Summary

The recently enacted tax reform legislation significantly expanded the application of Subpart F, including by adding a new inclusion rule for non-routine CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... income, termed “global intangible low-taxed income” (GILTI). The GILTI rules apply higher tax rates to GILTI attributed to individuals and trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. who own CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... stock (either directly or through LLCs or S corporations) than to C corporation shareholders. This article describes the difference and suggests steps individuals and trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. may take to defer or reduce the effect of the GILTI rules on individuals and trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms..

In depth

Effective for the first tax year of a controlled foreign corporation (CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making....) beginning after December 31, 2017, any US person who is a US shareholder of a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... and directly or indirectly owns stock in the CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... on the last day of the CFC’s tax year (or the last day on which the foreign corporation is a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making....) is subject to US federal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... on the owner’s share of the CFCs’ Global Intangible Low Taxed Income (GILTI) under new Section 951A of the Internal Revenue Code. GILTI is defined to include most business income of a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making...., reduced by 10 percent of the adjusted tax basis of the CFC’s depreciable tangible personal property (generally, plant and equipment, but not real property). The new GILTI rule, which is intended to subject all of a CFC’s above-routine income to a minimum tax, results in a significantly higher tax cost to US shareholders that are not C corporations (non-C corporation US shareholders) than to US shareholders that are C corporations (C corporation US shareholders).

In short, C corporation US shareholders are entitled to reduce their GILTI by 50 percent, are subject to a US federal corporate taxCorporate Tax refers to the tax imposed by governments on the income or capital of corporations. Corporations, considered separate legal entities, are taxed on their profits, meaning the income generated from their operational activities, investments, and other financial undertakings. This tax is generally a key revenue source for governments, helping to fund public services, infrastructure, and other essential functions. The... rate of only 21 percent, and are entitled to claim a credit for up to 80 percent of the foreign taxes paid or accrued by the CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... on the GILTI. As a result, the GILTI rules generally impose a US corporate minimum tax of 10.5 percent (50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} x 21{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}) and to the extent foreign tax credits are available to reduce the US corporate taxCorporate Tax refers to the tax imposed by governments on the income or capital of corporations. Corporations, considered separate legal entities, are taxed on their profits, meaning the income generated from their operational activities, investments, and other financial undertakings. This tax is generally a key revenue source for governments, helping to fund public services, infrastructure, and other essential functions. The..., may result in no additional US federal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... being due.

In the case of non-C corporation US shareholders, however, the effective rate imposed on GILTI is much higher. The reason for this is that non-C corporation shareholders are not entitled to deduct 50 percent of their GILTI, are subject to a US federal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... rate of up to 37 percent and cannot generally claim a credit for the foreign taxes paid or accrued by the CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... on GILTI. As a result, non-C corporation US shareholders will generally be subject to US federal tax on GILTI at a 37 percent rate plus any foreign taxes imposed on the CFC’s GILTI. Steps may be taken to allow non-C corporation US shareholders to claim a credit for the foreign taxes imposed on their share of a CFC’s GILTI and to defer paying full US tax on the GILTI.

It is unclear whether or to what extent GILTI will be subject to state or local income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... or to the 3.8 percent tax on net investment income. This article addresses only the regular US federal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... aspects of GILTI. Tax planningTax planning is the process of organising and structuring one’s financial affairs in a manner that legally minimises tax liabilities while ensuring compliance with relevant tax laws. The primary objective of tax planning is to reduce the amount of taxes paid, optimise the use of available tax benefits, and preserve wealth. It can be applied at various levels, including personal... should take into account the potential application of the state and local and net investment income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... regimes as well as the taxpayer’s particular facts and overall tax position.

Prior to the GILTI rules, the active business income of a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... owned by a non-C corporation US shareholder generally qualified for deferral from US tax and, when distributed, may have qualified for a reduced qualified dividend rate of 20 percent, resulting in an overall effective US regular federal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... rate of 20 percent on such income on a fully repatriated basis. As a result of the GILTI rules, however, active business income of a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... is generally subject to full US individual regular federal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... at a 37 percent rate so GILTI not only eliminates deferral but also increases the effective tax imposed on the GILTI attributable to non-C corporation US shareholders of CFCsControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.....

