policy suggests that GILTI income must be included in total revenue for Texas franchise tax purposes and may not be subtracted under the above provisions applicable to foreign royalties and foreign dividends determined under Section 78 or Sections 951-964 of the IRC. It does not address how other aspects of the Texas Tax Code may apply to these amounts other than to state that gross receipts for apportionment purposes will be calculated based on amounts reported on the federal tax return without adjustment for the 2007 IRC, except where the statute or rule specifically references the IRC.

For context, GILTI reflects a form of taxable income for certain U.S. shareholders with foreign interests created as part of the 2017 Tax Cuts and Jobs Creation Act (TCJA).² It provides a means of taxing a U.S. shareholder’s share of certain income earned by a controlled foreign corporation by utilizing a formula set out in IRC Section 951A.³ GILTI generally targets income generated from foreign-sourced intangible assets using a complex calculation that does not consider specific intangible assets or source income to any specific assets but instead assumes a certain minimum return on tangible assets.⁴ 

At the same time Congress added GILTI, it made other corresponding changes to the IRC. Those additional revisions include, among others:

• A reduction of the corporate tax rate from a high of 35 percent to 21 percent,
• A deduction for certain foreign-sourced dividends from foreign subsidiaries,
• The allowance of a foreign tax credit against GILTI, and
• A corresponding 37.5 percent deduction against eligible income under IRC Section 250 for taxpayers with exports tied to intangible assets in the U.S. (generally referred to as foreign-derived intangible income or FDII).⁵ 

Collectively, these provisions are designed to discourage taxpayers from placing intangibles offshore and to instead encourage the on-shoring of those intangibles.⁶ GILTI has often been referred to as the “stick” with FDII acting as the “carrot” in accomplishing this overall goal.⁷ Other complementary revisions to the IRC in the TCJA include a Business Erosion and Anti-Abuse Tax (BEAT), which imposes a minimum tax on deductible payments from domestic entities to their foreign subsidiaries.⁸ 

While not discussed in the Texas Comptroller Conformity Memo, the One Big Beautiful Bill Act (OBBBA), which was signed into law on July 4, 2025, makes several revisions to these provisions. GILTI will be renamed as “net CFC tested income” (NCTI) and FDII will be known as “foreign-derived deduction-eligible income” (FDDEI).⁹ The name changes are intended to recognize that the focus of the foreign earnings will no longer be foreign income derived from intangible sources as under GILTI and FDII, thus potentially broadening the tax base under IRC Section 951A. These changes are effective in 2026.¹⁰ 

The inclusion of income from a controlled foreign corporation in a U.S. shareholder’s income is not necessarily new under federal income tax law, as certain amounts were includable in a U.S. shareholder’s income from a controlled foreign corporation even before the TCJA in the form of Subpart F income.¹¹ However, those amounts were excluded from total revenue under Tex. Tax Code §171.1011(c)(B)(ii). After the enactment of the TCJA, the Texas Comptroller’s position, at least according to the Texas Comptroller Conformity Memo, was that GILTI income was not included in total revenue, although we have not located any specific guidance addressing the issue.  As such, grappling with the treatment of these amounts for Texas franchise tax purposes would have been largely a non-issue, until now.

Perhaps a key question resulting from this new policy will be how GILTI should be sourced for Texas franchise tax apportionment purposes. The memo suggests that GILTI is not only included in total revenue but will also be subject to apportionment. From the language in the Texas Comptroller Conformity Memo, it appears the Texas Comptroller may be inclined to treat the income as dividend income, although that is not specifically stated. If so, existing Texas Comptroller policy applicable to sourcing of dividends for apportionment purposes would likely source GILTI to the location of the payor, which for a corporation or LLC would be its state of formation.¹² 

Under this sourcing provision, the denominator of a taxable entity’s apportionment factor may increase from what it would have been under prior Texas Comptroller policy with the addition of GILTI but the numerator may not necessarily increase given that controlled foreign corporations are by definition entities formed outside the U.S.¹³ This could result in a reduction of an entity’s apportionment factor, thereby eliminating or reducing the potential tax increase otherwise resulting from including GILTI in the tax base.

