AB1790 - Corporations Tax Law: water’s-edge election: global intangible low-taxed income.

Amended IN Assembly April 29, 2026 CALIFORNIA LEGISLATURE— 2025–2026 REGULAR SESSION Assembly Bill No. 1790 Introduced by Assembly Members Connolly, Elhawary, and Lee (Principal coauthor: Assembly Member Bonta) (Coauthor: Assembly Member Rogers) February 10, 2026 An act to amend Sections 25106.5, 25110, and 25113 of the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy. LEGISLATIVE COUNSEL'S DIGEST AB 1790, as amended, Connolly. Corporations Tax Law: water’s-edge election: global intangible low-taxed income. The Corporation Tax Law imposes on every corporation doing business in the state, as defined, a tax according to or measured by net income and, in the case of a corporation with income derived from or attributable to sources both within and without this state, apportions the income between this state and other states and foreign countries in accordance with a single sales formula based on the sales within and without this state, except that in the case of an apportioning trade or business that derives more than 50% of its gross business receipts from conducting one or more qualified business activities, as defined, business income is apportioned in accordance with a specified 3-factor formula. Existing federal law, for purposes of determining a taxpayer’s gross income for federal income tax purposes, requires that a person who is a United States shareholder of any controlled foreign corporation, as defined, to include in their gross income the net CFC tested income, as provided. The Corporation Tax Law, for taxable years beginning on or after January 1, 2003, for purposes of determining income derived from or attributable to sources within this state, allows corporations to make a statutory election as to whether their income is determined on a “water’s-edge” basis or on a worldwide unitary basis. Under existing law, the election to report income on a water’s-edge basis remains in effect until terminated, and provides conditions for the termination of the election. This bill, for taxable years beginning on or after January 1, 2026, would require a taxpayer that files on a water’s-edge basis to account for net CFC tested income within the water’s-edge group, as provided. The bill would require a taxpayer that files on a water’s-edge basis to include all income and apportionment factors of any corporation, other than a bank, whose sales factor, instead of the average of 3 factors, in the United States is at least 20%. The bill would also terminate all water’s-edge elections for the first taxable year beginning on or after January 1, 2028, and would not allow a taxpayer to make a water’s-edge election, or file on a water’s-edge basis, for taxable years beginning on or after January 1, 2028. The bill would authorize any taxpayer that has made a water’s-edge election to terminate that election without the consent of the Franchise Tax Board for taxable years beginning on or after January 1, 2026, and before January 1, 2028. This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIII A of the California Constitution, and thus would require for passage the approval of 2 / 3 of the membership of each house of the Legislature. This bill would take effect immediately as a tax levy. Digest Key Vote: 2/3 Appropriation: NO Fiscal Committee: YES Local Program: NO Bill Text The people of the State of California do enact as follows: SECTION 1. The Legislature finds and declares all of the following: (a) Multinational corporations continue to shift income earned in California out of the country. (b) The water’s-edge election has not been updated to conform with developments in federal corporate tax law aimed at combating such shifting. (c) Mandatory worldwide combined reporting is the most efficient and fairest way to tax the income of large multinational corporations. (d) In order to facilitate the transition to worldwide combination, this bill would allow taxpayers that have made a water’s-edge election to continue to file on a water’s-edge basis for two years if the water’s-edge election calculation is modified, as provided. The measure would also allow taxpayers to terminate an existing water’s-edge election and file on a worldwide basis sooner if they choose. SEC. 2. Section 25106.5 of the Revenue and Taxation Code is amended to read: 25106.5. (a) The Franchise Tax Board may adopt regulations necessary to ensure that the tax liability or net income of any taxpayer whose income derived from or attributable to sources within this state which is required to be determined by a combined report pursuant to Section 25101 or 25110 of this chapter, and of each entity included in the combined report, both during and after the period of inclusion in the combined report is properly reported, determined, computed, assessed, collected, or adjusted. (b) Notwithstanding subdivision (a), the Franchise Tax Board shall not adopt regulations under the authority of this section which shall in any manner determine, prescribe, or otherwise affect either of the following: (1) The inclusion or exclusion in the combined report of those entities whose income and apportionment factors are to be taken into account pursuant to Sections 25101 and 25110 of this chapter. (2) After the period of inclusion, cause the income or expenses of an entity which is excluded from a combined report pursuant to Sections 25101 and 25110 of this part to be included in a combined report. (c) The Legislature finds and declares the following relating to the combined reporting method: (1) All persons that are part of a unitary business shall be included in the combined report. Determination of a unitary business shall be governed by the unitary business principle which shall be applied to the greatest extent allowed by the United States Constitution. (2) A combined return shall include the income and apportionment factors of any captive insurers that are part of the unitary business. For purposes of this paragraph, a “captive insurer” is an insurance company that satisfies both of the following: (A) Is owned or controlled by a member or members of the unitary group. (B) Is used for the insurance of risks of the parent organization and affiliated persons. (3) All income and factors of a combined group shall have their income and factors combined even if the state has a special apportionment regime for any particular entity if considered separately. A taxpayer may use the special apportionment regime for a particular entity, with the consent of the Franchise Tax Board, if the taxpayer demonstrates by clear and convincing evidence that failure to use the special formula will result in an unfair representation of income produced in this state. (4) If any member of the unitary business is subject to a net income tax or a tax measured by net income under some other provision of the laws of this state, then such tax liability shall be a credit against any tax liability as a result of this part. SEC. 3. Section 25110 of the Revenue and Taxation Code is amended to read: 25110. (a) Notwithstanding Section 25101, a qualified taxpayer, as defined in paragraph (2) of subdivision (b), that is subject to the tax imposed under this part, may elect to determine its income derived from or attributable to sources within this state pursuant to a water’s-edge election in accordance with the provisions of this part, as modified by this article. A taxpayer, that