There are certain steps that may be taken to reduce the overall tax burdenTax liability represents the total amount of tax owed by an individual or business to a tax authority, whether local, national, or international. This obligation arises through various forms of income, profits, or transactions subject to taxation laws and regulations. Understanding tax liability is essential for compliance and efficient financial management for corporations and individuals. It influences how businesses structure... on non-C corporation US shareholders as a result of the GILTI rules. These steps may allow a non-C corporation US shareholder to obtain partial deferral of US regular federal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... on the shareholder’s GILTI and may allow for crediting of foreign taxes (although the total tax computed on a fully repatriated basis will generally be equal to at least 37 percent).

Because of the significantly adverse impact of the GILTI rules to non-C corporation US shareholders, it is important that investment funds, family offices, US closely held companies, domestic trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms., domestic estates, and US citizens or resident alien individuals with investments in foreign corporations assess the US federal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... impact of the GILTI provisions on their foreign investments and consider whether it may be beneficial to take advantage of one of the planning ideas discussed below.

In depth

Introduction

Public Law 115-97 (the Act) ushers in a new era of US international taxationFOR MORE INSIGHT ON INTERNATIONAL TAXATION, PLEASE READ THIS ARTICLE: Introduction to International Taxation: Key Concepts & Guidelines International Taxation encompasses the framework of laws, principles, and treaties that govern the tax obligations of individuals and entities engaged in economic activities that span multiple jurisdictions. This field addresses how income, profits, and gains are taxed when operations or investments extend.... In particular, the Act adds new Section 951A of the Code, pursuant to which US shareholders of CFCsControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... are subject to US federal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... on GILTI, a new category of income that is treated in the same manner as Subpart F income for purposes of applying numerous provisions of the Code (although it is not actually Subpart F income). Despite its name, GILTI is neither limited to income that is derived from intangible property nor is it limited to low-taxed income generated abroad. In general, the GILTI rules are intended to tax a CFC’s income that is not otherwise subject to US tax as Subpart F income or effectively connected income (ECI) to the extent that income exceeds a notional return on the CFC’s tangible depreciable property (10 percent of the adjusted tax basis of such property).

The GILTI rules do not apply to a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... whose only income is passive investment income as that income would generally already be taxed under the Subpart F rules.

GILTI included in gross incomeGross Income is a comprehensive term used to define the total income received by an individual or entity before any deductions, exemptions, or allowances. The concept is central to the calculation of taxable income across different tax jurisdictions. It encompasses a broad range of income sources, such as wages, salaries, business income, dividends, interest, rental income, and other forms of... on the last day of the CFC’s tax year

Like the Subpart F rules, the GILTI rules apply to require any US person who is a US shareholder of a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... on any day during the tax year and who owns (directly or indirectly) stock on the last day of the CFC’s tax year to include in gross incomeGross Income is a comprehensive term used to define the total income received by an individual or entity before any deductions, exemptions, or allowances. The concept is central to the calculation of taxable income across different tax jurisdictions. It encompasses a broad range of income sources, such as wages, salaries, business income, dividends, interest, rental income, and other forms of... its share of the CFC’s GILTI. For this purpose, a US shareholder is any US person (including US citizens and resident alien individuals, US trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms., US partnerships and US S corporations) who owns, directly, indirectly or constructively, at least 10 percent of the CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... stock (by vote or by value) at any time during the CFC’s tax year. A CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... is any foreign corporation more than 50 percent of the stock of which (by vote or value) is owned by US shareholders on any day during the taxable year.

Thus, only US shareholders who own (directly or indirectly) stock in the CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... on the last day of the CFC’s tax year (or on the last day that the CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... was a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... in the tax year) are required to include in gross incomeGross Income is a comprehensive term used to define the total income received by an individual or entity before any deductions, exemptions, or allowances. The concept is central to the calculation of taxable income across different tax jurisdictions. It encompasses a broad range of income sources, such as wages, salaries, business income, dividends, interest, rental income, and other forms of... their pro rata share of the CFC’s GILTI under Section 951A. For example, if US Shareholder A sells its interest in a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... to US Shareholder B during the tax year, and the CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... remains a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making...., only US Shareholder B is required to include the CFC’s GILTI in the year of sale.