If the Texas Comptroller applies a different sourcing rule (e.g., by treating GILTI as something other than dividend income) or for taxpayers that may otherwise owe more in Texas franchise tax than they would without including GILTI in total revenue, there may also be legitimate questions regarding the validity of the Texas Comptroller’s new policy. Among other things, there may be a question as to whether the additional amount owed as a result of including GILTI in total revenue is consistent with the language of the Texas Tax Code and legislative intent for a number of different reasons, including the fact that the Texas Tax Code generally follows a water’s-edge rather than a worldwide approach to taxing revenue, as reflected in the combined reporting rules.¹⁴ 

In addition, in some instances there may be a question as to whether the Texas Comptroller may legitimately tax GILTI under the U.S. Due Process and Commerce Clauses. The U.S. Supreme Court has often stated, for example, that “the ‘linchpin of apportionability for state income taxation of an interstate enterprise is the ‘unitary business principle’” and has in fact applied this concept to deny the state taxation of foreign-sourced revenue in some cases, including dividends received from certain foreign subsidiaries.¹⁵ The unitary business principle is indeed a concept that the Texas Tax Code incorporates for combined reporting.¹⁶ To the extent that GILTI derives from a nonunitary source, there may be a question as to whether the Texas Comptroller may require a taxpayer to include it in a taxpayer’s total revenue and subject it to apportionment.

There may also separately be a question in some instances as to whether the Texas Comptroller’s taxation of GILTI violates the U.S. Foreign Commerce Clause. In a 1992 decision, the U.S. Supreme Court invalidated a state’s taxation of dividends received by a taxpayer from foreign subsidiaries where the state did not similarly tax dividends from domestic subsidiaries.¹⁷ The Court reiterated its holding in a prior decision that “the constitutional prohibition against state taxation of foreign commerce is broader than the protection afforded to interstate commerce, … in part because matters of concern to the entire Nation are implicated.” Id.

The Court went on to state, “[W]e think that a State’s preference for domestic commerce over foreign commerce is inconsistent with the Commerce Clause even if the State’s own economy is not a direct beneficiary of the discrimination.” Id. Given the overall federal policies reflected in the enactment of GILTI and the various complex nuances of both GILTI and the Texas franchise tax, there will likely be legitimate questions in many situations as to whether the taxation of GILTI at the state level violates the U.S. Foreign Commerce Clause.

In short, the Texas Comptroller’s new policy reflected in the Texas Comptroller IRS Conformity Memo raises complex issues for many taxpayers especially in light of the unresolved questions. Any taxpayers seeking guidance on the impact of these changes who want to analyze their options in light of this new policy are welcome to contact the authors.

David Colmenero can be reached at dcolmenero@meadowscollier.com and Alex Pilawski can be reached at apilawski@meadowscollier.com. To contact them by phone, please call 214-744-3700.

Footnotes

1. See Tex. Comptroller Memo Re Conformity of Texas Franchise Tax to the Internal Revenue Code, STAR Access No. 202512012M (Dec. 19, 2025) available at https://star.comptroller.texas.gov/view/202512012M?q1=gilti.

2. See IRC Section 951A (before 2025 amendment).

3. See id.

4. See id.

5. See generally IRS Tax Cuts and Jobs Act: A Comparison for Large Businesses and International Taxpayers available at https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-a-comparison-for-large-businesses-and-international-taxpayers.

6. See The Tax Advisor, "The Carrot-and-Stick Approach to On-Shoring Intangible Value" (Aug. 1, 2018) available  at https://www.thetaxadviser.com/issues/2018/aug/carrot-stick-approach-on-shoring-intangible-value/.

7. See, e.g., id.

8. See IRC Section 59A (before 2025 amendment).

9. See "What’s the Difference Between FDII (Now FDDEI) and GILTI (Now NCTI)?" Bloomberg Tax available at https://pro.bloombergtax.com/insights/international-tax/foreign-derived-intangible-income/.

10. See id.

11. See IRC Sections 951-964.

12. See 34 Tex. Admin. Code §3.591(e)(7)(C).

13. See 26 USC Sections 7701(a)(4),(5).

14. See Tex. Tax Code §171.1014.

15. See, e.g., ASARCO Inc. v. Idaho, 458 U.S. 787 (1982); F.W. Woolworth Co. v. New Mexico, 458 U.S. 354 (1982).

16. See Tex. Tax Code Section 171.1014.

17. See Kraft General Foods, Inc. v. Iowa Dept. of Revenue and Finance, 505 U.S. 71,79 (1992).