GILTI tax explained: Definition, calculation, examples & planning

Global Intangible Low-Taxed Income (GILTI) represents a significant component of US international tax law affecting businesses and individuals with foreign investments. It was introduced as part of the Tax Cuts and Jobs Act (TCJA) in 2017 to ensure that US taxpayers pay a minimum level of tax on foreign earnings, particularly those derived from intangible assets.

This comprehensive guide explores what GILTI is, how it works, calculation methods, tax planning strategies, and practical examples.

What is GILTI?

GILTI, short for Global Intangible Low-Taxed Income, is a tax applied to the tested income of controlled foreign corporations (CFCs) owned by US corporations and citizens. It targets income that US shareholders earn from intangible assets held overseas, such as patents, trademarks, copyrights, and other intellectual property.

The GILTI provisions were designed to discourage US companies from shifting profits to low-tax jurisdictions through the strategic placement of intangible assets. A CFC must be more than 50% owned by US persons, and the US shareholders must each own at least 10% of any stock in the corporation.

Despite its name suggesting a focus solely on intangible assets, this tax effectively functions as a minimum tax on most foreign income above a specified return on tangible assets.

Who is subject to GILTI tax?

These tax rules apply to US shareholders who own 10% or more of a controlled foreign corporation (CFC). This includes both corporate and individual shareholders who directly or indirectly control these foreign entities, unlike other international tax provisions, which affect taxpayers regardless of whether profits have been distributed.

US shareholders must report their share of their gross income annually, even if the income has not been physically repatriated to the United States.

GILTI vs. Subpart F Income

While GILTI and Subpart F income are both mechanisms for taxing foreign earnings, they differ significantly in scope and application. Subpart F income has been part of the US tax code since the 1960s and specifically targets passive income and certain types of related-party transactions that could facilitate tax avoidance.

Subpart F income includes:

• foreign earnings and profits from sales and services
• insurance income
• foreign personal holding company income (dividends, interest, royalties, annuities, and rent)
• foreign-based company income (FBCI)

GILTI focuses on active business income above a specified return threshold, particularly from intangible assets. Importantly, it excludes:

• Subpart F income (to prevent double taxation)
• income connected with US trade or business
• related-party dividends
• foreign oil and gas extraction income

The tax rates also differ significantly. Subpart F income is taxed at the full corporate rate of 21%, while GILTI income for corporations is taxed at rates between 10.5% and 13.125%.

Limitations and criticisms of GILTI

However, the GILTI regime has faced several criticisms since its implementation. One significant limitation involves the foreign tax credit system. While it allows foreign tax credits (FTCs), these credits cannot exceed 80% of their worth, which can increase the effective tax rate on foreign earnings already taxed abroad.

Another criticism centers on the “cliff effect” of the high-tax exception. Income taxed at a rate of at least 18.9% can be excluded. However, income taxed just below this threshold receives no relief, creating potential distortions in business decisions.

It can be particularly burdensome for individual shareholders, who face higher tax rates and fewer deductions than corporate shareholders. The complexity of compliance has also been cited as a significant challenge for businesses with international operations.

How does GILTI work?

The GILTI framework uses calculations designed to identify “excess” returns on foreign assets that are presumed to come from intangible assets.

1. GILTI calculation

The calculation begins with determining the “tested income” of each controlled foreign corporation. The GILTI tax formula can be expressed as:

GILTI = Net CFC tested income – (10% × Qualified Business Asset Investment (QBAI) – interest expense)

Breaking down this formula:

• Net CFC tested income is the gross income of a CFC, excluding:
  • income effectively connected with US trade or business
  • Subpart F income
  • income excluded from Subpart F due to high foreign tax rates
  • related-party dividends
  • foreign oil and gas extraction income
• QBAI represents the average quarterly tax basis of tangible property used in the production of tested income.
• Interest expense refers to the net interest expense that reduces the net deemed tangible income return.

The formula assumes that returns above 10% on tangible assets derive from intangible assets, which becomes the basis for GILTI taxation. This approach means that even businesses without significant intellectual property may face GILTI tax if they generate high returns on modest tangible assets.

2. GILTI tax rate

The tax rate varies depending on whether the US shareholder is a corporation or an individual. For corporate shareholders, the effective tax rate ranges from 10.5% to 13.125% until 2025. This reduced rate is achieved through a 50% deduction under Section 250 of the Internal Revenue Code.

After 2025, certain provisions of the TCJA expire, and the tax rate for corporations is scheduled to increase to a range of 13.125% to 16.406%. This results from a reduction in the Section 250 deduction from 50% to 37.5%.

For individual shareholders, without special elections, individuals face this tax at their ordinary income tax rates, which can be as high as 37%.

3. High-tax exception

The high-tax exception provides significant relief for certain income. Under IRS regulations, income earned by a CFC subject to an effective tax rate greater than 18.9% (90% of the US corporate tax rate of 21%) can be excluded from calculations.

This exception requires an annual election and applies on a country-by-country basis, meaning businesses must carefully analyze their global tax positions to determine eligibility. The high-tax exception creates planning opportunities for multinational businesses with operations in both high-tax and low-tax jurisdictions.

Companies may restructure operations or time income recognition to take advantage of this exception.

4. GILTI Foreign Tax Credit Limitation

Foreign tax credits (FTCs) help prevent double taxation. However, the GILTI regime imposes specific limitations on these credits that can impact overall tax liability.

Key constraints include:

• The 80% limitation: Only 80% of foreign taxes paid can be credited against US tax liability.
• Separate limitation basket: FTCs fall into their own limitation basket, preventing excess credits from offsetting other foreign income taxes.
• No carryforwards or carrybacks: Unlike other FTCs, excess credits cannot be carried forward or backward to other tax years.

