By Lynn M. Eller, CPA, APCIT, PFS
IN THIS ARTICLE:
US citizens and tax residents who have formed — or are considering forming — a corporation in a foreign country may be impacted by global intangible low-taxed income (GILTI). The tax implications and considerations are complex. Understanding GILTI is important for making informed decisions for yourself and your business structure.
It has been more than five years since the Tax Cuts and Jobs Act (TCJA) introduced the concept of GILTI. In this article, we’ll break down:
- The basics of GILTI
- How to calculate foreign intangible income
- The difference in GILTI calculations for individuals and C corps
The Basics of GILTI
GILTI minimizes the deferral advantage of owning a foreign corporation that was enjoyed prior to the passage of the Tax Cut and Jobs Act (TCJA).
One objective of GILTI is to ensure U.S. shareholders of Controlled Foreign Corporations (CFCs) pay a minimum tax on certain types of income generated from foreign businesses.
GILTI applies only to:
- Certain types of foreign income. GILTI applies if income is derived from a CFC. The rules for CFCs have recently expanded, but essentially a CFC is defined as a foreign corporation that is more than 50% U.S. controlled when counting only U.S. shareholders that own at least 10% each.
- Certain taxpayers. GILTI only applies to a U.S. shareholder of a CFC that owns 10% or more of vote or value of shares.
It’s important to note that GILTI can grab foreign income and tax it in the U.S. even if there have been no distributions from the CFC.
How to Calculate Foreign Intangible Income
The GILTI calculation of the foreign “intangible income” gets a bit confusing when you consider that it can have nothing to do with intangible income.
GILTI is a type of minimum tax targeted at foreign earnings from intangible assets and intellectual property (copyrights, patents, trademarks, etc.) and changed incentives for tax avoidance based on where companies hold those intangibles.
However, the calculation begins with most all income of the CFC — even if those earnings are not derived from intangibles — then subtracts 10% of certain tangible depreciable assets. The result is deemed to be intangible income.
GILTI Calculation: C Corps vs. Individuals
Below we break down the basics of how the GILTI calculation impacts C Corps and individuals.
- C Corps are allowed up to a 50% deduction and can claim the foreign tax credit (FTC). In general, the tax on the GILTI income for C Corps is at most 10.5%.
- Individuals do NOT get the 50% deduction or FTC and are taxed at individual marginal rates (up to 37%).
There is an exception, however. With the IRC 962 election, individuals can opt to be treated as a C Corp for GILTI purposes only. There are pros and cons to this strategy that should be discussed with your tax advisor.
Let our team help navigate the many tax considerations involved with doing business overseas.
At PBMares, we help clients — including those in construction, government contracting, hospitality, and more — manage these complex issues. Let us help you manage your evolving business as you encounter new international tax rules and regulations.
Contact us to learn more today.