Prior to 2017, US shareholders could generally defer US taxation on the earnings of a foreign corporation. However, the global intangible low-taxed income (GILTI) regime—introduced through tax legislation in 2017—requires US shareholders who own controlled foreign corporations (CFCs) to pay generally a minimum tax on foreign income in the year earned regardless of actual distributions.
Taxpayers received some relief on July 20, 2020, with the publication of the final GILTI high-tax exclusion (GILTI HTE) regulations. Under these rules, US shareholders may elect to exclude from their GILTI calculation any items of CFC income that are subject to a foreign effective tax rate greater than 18.9%—90% of the 21% US corporate tax rate.
Who Can Benefit
Taxpayers who could potentially benefit from this election include:
- C Corporations in a net operating loss position that cannot take the Internal Revenue Code (IRC) Section 250 deduction or utilize foreign tax credits
- Individual shareholders who aren’t eligible for either the IRC Section 250 deduction or the foreign tax credits for GILTI inclusions
- Taxpayers whose use of the foreign tax credit against GILTI income is limited because of apportioned expenses
Making the Election
Controlling shareholders of CFCs could choose to make an election to exclude high-taxed income from GILTI. Upon making the election, taxpayers must exclude each CFC’s taxable income that was subject to foreign income tax at an effective tax rate of more than 18.9% from the GILTI calculation. Note this is an annual election.
The determination of whether income is considered high-taxed must be done at a granular level for each component of the CFC’s operations subject to foreign income tax. These components are referred to as tested units. For example, if a CFC in Germany has a branch in Portugal subject to Portuguese income tax, the calculation for the Portuguese branch must be computed separately.
The calculation must be done separately for each category of income such as passive or general. There are also CFC group rules and combination rules that need to be taken into account when determining the applicability of the election.
The final GILTI HTE regulations apply to taxable years of foreign corporations beginning on or after July 23, 2020, and to the taxable years of US shareholders for which the CFC’s taxable year-end falls within.
Taxpayers could choose to adopt the final regulations for taxable years beginning after December 31, 2017. All US shareholders of the CFC would be required to file an amended tax return for a valid election under the final GILTI HTE regulations for prior years.
Taxpayers who own foreign subsidiaries that are CFCs should consider whether they could benefit from making the GILTI HTE election for 2018 and any future years. Before making the election, taxpayers should consider the impact on their foreign tax credits and other aspects of their US taxable income.
We’re Here to Help
To understand if these new GILTI HTE regulations impact your business, and to learn next steps, contact your Moss Adams professional.
Special thanks to Yidi Wang, International Tax Senior, for her contributions to this article.