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GILTI income may be exempt for individual US owners of foreign corporations registered in high tax countries

GILTI income may be exempt for individual US owners of foreign corporations registered in high tax countries
Ines Zemelman, EA
02 August 2020

By way of background, GILTI functions as an anti-base erosion, minimum tax provision intended to discourage multinational corporations from using intangible property to shift profits out of the U.S.

GILTI, however, is not limited to low-taxed income. As a result, double taxation could arise because of GILTI foreign tax credit limitations and the absence of a statutory high-tax exception comparable to that contained in the Subpart F provisions (under Section 954(b)(4)). 

As a result of lobbying efforts, the Treasury and IRS amended the regulatory rules under section 954(b)(4) for purposes of both subpart F income and tested income high-tax exception

On July 23, 2020 the Treasury issued the Global Intangible Low-Taxed Income (GILTI) high-tax exclusion final regulations

High-Tax (over 18.9%) exeption for Controlled Foreign Corporations

If a foreign corporation is incorporated in a country with a high tax rate rate (over 18.9%), GILTI income may be exempt. Note - this does not imply that GILTI income is removed by default, this exemption requires proper filing with correct elections & appropriate statements. 

Unitary Approach for GILTI and Subpart F: a single high-tax exception be applied for purposes of the GILTI and Subpart F regime thereby eliminating the incentive for taxpayers to structure into the subpart F high-tax exception.

Effective Date: Taxable years of a foreign corporation ending on or after July 20, 2020.

 

 To exempt GILTI income 
  • Section 954(b)(4) election on an annual basis.
  • Election made on tax return or on amended return by attaching a statement.
  • All or nothing approach: Election applies on a consistent basis to all Controlled Foreign Corporations (CFCs) owned by the same domestic controlling U.S. shareholders (more than 50 percent) and to all of the CFC's U.S. shareholders 
  • Controlling U.S. shareholders notify non-controlling U.S. shareholders.
  • High tax: foreign tax rate should be in excess of 18.9 percent
  • Unitary Approach for GILTI and Subpart F: a single high-tax exception be applied for purposes of the GILTI and Subpart F regime thereby eliminating the incentive for taxpayers to structure into the subpart F high-tax exception.
  • Under the high-tax election, U.S. shareholder no longer can utilize qualified business asset investment (QBAI) or Foreign Tax Credit (FTCs) as GILTI gross income is excluded from gross income

Effective date

Tax years of foreign corporations beginning on or after July 23, 2020, and for tax years of U.S. shareholders in which, or with which, such tax years of foreign corporations end.

Taxpayers may elect to apply the final regulations retroactively for tax years beginning after Dec. 31, 2017, and before July 23, 2020.

Income repatriation

For individual shareholders, excluded income is U.S. tax deferred until repatriated. When repatriated, U.S. individual shareholders would be subject to ordinary income taxation up to a maximum rate of 37 percent or reduced qualified dividend 20 percent rate, if CFC were treaty eligible.

Tax Rate Determination

Under the prior Subpart F high-tax exception, the effective tax rate is determined at the CFC level separately for separate items of Subpart F income. Going forward, post issuance of the Final Regulations, the Subpart F high-tax exception will apply on a tested unit basis and can only be made on a "unitary" basis; i.e., both for Subpart F and GILTI purposes.

962 election or 954(b)(4) election choice

Clients who previously took Sec 962 election may switch to Section 954(b)(4) if they wish. Both elections are effective for one year. 

Tax rate test on corporate tax rate of the country, not actual tax paid by the company

It does not matter whether the corporation actually paid tax in a reported taxpayer tax year or not. It is not a Foreign Tax Credit - it is full exemption of GILTI and Subpart F income.

Corporate tax rates in various countries depend on industry (example: UAE is listed at 55% on some tables, but that is only for Oil & Gas companies, most others are taxed at 0%)

Please review https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-corporate-tax-rates.pdf for corporate tax rate analysis.

Ines Zemelman, EA
founder of Taxes for Expats