IRS Issued Final Regulations on the GILTI High-Tax Exclusion

Are you a U.S. shareholder of a controlled foreign corporation (CFC)? The final regulation on Global Intangible Low-Taxed Income (GILTI) high-tax exclusion (HTE) published by the IRS in July 2020 may allow you to exclude “high-taxed” foreign income if certain requirements are met.

As part of the 2017 Tax Cuts and Jobs Act (TCJA), Global Intangible Low-Taxed Income (GILTI) rules require U.S. shareholders of controlled foreign corporations (CFCs) to include their share of the CFC’s GILTI in their gross income every year and pay a minimum 10.5% tax regardless of whether they received a distribution.

After the release of the final regulation, taxpayers now are allowed to electively exclude GILTI inclusion items of a CFC's gross tested income if the CFC’s effective foreign tax rate exceeds 18.9%. The election adopts an “all or nothing” approach, which means that once the election is made, it applies to all CFCs owned by the same U.S. shareholders (if that shareholder owns more than 50% of the CFC) and to all of the CFC’s U.S. shareholders.

When it comes to repatriation tax, the corporate U.S. shareholder can repatriate the excluded income, tax-free, while an individual U.S. shareholder would have to pay either at ordinary income tax rates (37% maximum rate) or at the qualified dividend rate of 20% if the CFC is treaty-protected. Therefore, careful modeling is recommended as the taxpayer’s individual circumstances may vary.

The final regulation provides that the GILTI HTE is effective for tax years of foreign corporations beginning on or after July 23, 2020. However, the IRS allows taxpayers to make the GILTI HTE election annually or retroactively to CFC tax years beginning after December 31, 2017 by attaching a statement to a tax return or an amended return.

In conclusion, the GILTI HTE rule provides taxpayers with another planning tool. However, whether it is advantageous or not depends on the taxpayer’s individual circumstances. Especially with the benefits of other regulations, like Section 962 Election or foreign tax credits, the potential benefits require detailed comparison.

For more information about this topic or learn more about GILTI HTE, please contact your Schneider Downs’ international tax advisor.