Frequently Asked Questions

What is FDDEI?

FDDEI stands for Foreign-Derived Deduction Eligible Income. It generally relates to qualifying income earned by a U.S. corporation from certain property or services sold into foreign markets.

Who may qualify for FDDEI?

Domestic C corporations with qualifying foreign-derived income may be eligible. Manufacturers, distributors, service providers, and SaaS companies may all have activity worth reviewing. 

Is FDDEI the same as FDII?

FDDEI is similar, but the same.FDII was the term used under the prior Section 250 rules. Beginning in 2026, several aspects of several aspects of the calculation changed and the focus shifted to FDDEI.

What types of foreign revenue may qualify?

Potentially qualifying revenue can include sales of tangible property, services, and certain intangible property or licensing arrangements involving foreign customers.

U.S. companies selling products or services to customers outside the country may have a federal tax deduction worth reviewing.

Beginning in 2026, Section 250 now focuses on Foreign-Derived Deduction Eligible Income, or FDDEI.

Many businesses and advisors still know the older term FDII, or Foreign-Derived Intangible Income. The rules changed for 2026, but the basic opportunity remains: certain income earned by U.S. C corporations from foreign customers may receive a lower effective federal tax rate.

STG’s guidance notes that FDII was renamed FDDEI beginning in 2026 and that the benefit can be meaningful for businesses with significant or growing foreign sales.

What Is FDDEI?

In simple terms, FDDEI relates to certain income from foreign customers and foreign activity.

That may include:

• Property sold to foreign customers for foreign use
• Services provided to customers outside the United States
• Intangible property licensed to customers outside the U.S.

Simply having an international customer does not automatically make the income qualify.

The transaction, customer, use of the property or service, related expenses, and documentation all matter.

What Changed From FDII to FDDEI in 2026?

Companies that claimed FDII in prior years should not assume the 2026 calculation works the same way.

The One Big Beautiful Bill Act made several important changes to Section 250 for tax years beginning after December 31, 2025:

• The calculation of QBAI and DTIR was eliminated. Under the previous FDII rules, a Deemed Tangible Income Return based on 10% of Qualified Business Asset Investment, or QBAI, reduced the amount used to calculate the benefit. The new FDDEI framework removes the DII and DTIR components, so QBAI no longer creates that reduction. 
• Interest expense no longer reduces DEI. For the Section 250 calculation, interest expense is excluded from the expenses and deductions allocated or apportioned against gross DEI and gross FDDEI. 
• Research and experimental expenditures no longer reduce DEI. R&E expenditures under Sections 174, 174A, or 59(e)(2)(B) are also excluded when determining the deductions properly allocable to gross DEI and gross FDDEI. 
• Certain property disposition income is now excluded from DEI. Income or gain from certain sales or dispositions of intangible property and depreciable, amortizable, or depletable business property is excluded under the new rules. Leases and licenses are treated differently from outright sales or dispositions for this purpose. 
• The deduction is 33.34% of FDDEI. At a 21% corporate tax rate, that produces an effective federal rate of approximately 14% on qualifying FDDEI.

These changes can materially affect the calculation.

A company that claimed FDII in prior years may get a different result in 2026 even if its foreign revenue has not changed. Businesses with significant interest expense or research expenditures may see an especially meaningful difference because those expenses no longer reduce DEI for Section 250 purposes.

What Types of Businesses Should Review FDDEI?

FDDEI is not limited to manufacturers shipping physical products overseas.

Manufacturers and Distributors

A U.S. manufacturer or distributor selling property to foreign customers for foreign use may have qualifying foreign-derived income.

The important questions include who purchased the property and where it will ultimately be used.

Service Businesses

A U.S. company may also have qualifying income from services provided to a person outside the United States or with respect to property located outside the United States.

That can potentially include consulting, engineering, professional services, and other service businesses.

SaaS and Technology Companies

Technology and SaaS companies with international customers may also have activity worth reviewing.

The treatment depends on how the offering is classified and the facts surrounding the customer, service, and transaction. A company should not assume that having foreign subscribers automatically makes all of its international revenue FDDEI.

Companies With Licensing Revenue

Certain leases and licenses involving foreign markets can remain relevant under Section 250. However, the 2026 rules now exclude income and gain from certain outright sales or other dispositions of intangible property, making the structure of the transaction more important than before. 

Key Takeaways Are:

How much of a company's revenue pie is with customers outside the U.S. and what is the nature of property or services provided to those customers

Why Revenue Mix and Cost Allocation Matter

Foreign sales are only part of the calculation.

Businesses also need to determine which expenses and costs are connected to the qualifying income.

STG’s approach includes reviewing both the company’s revenue mix and cost allocations in order to optimize the benefit available.

Two companies with the same amount of foreign revenue may have very different results depending on margins, expenses, and their mix of domestic and international business.

What Documentation Should Businesses Keep?

A thorough FDDEI calculation should be supported by robust internal documentation.

Useful records may include:

• Customer location information
• Contracts and sales invoices
• Shipping records
• Service agreements
• Licensing agreements
• Revenue by customer or country
• Cost of goods sold records
• Expense allocation support
• Related-party transaction information

The goal is to support why the income qualifies and how the deduction was calculated.

When Should a Business Review FDDEI?

The best time to review FDDEI is when something has changed in the company’s international business or tax profile.

A review is especially worth considering when:

• The company previously claimed FDII. The 2026 calculation is different, so prior-year methodology should not simply be carried forward.
• Foreign revenue has grown materially. New countries, customers, distributors, or service relationships may change the potential benefit.
• The company recently became profitable. Businesses that previously had limited taxable income may now have a meaningful Section 250 opportunity.
• The business has significant R&E or interest expense. Because those expenses no longer reduce DEI for Section 250 purposes, the 2026 calculation may look different from prior years.
• The company changed how it sells internationally. New licensing models, SaaS offerings, related-party arrangements, distributors, or intermediaries can affect how transactions are classified.
• The business sold intellectual property or other business assets. The new exclusions for certain property dispositions should be considered before assuming that income qualifies.

What an FDDEI Review Should Cover

Rather than starting with a top-line percentage of foreign sales, an FDDEI review should work through the underlying transactions.

That typically means:

1. Identifying foreign revenue streams and separating sales, services, licenses, and other transaction types.
2. Confirming the foreign-use or service-location requirements for the revenue being treated as FDDEI.
3. Identifying income that is excluded from DEI, including certain property dispositions.
4. Applying the new 2026 expense rules, including the treatment of interest and R&E expenditures.
5. Reviewing cost allocation for expenses that still reduce DEI and FDDEI.
6. Calculating the potential Section 250 deduction using the 33.34% FDDEI percentage.
7. Organizing documentation so the calculation can be traced back to actual customer and transaction records.

This gives the company and its tax advisor a clearer answer than simply asking what percentage of total revenue came from foreign customers.

Final Takeaway

FDDEI can represent an important tax savings opportunity for U.S. C corporations doing business internationally.

Businesses that previously claimed FDII should review the new 2026 rules. Companies that have never taken advantage of the deduction should assess their revenue mix and reach out to STG to for support in further analyzing their FDDEI Deduction opportunity.

For companies with meaningful international revenue, it is worth asking the question.