Who Is Subject to GILTI and How Does the Tax Work?

Global Intangible Low-Taxed Income (GILTI) is a provision within U.S. international tax law designed to address foreign earnings of certain U.S.-owned corporations. This tax aims to ensure a minimum level of U.S. taxation on profits generated abroad, particularly those that may be subject to low foreign tax rates. Applicability of GILTI requires understanding specific definitions and ownership structures.

Understanding Key Definitions

The application of Global Intangible Low-Taxed Income relies on two foundational concepts: the U.S. Shareholder and the Controlled Foreign Corporation. These definitions establish the framework for identifying GILTI tax obligations.

A U.S. Shareholder is any U.S. person who owns, directly, indirectly, or constructively, 10% or more of the total combined voting power of all classes of voting stock of a foreign corporation, or 10% or more of the total value of shares of all classes of stock. This definition encompasses individuals, corporations, partnerships, and trusts. The 10% ownership threshold is crucial.

A Controlled Foreign Corporation (CFC) is a foreign corporation where U.S. Shareholders collectively own more than 50% of the total combined voting power of all classes of voting stock, or more than 50% of the total value of the stock. This 50% threshold is based on the aggregate ownership of all U.S. Shareholders, each meeting the 10% ownership requirement. If U.S. Shareholders together exceed this 50% threshold, the foreign entity is classified as a CFC.

For instance, if a foreign corporation has five U.S. individuals, each owning 12% of its stock, the corporation would be a CFC because their combined ownership is 60%, exceeding the 50% threshold. Each of these individuals also meets the 10% U.S. Shareholder definition.

The classification as a CFC is significant because it triggers specific U.S. tax provisions, including GILTI, for its U.S. Shareholders. The purpose of these rules is to prevent U.S. taxpayers from deferring U.S. taxes by accumulating profits in foreign entities located in low-tax jurisdictions. These definitions establish the conditions for GILTI applicability.

Identifying Entities Subject to GILTI

Global Intangible Low-Taxed Income is an inclusion in the gross income of a U.S. Shareholder. This inclusion applies to U.S. Shareholders of a Controlled Foreign Corporation (CFC) on the CFC’s “net CFC tested income”. U.S. persons with significant ownership in foreign corporations must currently report certain foreign earnings, regardless of whether those earnings are distributed.

A U.S. Shareholder is subject to GILTI if they own 10% or more of the voting power or value of a foreign corporation’s stock, and that corporation qualifies as a CFC. This ownership can be direct, indirect, or constructive. The GILTI inclusion amount is the excess of the U.S. Shareholder’s pro rata share of net CFC tested income over their net deemed tangible income return.

The calculation of GILTI operates on an aggregate basis across all CFCs owned by a single U.S. Shareholder. A U.S. Shareholder includes their pro rata share of the total net CFC tested income from all CFCs in which they hold a qualifying interest. “Net CFC tested income” is derived from the CFC’s gross income, subject to certain exclusions, less allocable deductions. This aggregate approach ensures comprehensive assessment of foreign low-taxed income.

The GILTI regime aims to tax foreign earnings that exceed a routine return on a CFC’s tangible assets. This “deemed return on tangible assets” is 10% of the U.S. Shareholder’s pro rata share of the adjusted tax basis of the CFC’s tangible depreciable property, referred to as Qualified Business Asset Investment (QBAI). The GILTI inclusion is the CFC’s income above this 10% return, reduced by certain interest expenses. This structure targets income presumed to be derived from intangible assets, often easily shifted to low-tax jurisdictions.

For corporate U.S. Shareholders, the GILTI inclusion is subject to an effective U.S. tax rate of 10.5% through a 50% deduction. Corporate shareholders may also claim an indirect foreign tax credit for up to 80% of foreign taxes paid by the CFC attributable to GILTI. Individuals are also subject to GILTI, though the 50% deduction and indirect foreign tax credits are not available unless a Section 962 election is made. This election allows individuals to be taxed as a corporation for certain foreign income purposes, potentially benefiting from corporate rates and credits.