Like Subpart F income, GILTI is generally treated as previously taxed income (PTI) for purposes of Section 959, and thus is not again subject to US federal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... when distributed (whether distributed to a non-C corporation US shareholder or a C corporation US shareholder). In addition, GILTI inclusions treated as PTI increase the basis in the CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... stock of the US shareholder who took the GILTI into account at the end of the year.

Computation of tax on GILTI amount

GILTI is defined as a US shareholder’s pro rata share of the CFC’s “net CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... tested income” over the shareholder’s “net deemed tangible income return” for the shareholder’s taxable year (which amounts are determined on an aggregate basis looking at all of the CFCsControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... owned by a particular US shareholder). “Net CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... tested income” is essentially defined as all of a CFC’s gross incomeGross Income is a comprehensive term used to define the total income received by an individual or entity before any deductions, exemptions, or allowances. The concept is central to the calculation of taxable income across different tax jurisdictions. It encompasses a broad range of income sources, such as wages, salaries, business income, dividends, interest, rental income, and other forms of... (other than ECI, Subpart F income, dividends from related persons and certain foreign oil and gas extraction income) less certain deductions such as interest expense and taxes. A CFC’s “net deemed tangible income return” is essentially measured by multiplying the adjusted tax basis of the CFC’s “qualified business asset investment” (QBAI) (i.e., depreciable tangible personal property used in a trade or business) by a deemed return of 10 percent.

The Act introduced certain GILTI relief provisions, which are only applicable to C corporation US shareholders of CFCsControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making..... Specifically, new Section 250 permits C corporation US shareholders of CFCsControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... to deduct 50 percent of the GILTI amount calculated in Section 951A (reduced to 37.5 percent beginning in 2026). Section 250(a)(1) states that this deduction applies only “in the case of a domestic corporation” for any taxable year. The Senate report specifically provides that “the deduction for GILTI… is only available for domestic corporations. U.S. shareholders that are not domestic corporations are subject to full U.S. tax on their GILTI.” The Conference report further clarifies that the deduction for 50 percent of GILTI is not available to S corporations. Therefore, a non-C corporation US shareholder of a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... is required to include in gross incomeGross Income is a comprehensive term used to define the total income received by an individual or entity before any deductions, exemptions, or allowances. The concept is central to the calculation of taxable income across different tax jurisdictions. It encompasses a broad range of income sources, such as wages, salaries, business income, dividends, interest, rental income, and other forms of... 100 percent of any GILTI attributable to it from a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... in which it owns stock at the end of the CFC’s tax year.

In addition, in the case of foreign tax credits, the Act amended Section 960 by adding subsection (d), which essentially provides that a domestic corporation is deemed to have paid a pro rata share of up to 80 percent of the foreign income taxes imposed on the CFC’s GILTI. The Section 960 deemed paid credit rules do not generally apply to non-C corporation US shareholders.

For purposes of illustrating these rules, assume that a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... earns $200 of income (non-ECI, non-Subpart F income), has no QBAI and pays foreign tax at a rate of 10 percent on the income (i.e., pays $20 of foreign tax). Assume further that the CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... has two equal US shareholders, USCo, a US C corporation and Individual A, a US individual. USCo may claim a 50 percent deduction on the $100 ($90 GILTI + $10 foreign taxes) attributable to it and would thus have an initial US tax liabilityTax liability represents the total amount of tax owed by an individual or business to a tax authority, whether local, national, or international. This obligation arises through various forms of income, profits, or transactions subject to taxation laws and regulations. Understanding tax liability is essential for compliance and efficient financial management for corporations and individuals. It influences how businesses structure... of $10.50 ($50 x 21{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}). USCo may also claim a foreign tax credit of $8 ($10 x 80{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}). Thus, USCo would pay only $2.50 of US federal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... on its share of the CFC’s GILTI and the effective tax rateThe Effective Tax Rate (ETR) measures the percentage of a company’s pre-tax profits that is paid as tax. Unlike statutory tax rates, which are legally prescribed by a jurisdiction, the ETR provides a more accurate picture of a company’s actual tax burden by incorporating various deductions, credits, and exemptions available. It is a crucial metric for assessing a company’s tax... imposed on the C corporation US shareholder’s share of the GILTI including the foreign taxes would be 12.5 percent (2.5 percent US tax plus 10 percent foreign tax).

