FDEI Under OBBBA: America’s New Export-Friendly Tax Break

When Congress passed the One Big Beautiful Bill Act on July 4, 2025, it didn’t just tweak the corporate tax code—it rewrote one of its most strategically important incentives. The long-standing Foreign-Derived Intangible Income (FDII) regime, often criticized for its complexity and its awkward treatment of tangible investments, was replaced with something simpler, more predictable, and arguably more potent: Foreign-Derived Deduction Eligible Income (FDEI).

How the new FDEI tax regime will help American exporters

What Exactly Is the FDEI Deduction?

In its simplest form, the FDEI deduction is a permanent, preferential tax rate for U.S. corporations that generate income from foreign sales of goods and services. It’s designed to encourage American companies to produce, innovate, and export from U.S. soil, rather than shifting operations offshore.

The mechanics are now refreshingly straightforward:

FDEI Deduction= 33.34%×FDEI

This replaces FDII’s tangled formula, which involved calculating deduction-eligible income, applying a foreign sales ratio, and reducing the result by the so-called QBAI offset (which penalized firms with large tangible asset bases in the U.S.).

How It Works in Practice

Here’s how the deduction applies:

• Eligible Income: Sales of goods, licenses of software, and provision of services to foreign customers.

• Exclusions: Gains from selling or transferring intangible property (e.g., patents), and sales of depreciable or amortizable property.

• Benefit: The deduction effectively lowers the corporate tax rate on qualifying foreign sales to about 14%—compared to the standard 21%.

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Why OBBBA Changed It

The old FDII structure was criticized on two fronts:

1. Complexity — It required accountants to run a multi-step formula that only a tax department could love.

2. Misaligned Incentives — The QBAI offset discouraged U.S. investment in tangible assets, directly contradicting the stated goal of bringing production back home.

   
   

OBBBA’s FDEI regime fixes both. By removing the QBAI penalty, companies can now expand U.S. manufacturing without watching their export tax break shrink. And by locking the deduction rate at 33.34%, Congress removed the uncertainty of the scheduled 2026 cut that would have slashed benefits by nearly half.

Winners and Losers

The winners are clear: U.S.-based exporters with real production capacity—think aerospace, machinery, semiconductors, and specialized manufacturing. They’ll enjoy a cleaner, more predictable tax incentive that scales with their foreign sales.

The losers? Companies whose FDII strategy hinged on shifting intangible property abroad to capture a deduction without much real economic activity in the U.S. That door has now closed.

The Bigger Picture

FDEI is more than just a tax tweak—it’s a signal. Washington is telling exporters:

“Keep your operations, your innovation, and your jobs here—and we’ll reward you when you sell to the world.”

Whether this streamlined incentive will drive a manufacturing renaissance remains to be seen. But one thing is certain: FDEI is a cleaner, more transparent play in America’s tax policy arsenal—and it just made exporting from the U.S. more attractive than it’s been in years.