Exclusions from GILTI Applicability

While many U.S. Shareholders of Controlled Foreign Corporations may be subject to GILTI, certain income types or circumstances can lead to an exclusion from the GILTI calculation. These exclusions prevent double taxation or align with other U.S. tax policy objectives. Understanding these exceptions is important for determining GILTI liability.

The High-Tax Exclusion allows for the exclusion of a CFC’s income from “tested income” if that income is subject to a foreign effective tax rate that meets a specified threshold. The current threshold is an effective foreign tax rate greater than 18.9%, representing 90% of the U.S. corporate tax rate of 21%. If a CFC’s income is taxed at or above this foreign tax rate, it may be excluded from the GILTI inclusion, reducing or eliminating the U.S. tax on that income. This election can be made annually by the controlling U.S. Shareholders of the CFC.

Income effectively connected with a U.S. trade or business (ECI) is excluded from a CFC’s tested income for GILTI purposes. This exclusion applies because such income is already subject to U.S. taxation under other provisions of the Internal Revenue Code. Including ECI in the GILTI calculation would result in double taxation, which the exclusion aims to prevent.

Subpart F income is also excluded from GILTI tested income. This includes passive income like interest, dividends, rents, royalties, and capital gains, as well as some active business income that is easily shifted. This income is already subject to current U.S. taxation under a separate set of rules, regardless of whether it is distributed. Excluding Subpart F income from GILTI prevents double taxation under different U.S. international tax regimes.

Certain dividends from related persons and foreign oil and gas extraction income may also be excluded. These exclusions refine the scope of income under the GILTI regime. The purpose of these exclusions is to ensure GILTI primarily targets foreign income not adequately taxed by a foreign jurisdiction or by other U.S. tax provisions, aligning the tax with its objective of preventing tax deferral and profit shifting.

Reporting Requirements for Subject Taxpayers

U.S. Shareholders subject to GILTI must comply with specific reporting requirements. These requirements involve filing IRS forms that provide information about foreign corporations and the GILTI inclusion amount. Adherence to these steps is essential for compliance.

Form 8992, “U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI),” is the primary form used to calculate and report the GILTI inclusion. It assists U.S. Shareholders in determining their GILTI inclusion amount, which is reported on their annual income tax return. Schedule A (Form 8992), “Schedule of Controlled Foreign Corporation (CFC) Information To Compute Global Intangible Low-Taxed Income (GILTI),” is also completed and attached to Form 8992 to provide details for each CFC.

U.S. Shareholders of CFCs must also file Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations.” Form 5471 is an information return, not a tax return, providing the IRS with financial and ownership details about foreign corporations. This form includes schedules that report a CFC’s income statement, balance sheet, and other financial data, foundational for GILTI calculations. There are different categories of filers for Form 5471, and U.S. Shareholders of CFCs fall under Category 1 or Category 5, depending on their involvement and ownership.

The GILTI inclusion amount calculated on Form 8992 is integrated into the U.S. Shareholder’s main income tax return. For individual taxpayers, the GILTI inclusion is reported on Schedule 1 (Form 1040) as “Section 951A(a) inclusion.” For corporate taxpayers, the amount is reported on Form 1120, Schedule C, or comparable corporate returns. This integration ensures the GILTI amount becomes part of the taxpayer’s overall taxable income for the year.

The filing deadline for Form 8992 and Form 5471 is the same as the U.S. Shareholder’s regular income tax return deadline, including extensions. For calendar year taxpayers, this is April 15. U.S. citizens and resident aliens residing abroad receive an automatic two-month extension to June 15 for filing their income tax returns, including associated international forms. Further extensions to October 15 can be requested using Form 4868; this extends the filing deadline, not the payment deadline for taxes owed. Failure to file these forms accurately and on time can result in substantial penalties.