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A person who is a U.S. shareholder of any controlled foreign corporation (CFC) is required to include its global intangible low-taxed income (GILTI) in gross income for the tax year in a manner generally similar to that for Subpart F inclusions. The computation of GILTI is complex and requires the calculation of certain items of each CFC owned by U.S. shareholders, and then a single GILTI inclusion amount is determined by reference to all the U.S. shareholder’s CFCs. The provision applies to tax years of foreign corporations beginning after December 31, 2017, and to tax years of U.S. shareholders with which or within which such tax years of foreign corporations end.
The GILTI inclusion is treated similarly to a subpart F inclusion, for some purposes, but it is determined in a very different manner. In comparison to the computation of GILTI, subpart F income is determined at the level of the CFC and then included in the gross income of the U.S. shareholder according to the U.S. shareholder’s pro rata share of the income. The computation of the U.S. shareholder’s pro rata share of the CFC’s subpart F income is generally the last step in the process. The amounts are taken into account on a CFC-by-CFC basis. Because the GILTI inclusion amount is determined on the basis of all of the U.S. shareholder’s CFC, it ensures that the U.S. shareholder is taxed on GILTI, wherever it is derived.
The term global intangible low-taxed income is defined as the excess (if any) of: (1) the U.S. shareholder’s net CFC tested income for that tax year, over (2) the U.S. shareholder’s net deemed tangible income return for that tax year.
Steps to U.S. Shareholder’s GILTI
Net deemed tangible income return.The term net deemed tangible income return means with respect to any U.S. shareholder for the tax year, the excess (if any) of: (1) 10 percent of the aggregate of its pro rata share of the qualified business asset investment (QBAI) of each CFC in which it is a U.S. shareholder, over (2) the amount of interest expense taken into account in determining its net CFC tested income for the tax year to the extent that the interest expense exceeds the interest income properly allocable to the interest expense that is taken into account in determining its net CFC tested income.
As noted in the Conference Agreement, if the amount of interest expense exceeds 10% × QBAI, then the quantity in brackets in the formula equals zero in the determination of GILTI (Conference Report on H.R. 1, Tax Cuts and Jobs Act (H. Rept. 115-466)).
The term qualified business asset investment is defined by reference to specific tangible property used in a trade or business that is depreciable under IRC §167. Specified tangible property is property used in the production of tested income, unless the rule for dual use property applies. Specifically, QBAI is the CFC’s average aggregate adjusted bases as of the close of each quarter of the tax year in the property. Dual use property—property used both in the production of tested income and income that is not tested—is treated as specified tangible property in the same proportion that the CFC’s tested income produced with respect to the property bears to the total gross income produced with respect to the property.
The adjusted basis of the property is determined using the alternative depreciation system under IRC §168(g) and allocating depreciation deductions for the property ratably to each day during the period in the tax year to which the depreciation relates.
Further, if a CFC holds an interest in a partnership at the end of the CFC’s tax year, the CFC takes into account its distributive share of the aggregate of the partnership’s adjusted basis in tangible property held by the partnership if the property is used in the trade or business of the partnership, is of a type to which a deduction is allowed under IRC §167, and is used in the production of tested income. The CFC’s distributive share of the adjusted basis of any property is the CFC’s distributive share of income with respect to the property.
A CFC with business interest expense would apply the limitation on the interest expense deduction in determining properly allocable deductions. In general, the interest expenses deduction limitation rules generally apply to a CFC, in the same manners as they apply to a domestic C corporation. Highly related CFCs may elect to be treated as a group, under an alternative method that allows for the netting of intercompany interest and interest expense within the group. The rules can generally be applied to tax years beginning after December 31, 2017.
A CFC’s tested loss for any tax year is the excess of the properly allocated deductions over the CFC’s tested income.
The term net CFC tested income means with respect to a U.S. shareholder for any tax year of the shareholder, the excess (if any) of (1) the aggregate of the shareholder’s pro rata share of the tested income of each CFC with respect to which the shareholder is a U.S. shareholder for the tax year of the U.S. shareholder, over (2) the aggregate of the shareholder’s pro rata share of the tested loss of each CFC with respect to which the shareholder is a U.S. shareholder for the tax year of the U.S. shareholder. The amounts are determined for each tax year of the CFC which ends in or with such tax year of the U.S. shareholder.
The definition of a U.S. shareholder was expanded, effective for tax years of foreign corporations beginning after December 31, 2017, and to tax years of U.S. shareholders with or within which such tax years of foreign corporations end, to include a U.S. person that owns at least 10 percent of the total value of all classes of stock of the foreign corporation, in addition to a U.S. person that owns at least 10 percent of the voting stock of the foreign corporation. The definition applies for purposes of Title 26 and not just subpart F.
Pro rata share.
A shareholder’s pro rata share for purposes of determining GILTI and net CFC tested income is determined under the rules that apply with respect to subpart F income. The pro rata shares are taken into account in the tax year of the U.S. shareholder in which or with which the tax year of the CFC ends. A person is treated as a U.S. shareholder of a CFC only if the person owns (direct or indirect ownership) stock in the foreign corporation on the last day of the tax year of the foreign corporation on which the foreign corporation is a CFC. A foreign corporation is treated as a CFC, for any tax year if the foreign corporation is a CFC at any time during the tax year.
Foreign tax credit.
Foreign tax credits are allowed for foreign income taxes paid on GILTI included in the gross income of a domestic corporation. The foreign income taxes paid are restricted to 80 percent of the domestic corporation’s inclusion percentage multiplied by the aggregate tested foreign income taxes paid or accrued by CFCs. The inclusion percentage is the ratio (which is expressed as a percentage) of the corporation’s GILTI divided by the aggregate amounts of the shareholder’s pro rata share of the tested income of each CFC where the shareholder is a U.S. shareholder for their tax year.
Once a U.S. domestic corporation’s gross GILTI is determined, the shareholder is entitled to deduct 50 percent of this amount to arrive at its new GILTI. Under the 21 percent corporate tax rate, a shareholder’s GILTI is subject to an effective U.S. tax rate of 10.5 percent. For tax years beginning in 2026, the deduction decreases to 37.5 percent, resulting in an effective rate of 13.125 percent (see Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income).
New Reporting Requirements
U.S. shareholders must file a new Schedule I-1, Information for Global Intangible Low-Taxed Income, to Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, as well as new Form 8992, U.S Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), to provide the information that a U.S. shareholder needs with respect to each of its CFCs to determine the U.S. shareholder's GILTI inclusion amount for a taxable year. See Draft Form 8992 and its Draft Instructions.
Canadians who spend significant time in the U.S. must be aware of these new rules to prevent the imposition of these new taxes on Canadian corporation activities. Please contact us if you require a specific analysis of your potential exposure to this new tax.