Foreign-Derived Intangible Income (FDII) is a U.S. tax provision introduced under the Tax Cuts and Jobs Act (TCJA) of 2017. It aims to encourage U.S. businesses to use intangible assets for activities abroad. The provision provides a tax incentive for U.S. companies to generate income from intangible assets like patents, trademarks, and software in foreign markets. FDII offers a reduced tax rate on foreign-derived income to help businesses keep and use intangible assets in the U.S., rather than offshoring them.
The Tax Benefit
U.S. corporations can deduct a portion of their foreign-derived intangible income. This lowers the tax rate on that income. As of 2025, eligible income is taxed at about 13.125%, compared to the standard 21% corporate tax rate.
Who It Applies To
FDII applies to income earned from:
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- Sales, leases, or licenses of property to foreign persons.
- Services provided to foreign markets.
This includes:
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- Sales of goods to foreign customers.
- Royalties or licensing income from foreign markets.
- Foreign services provided by the company.
FDII Calculation
To calculate FDII, take a percentage of foreign-derived income. Then subtract a return on tangible assets used to generate that income. This calculation focuses on income linked to intangible assets.
FDII is available to U.S. corporations, including C-corporations and some pass-through entities. It does not apply to foreign companies or individuals.
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