Author: Ray Polantz
As a result of the Tax Cuts and Jobs Act (TCJA), U.S. shareholders of controlled foreign corporations (CFCs) could see a significant change in their tax bill beginning in 2018 — and not for the better. Absent strategic tax planning efforts, the new law will currently tax global intangible low-taxed income, or GILTI.
The GILTI provisions are some of the most significant steps taken by the TCJA to broaden the U.S. tax base and prevent taxpayers from shifting value outside the U.S. borders, namely through holding intangible assets, such as patents and tradenames, in foreign subsidiaries. However, the provisions are much broader and also cover “soft” intangibles like workforce in place and general know-how.
GILTI income — which is generally a U.S. shareholder’s pro-rata share of a CFC’s aggregate net income minus its net deemed tangle income return (NDTIR) — will now be included in U.S. income, even though it often was deferred from U.S. tax under the prior tax regime. And since the GILTI provisions apply to all U.S. shareholders of CFCs, they stand to have a widespread impact.
Below are some options and considerations taxpayers with CFCs should discuss with their advisors to mitigate the impact of the GILTI provisions.
How GILTI Works for a C Corporation
To fully understand planning options for non-C Corporations, it’s helpful to know how GILTI operates for C Corporations. C Corporations benefit from two specific GILTI provisions:
- GILTI deduction. Domestic corporations are permitted a 50% deduction for their share of GILTI. For tax years beginning after December 31, 2025, the deduction percentage is reduced to 37.5%.
- Foreign tax credits. Domestic corporate shareholders are permitted an indirect foreign tax credit up to 80% of the foreign taxes paid or accrued by the CFC on GILTI.
The net effect of the GILTI rules results in a U.S. corporate minimum tax of 10.5%. That rate is further reduced by foreign tax credits related to the GILTI amount.