By contrast, Individual A would be required to include the full $90 ($100 – $10 foreign tax) of the CFC’s GILTI attributable to it in gross incomeGross Income is a comprehensive term used to define the total income received by an individual or entity before any deductions, exemptions, or allowances. The concept is central to the calculation of taxable income across different tax jurisdictions. It encompasses a broad range of income sources, such as wages, salaries, business income, dividends, interest, rental income, and other forms of... and would be subject to US federal regular income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... at a 37 percent rate on such income (i.e., $90 x 37{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} = $33.30). Individual A would also not be entitled to a credit (absent the Section 962 election described below) for the $10 of foreign taxes imposed on its $90 of GILTI. As a result, the total effective tax rateThe Effective Tax Rate (ETR) measures the percentage of a company’s pre-tax profits that is paid as tax. Unlike statutory tax rates, which are legally prescribed by a jurisdiction, the ETR provides a more accurate picture of a company’s actual tax burden by incorporating various deductions, credits, and exemptions available. It is a crucial metric for assessing a company’s tax... imposed on Individual A’s share of the CFC’s GILTI would be 43.3 percent.

Below we describe three steps a non-C corporation US shareholder could take to reduce or defer taxes on GILTI: electing 962 treatment, owning CFCsControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... through a C corporation, and structuring foreign operations in pass-through form. These steps reduce but do not eliminate the disparity between the GILTI taxation of C corporation US shareholders and non-C corporation US shareholders.

Electing Section 962 treatment

Section 962, which was in the Code prior to the Act but was not widely used, provides a special rule which allows US individual shareholders to elect to be taxed on amounts included in their gross incomeGross Income is a comprehensive term used to define the total income received by an individual or entity before any deductions, exemptions, or allowances. The concept is central to the calculation of taxable income across different tax jurisdictions. It encompasses a broad range of income sources, such as wages, salaries, business income, dividends, interest, rental income, and other forms of... under Section 951(a) at corporate rates and to get the benefit of Section 960 foreign tax credits with respect to such income. The GILTI rules expressly provide that GILTI is treated as included in Section 951(a) for purposes of Section 962, so this rule should apply to GILTI as well as to regular Subpart F income. However, the 50 percent deduction against GILTI which C Corporation US Shareholders enjoy is not made available by a section 962 election. The benefits to non-C corporation US shareholders of making a Section 962 election, therefore, are (1) GILTI is subject to US tax at the 21 percent corporate rate rather than the higher 37 percent US individual tax rate and (2) US tax on GILTI may be offset by foreign tax credits (subject to the generally applicable foreign tax credit limitation rules). A distribution of GILTI for which a 962 election was made will be subject to US tax upon distribution to the extent that the distribution exceeds the amount of US tax previously imposed on such income under the GILTI rules and such amount will not be treated as PTI.

In the example above, if Individual A made an election under Section 962, Individual A would be able to defer paying full US individual tax on its GILTI and would be entitled to a credit for 80 percent of the $10 of foreign tax paid on its GILTI. So, again, assuming that Individual A had $90 of GILTI and $10 of foreign tax, Individual A would be subject to US tax of $13 on its $100 inclusion ($100 x 21{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} = $21 – $8 foreign tax credit). Upon distribution of the GILTI, Individual A would owe US regular income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... on the portion of the distribution that exceeds the $13 of US regular income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... imposed on the distributed income (i.e., $90 – $13 = $77) and such amount would not be PTI. Assuming that the $77 taxable portion of the distribution is eligible for the 20 percent US rate on dividends, the US tax due on such amount would be $15.40 resulting in an overall rate of 38.40 percent (current US tax rate of 13 percent, deferred US tax of 15.4 percent plus foreign tax rate of 10 percent.) Thus the Section 962 election reduces the current US regular income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... from $33.30 to $13.00, and decreases the overall US regular income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... after all income is distributed from $33.30 to $28.40.