makes a water’s-edge election on or after January 1, 2006, shall take into account that portion of its own income and apportionment factors and the income and apportionment factors of its affiliated entities to the extent provided below: (1) The entire income and apportionment factors of any of the following corporations: (A) Domestic international sales corporations, as described in Sections 991 to 994, inclusive, of the Internal Revenue Code and foreign sales corporations as described in Sections 921 to 927, inclusive, of the Internal Revenue Code. (B) Any corporation, other than a bank, regardless of the place where it is incorporated if its sales factors within the United States is 20 percent or more. (C) Corporations that are incorporated in the United States, excluding corporations making an election pursuant to Sections 931 to 936, inclusive, of the Internal Revenue Code. or formed under the laws of any state, the District of Columbia, or any territory or possession of the United States. (D) Export trade corporations, as described in Sections 970 to 972, inclusive, of the Internal Revenue Code. (E) Any corporation that is a member of the water’s-edge group that is incorporated in the United States, or formed under the laws of any state, the District of Columbia, or any territory or possession of the United States. (2) (A) With respect to a corporation that is not described in paragraph (1), as provided in any of the following clauses or a combination thereof: (i) The income and apportionment factors of that corporation to the extent of its income derived from or attributable to sources within the United States and its factors assignable to a location within the United States in accordance with paragraph (3) of subdivision (b). Income of that corporation derived from or attributable to sources within the United States as determined by federal income tax laws shall be limited to, and determined from, the books of account maintained by the corporation with respect to its activities conducted within the United States. (ii) The income and apportionment factors of that corporation that is a “controlled foreign corporation,” as defined in Section 957 of the Internal Revenue Code, to the extent determined by multiplying the income and apportionment factors of that corporation without application of this subparagraph by a fraction not to exceed one, the numerator of which is the “Subpart F income” of that corporation for that taxable year and the denominator of which is the “earnings and profits” of that corporation for that taxable year. (iii) Forty percent of net CFC tested income, as that term is defined in Section 951A of the Internal Revenue Code, relating to net CFC tested income included in gross income of United States shareholders, is included as business income. No factors of any controlled foreign corporation, as defined in Section 957 of the Internal Revenue Code, relating to controlled foreign corporations, shall be included as a result of including that income. (B) For purposes of this paragraph, both of the following apply: (i) “Subpart F income” means “Subpart F income” as defined in Section 952 of the Internal Revenue Code. (ii) “Earnings and profits” means “earnings and profits” as described in Section 964 of the Internal Revenue Code. (3) The income and apportionment factors of the corporations described in this subdivision shall be taken into account only to the extent that they would have been taken into account had no election under this section been made. (4) The Franchise Tax Board shall prescribe regulations to coordinate implementation of subparagraph (A) of paragraph (2) to prevent multiple inclusion or exclusion of income and factors in situations where the same item of income is described in both clauses. (b) For purposes of this article and Section 24411, all of the following definitions apply: (1) An “affiliated corporation” means a corporation that is a member of a commonly controlled group as defined in Section 25105. (2) A “qualified taxpayer” means a corporation that does both of the following: (A) Files with the state tax return, on which the water’s-edge election is made, a consent to the taking of depositions, at the time and place most reasonably convenient to all parties, from key domestic corporate individuals and to the acceptance of subpoenas duces tecum requiring reasonable production of documents to the Franchise Tax Board, as provided in Section 19504, by the State Board of Equalization, as provided in Section 5005 of Title 18 of the California Code of Regulations, or by the courts of this state, as provided in Chapter 2 (commencing with Section 1985) of Title 3 of Part 4 of, and Chapter 9 (commencing with Section 2025.010) of Title 4 of Part 4 of, the Code of Civil Procedure. The consent relates to issues of jurisdiction and service and does not waive any defenses that a taxpayer may otherwise have. The consent shall remain in effect as long as the water’s-edge election is in effect, and shall be limited to providing that information necessary to review or adjust income or deductions in a manner authorized by Section 482, 861, Subpart F of Part III of Subchapter N, or similar provisions, of the Internal Revenue Code, together with the regulations adopted pursuant to those provisions, and for the conduct of an investigation with respect to any unitary business in which the taxpayer may be involved. (B) Agrees that, for purposes of this article, dividends received by any corporation whose income and apportionment factors are taken into account pursuant to subdivision (a) from either of the following are functionally related dividends and shall be presumed to be business income: (i) A corporation of which more than 50 percent of the voting stock is owned, directly or indirectly, by members of the unitary group and which is engaged in the same general line of business. (ii) Any corporation that is either a significant source of supply for the unitary business or a significant purchaser of the output of the unitary business, or that sells a significant part of its output or obtains a significant part of its raw materials or input from the unitary business. “Significant,” as used in this subparagraph, means an amount of 15 percent or more of either input or output. All other dividends shall be classified as business or nonbusiness income without regard to this subparagraph. (3) The definitions and locations of property, payroll, and sales shall be determined under the laws and regulations that set forth the apportionment formulas used by the individual states to assign net income subject to taxes on, or measured by, net income in that state. If a state does not impose a tax on, or measured by, net income or does not have laws or regulations with respect to the assignment of property, payroll, and sales, the laws and regulations provided in Article 2 (commencing with Section 25120) shall apply. Sales shall be considered to be made to a state only if the corporation making the sale may otherwise be subject to a tax on, or measured by, net income under the Constitution or laws of the United States, and shall not include sales made to a corporation whose income and apportionment factors are taken into account pursuant to subdivision (a) in determining the amount of income of the taxpayer derived from or attributable to sources within this state. (4) “The United States” means th [Text truncated for display. Full text available on Congress.gov.]