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Planning Opportunities to Minimize Tax Impact of GILTI

Planning Opportunities to Minimize Tax Impact of GILTI
Ines Zemelman, EA
30 January 2019

Intro reading

We’ve written a bevy of articles on the impact of tax reform on owners of non-US corporations. Here are a few articles that will provide context for the below. Please peruse our site for more information, as well.

  1. Transition Tax is not the same thing as GILTI Tax
  2. Revised Form 5471; 2017 Tax Reform Impact on Tax Compliance Continues
  3. Tax Reform for individuals with foreign corporations - Extended effect of Sec 962 Election

Controlled Foreign Corporation to Partnership or Disregarded Entity

One option is to change a foreign corporation’s status from a Controlled Foreign Corporation (CFC) to a foreign partnership or foreign disregarded entity, thus no longer subject to GILTI.  To process this change, an election is completed on Form 8832 and generally must be made no later than 75 days after the date from which the election requested to be effective.

As a result, all income from the foreign entity will flow through to the owner(s), and therefore could be subject to US taxation each year, but taxes paid or accrued will become eligible for credit (such credit is unavailable to individuals under GILTI).

Issues to consider

 

  • Unrealized appreciation of CFC is considered additional Earnings and Profits on deemed liquidation, causing one-time GILTI charge which could be high.
  • Pass-through Income from a foreign partnership of foreign disregarded entity may be a subject to Self-Employment tax in the US.

Income Acceleration: 180 degree shift

Pre Tax Reform:
 

  • Subpart F (income not allowed for deferral and taxable to the owner in the year when received by the corporation) was a stigma every CFC owner tried to avoid to achieve deferral of U.S. tax. This was a universal principle before Tax Reform.
  • When the CFC had income from the US, it was beneficial for the US owners to boost deductions in the U.S.

Post Tax Reform:

  • A taxpayer may elect to exclude from the corporate income an item of Subpart F income that qualifies was taxed in the foreign country at a rate over 31.5% (this is called “high-tax exception”). Thus, this income will not be subject to GILTI inclusion as well. As a result of tax reform, High-Tax Subpart F income is more beneficial than ever before.
  • Accelerate income recognition by paying out dividends. Paid out dividends will not be a part of GILTI inclusion and income recognized by the shareholder qualifies for the foreign tax credit.
  • Create deductions in foreign jurisdictions to reduce GILTI. This is the opposite to pre-reform strategy where Income in non-US jurisdictions could remain high because the income deferral was unlimited.

To summarize:

There is no incentive to reduce the foreign individual income of US shareholder because the option of foreign income deferral is no longer available. Instead, most strategies will focus around increasing the foreign income of the individual shareholder.

In high-tax countries, this will reduce GILTI income and generate a foreign tax credit allowed for the offset of US income. In low-tax countries, there will be low or no foreign tax credit but the GILTI income will be reduced anyway. The above is general information, each situation can require individual analysis.

Ines Zemelman, EA
founder of Taxes for Expats