What Is Global Intangible Low-Taxed Income?

Understanding Global Intangible Low-Taxed Income

Global Intangible Low-Taxed Income (GILTI) is a tax provision enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017. It aims to deter U.S. multinational corporations from shifting profits from intangible assets, like patents and trademarks, to foreign jurisdictions with lower tax rates. Before GILTI, U.S. companies could often defer U.S. tax on foreign subsidiary earnings until repatriation. GILTI ensures a minimum U.S. taxation level on certain foreign earnings, even if not repatriated. This tax applies to U.S. shareholders of controlled foreign corporations (CFCs), functioning as a minimum tax on specific foreign income.

A Controlled Foreign Corporation (CFC) is a foreign corporation where U.S. shareholders collectively own over 50% of the total voting power or value of shares. A U.S. Shareholder is any U.S. person owning 10% or more of the CFC’s stock, directly or indirectly.

The GILTI calculation involves a CFC’s “tested income” and “tested loss.” Tested income is a CFC’s gross income, excluding categories like U.S. source effectively connected income, Subpart F income, related-party dividends, and foreign oil and gas extraction income, less allocable deductions. A tested loss occurs when these deductions exceed gross income.

Qualified Business Asset Investment (QBAI) is another component in the GILTI calculation. QBAI represents the average adjusted bases of depreciable tangible property used in the CFC’s trade or business that generates tested income, such as machinery and buildings. QBAI allows for a deemed normal return on a CFC’s tangible assets.

GILTI taxes the “excess” return on a CFC’s assets. A 10% return on QBAI is considered a normal business return and is not subject to GILTI. Any income a CFC generates above this 10% return on its tangible assets is treated as income from intangible assets, even without explicit intellectual property ownership. This ensures highly mobile income, often from intangible assets, faces U.S. taxation.

Calculating Your GILTI Inclusion

A U.S. shareholder’s GILTI inclusion calculation aggregates data from all controlled foreign corporations (CFCs). The process begins by determining the “net CFC tested income,” which is the aggregate of the U.S. shareholder’s pro rata share of tested income from all CFCs, reduced by their pro rata share of tested losses.

Next, the “net deemed tangible income return” is calculated. This amount is 10% of the aggregate Qualified Business Asset Investment (QBAI) of all CFCs, reduced by any specified interest expense. QBAI is the average of the CFC’s aggregate adjusted bases in tangible property used to produce tested income and depreciable under U.S. tax law.

The final GILTI inclusion amount for a U.S. shareholder is the net CFC tested income minus the net deemed tangible income return. If the net deemed tangible income return exceeds the net CFC tested income, the GILTI inclusion is zero.

Example Calculation

For example, a U.S. corporation owns two CFCs. CFC A has tested income of $1,000,000 and QBAI of $5,000,000. CFC B has tested income of $200,000 and QBAI of $1,000,000. The net CFC tested income is $1,200,000 ($1,000,000 + $200,000). The aggregate QBAI is $6,000,000 ($5,000,000 + $1,000,000).

The net deemed tangible income return is 10% of the aggregate QBAI, or $600,000 (10% of $6,000,000). Assuming no specified interest expense, the GILTI inclusion is $600,000 ($1,200,000 – $600,000). This amount represents income attributed to intangible assets, subject to U.S. tax.

Tax Implications and Credits

Once the GILTI inclusion is determined, U.S. corporations generally receive a deduction under Section 250. For corporate taxpayers, this deduction is 50% of their GILTI inclusion, reducing the U.S. corporate tax rate on GILTI from 21% to 10.5%. For tax years beginning after December 31, 2025, this deduction decreases to 37.5%, raising the effective tax rate to 13.125%.

This deduction is available to domestic corporations. Individuals who are U.S. shareholders generally cannot claim it unless they make an election under Section 962. This election allows individuals to be taxed as if they were a U.S. corporation for their CFC income, potentially accessing the corporate tax rate and the deduction.

U.S. shareholders may claim a foreign tax credit (FTC) for certain foreign income taxes paid by their CFCs on tested income. Only 80% of foreign income taxes attributable to tested income can offset U.S. tax on GILTI. These foreign tax credits are “basketed,” meaning they only offset U.S. tax liability on GILTI and cannot reduce U.S. tax on other income.

Any excess GILTI foreign tax credits cannot be carried forward or carried back to other tax years. The combination of the deduction and foreign tax credit rules creates a minimum tax on GILTI. The effective U.S. tax rate on GILTI for corporations varies depending on foreign taxes paid. If foreign taxes are high enough, the 80% foreign tax credit might reduce the U.S. tax liability on GILTI to zero.

Compliance and Reporting

U.S. shareholders subject to GILTI must adhere to specific reporting requirements. The IRS form used for calculating and reporting the GILTI inclusion is Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI).

To complete Form 8992, U.S. shareholders gather financial information for each Controlled Foreign Corporation (CFC) they own. This includes each CFC’s tested income or loss and its Qualified Business Asset Investment (QBAI). These figures, derived from the CFC’s financial records, are entered on Form 8992 for the final GILTI inclusion.

In addition to Form 8992, U.S. shareholders of CFCs generally file Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. Form 5471 provides financial and ownership information about the CFC, serving as foundational data for international tax calculations, including GILTI. Schedule I-1 of Form 5471 reports GILTI inclusions.

Accurate record-keeping of tested income, tested loss, and QBAI for each CFC is important for GILTI compliance. Consulting with a tax professional specializing in international taxation is often beneficial due to the complexities involved.