The Section 962 election may be made by US individual shareholders including US estates and trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. as well as US individual partners of partnerships. US individual shareholders of S corporations may also be able to make this election if the income is reported to them on a Schedule K-1. The election can be made annually, but once made for a particular year, it applies to all CFCsControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... in which the non-C corporation US shareholder owns stock at the end of that year.

Owning CFCsControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... through a C corporation

As an alternative to a Section 962 election, a non-C corporation US shareholder may want to consider transferring its interest in its CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... to a US C corporation. A US C corporation holding company for CFCsControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... would be particularly beneficial where the CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... has foreign tax credits that would essentially eliminate the US corporation’s US tax liabilityTax liability represents the total amount of tax owed by an individual or business to a tax authority, whether local, national, or international. This obligation arises through various forms of income, profits, or transactions subject to taxation laws and regulations. Understanding tax liability is essential for compliance and efficient financial management for corporations and individuals. It influences how businesses structure.... In that case, while the CFC’s GILTI would be included in the gross incomeGross Income is a comprehensive term used to define the total income received by an individual or entity before any deductions, exemptions, or allowances. The concept is central to the calculation of taxable income across different tax jurisdictions. It encompasses a broad range of income sources, such as wages, salaries, business income, dividends, interest, rental income, and other forms of... of the C corporation US shareholder, no additional US tax would be owed assuming the foreign taxes are sufficient to eliminate the US tax liabilityTax liability represents the total amount of tax owed by an individual or business to a tax authority, whether local, national, or international. This obligation arises through various forms of income, profits, or transactions subject to taxation laws and regulations. Understanding tax liability is essential for compliance and efficient financial management for corporations and individuals. It influences how businesses structure.... The non-C corporation US shareholder would not be taxed on the GILTI until distributed by the holding company to the shareholder so the US taxation of the GILTI would essentially be deferred until distributed by the US C corporation to its shareholder. As there may be other adverse consequences to putting a C corporation above a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... owned by a non-C corporation US shareholder, the consequences of this alternative should be carefully considered.

Owning foreign operations in pass-through form

It may also make sense to have non-C corporation US shareholders set up new foreign operations through true foreign branches or through foreign entities that they elect to treat as pass-throughs for US federal income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... purposes under the check-the-box rules in order to avoid the application of the GILTI rules (and get the benefit of foreign tax credits) going forward. This option is more easily available for wholly owned CFCsControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... but may be difficult to achieve in the case of CFCsControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... in which there are both US non-C corporation shareholders and US C corporation shareholders (as the US C corporation shareholders may not agree to the check the box election).

If Individual A were in a position to own a new foreign business in pass-through form, Individual A’s share of the foreign income would be subject to US tax of 37 percent, but Individual A could reduce that amount by a foreign tax credit for 100 percent of the $10 of foreign tax paid. This reduces the $33.30 in US regular income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... determined above for ownership through a CFCControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making.... to $27.00 if owned in pass-through form. All the tax would be due currently, however, so that this structure would be most advantageous if all income is to be repatriated currently.

Conclusion

The new GILTI regime applies harshly to non-C corporation US shareholders of CFCsControlled Foreign Corporations (CFCs) are a fundamental concept in international taxation, referring to foreign companies that are under the control of domestic shareholders. Control is typically established when residents of a country, either individually or collectively, own more than a specified percentage of a foreign company’s shares, voting rights, or have the ability to exert substantial influence over its decision-making..... Measures are available to reduce or partially defer the tax, but careful consideration should be given to the taxpayer’s particular circumstances and overall tax position in determining what steps make sense.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information on this topic please contact Sandra P McGill, Gary C Karch, Kevin J Feeley or Susan E O’Banion at McDermott Will & Emery by telephone (+1 312 372 2000) or email (smcgill@mwe.com, gkarch@mwe.com, kfeeley@mwe.com or sobanion@mwe.com). The McDermott Will & Emery website can be accessed at www.mwe.com.