These limitations can result in double taxation when foreign tax rates exceed certain thresholds.

How to report GILTI

Reporting requires careful use of specific IRS forms. US shareholders of controlled foreign corporations must complete Form 8992, “US Shareholder Calculation of Global Intangible Low-Taxed Income,” to determine their share of tested income, tested loss, and qualified business asset investment for each CFC.

Form 5471, “Information Return of US Persons With Respect to Certain Foreign Corporations,” is also required to document ownership and provide detailed financial data about the CFC’s operations. Both forms are due with the taxpayer’s annual return, including extensions.

Corporate shareholders eligible for the Section 250 deduction must file Form 8993, “Section 250 Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income.”

When reporting GILTI, taxpayers must address complexities involving loss carryovers and qualified business asset investment (QBAI). Tested losses from prior years cannot offset current-year tested income in GILTI calculations, potentially triggering taxable inclusions even if a CFC’s net income is zero due to historical losses.

This creates a mismatch where GILTI liabilities arise despite no current foreign tax payments, limiting foreign tax credit utilization. Additionally, QBAI – calculated as the average quarterly adjusted basis of depreciable tangible property – is excluded for CFCs in a tested loss position, eliminating the 10% exemption on those assets and amplifying GILTI exposure (the “cliff effect”).

Domestic net operating losses (NOLs) further complicate GILTI reporting, as they may reduce the Section 250 deduction’s benefit before offsetting GILTI income, eroding future tax-saving opportunities.

Taxpayers must reconcile these dynamics on Form 8992, ensuring QBAI allocations and loss limitations align with IRS rules for tested income/loss CFCs. State-level variations in GILTI treatment add another layer of planning urgency, particularly for multinationals with complex asset bases or cyclical profitability.

At the state level, treatment varies – some states conform to federal rules, others exclude GILTI or have their own approaches, adding another layer of compliance complexity.

GILTI and tax planning

Strategic tax planning can significantly reduce its impact on US shareholders. Several approaches can minimize liability while maintaining compliance with GILTI tax regulations.

Section 962 Election

The Section 962 election offers individual shareholders the opportunity to be taxed as if they owned their CFC interests through a US corporation. This election can provide significant benefits by:

• allowing individuals to access the corporate tax rate of 21% rather than individual rates up to 37%
• making the 50% deduction under Section 250 available
• enabling the use of FTCs to offset liability

The election creates a second layer of tax when income is eventually distributed as dividends. This two-tier tax structure requires careful analysis based on distribution plans, foreign tax rates, and the shareholders' overall tax situation.

Salary Compensation

Restructuring compensation arrangements offers another strategy for managing tax exposure. Paying reasonable salaries to US shareholders who actively work in the business can shift income from the CFC to direct ordinary income.

This approach works particularly well for professional service businesses where US shareholders contribute significant value. The key is ensuring compensation levels are commercially reasonable and meet local country employment regulations.

Using the FTC

Despite limitations imposed on FTCs, strategies can enhance their usefulness:

1. Timing income recognition to maximize available credits.
2. Restructuring foreign operations for more favorable results.
3. Considering entity classification in elections to improve the FTC's position.

For corporate shareholders, blending high-taxed and low-taxed income can sometimes produce better results than relying on the high-tax exception. The goal is to achieve a foreign effective tax rate that, when limited to 80%, still offsets US tax liability while preserving the benefits of the 50% deduction.

Planning for TCJA expiration in 2025

The scheduled 2025 expiration of key TCJA provisions presents important planning considerations. The most significant change will be the reduction of the Section 250 deduction from 50% to 37.5%, increasing the effective tax rate.

Examples of GILTI in action

Understanding through practical examples helps clarify how these complex rules apply in real-world situations.

Example 1: Corporate shareholder in a low-tax jurisdiction

TechCorp USA owns 100% of TechCorp Singapore, which earns $10 million annually from licensing software. TechCorp Singapore has tangible assets (QBAI) worth $20 million and pays local tax at 5%.

GILTI calculation:

1. Tested income: $10 million
2. QBAI exemption: $20 million × 10% = $2 million
3. GILTI amount: $10 million - $2 million = $8 million

US tax consequences:

1. Amount included: $8 million
2. Section 250 deduction: $8 million × 50% = $4 million
3. Taxable amount: $4 million
4. US tax before credits: $4 million × 21% = $840,000
5. Foreign taxes paid: $10 million × 5% = $500,000
6. Foreign tax credit: $500,000 × 80% = $400,000
7. Final US tax: $840,000 - $400,000 = $440,000

The effective tax rate is 9.4% (below the intended minimum of 10.5%), demonstrating how the system creates a top-up tax when foreign rates are low.

Example 2: Individual shareholder with a minority stake

Dr. Jones owns 15% of a foreign medical research corporation that generates $5 million in income with $10 million in QBAI. The corporation pays foreign tax at 10%.

This example illustrates the dramatic difference the Section 962 election can make for individual shareholders.

Example 3: CFC with high foreign taxes

ManufactureCo USA owns a German subsidiary with an income of $4 million, QBAI of $15 million, and pays German corporate tax at 30%.

High-tax exception analysis:

• Foreign tax rate: 30%
• Threshold for exception: 21% × 90% = 18.9%
• Since 30% > 18.9%, the high-tax exception applies

With the high-tax exception election, there's no inclusion or US tax on this income (assuming the statutory German tax rate of 30% equals the effective tax rate).

Need help with compliance?

Navigating the complexities of GILTI tax rules requires specialized expertise. Our team of international tax professionals can help you understand your tax obligations, identify planning opportunities, and ensure full compliance with all reporting requirements.

We provide comprehensive services, including:

• calculations and projections
• Section 962 election analysis
• foreign tax credit optimization
• state-level compliance
• CFC restructuring advice