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Advanced Strategies Available to Mitigate the Tax Consequences of GILTI Inclusions

Advanced Strategies Available to Mitigate the Tax Consequences of GILTI Inclusions

By Anthony Diosdi

Introduction to the Global Intangible Low-Tax Regime

The 2017 Tax Cuts and Jobs Act dramatically changed the way outbound international transactions are taxed. The Tax Cuts and Jobs Act retained the existing Subpart F tax regime, but it also created a new class of taxable income known as global intangible low-taxed income (”GILTI”).

Internal Revenue Code Section 951 authorizes GILTI. GILTI was intended to impose a current year tax on income earned from intangible property that was subject to no or a low tax rate offshore. GILTI is defined as the residual of a controlled foreign corporations (CFC’s) income (excluding Subpart F income or income that is effectively connected with a U.S. trade or business, and certain other classes of income) above a 10 percent return on the CFC’s investment in tangible depreciable assets (otherwise known as a “qualified business asset investment” or “QBAI”). The GILTI rules presume that tangible property should provide an investment return of no greater than 10 percent annually. Internal Revenue Code Section 951 assumes that any income earned in the excess of 10 percent return of a CFC’s QBAI was earned from intangible property. This means that the tax reach of GILTI is not limited to income received from intangibles. Any income above this 10 percent floor, whether received from intangibles or not is taxed under the GILTI regime.

The federal income tax liability associated with GILTI is significantly different to a U.S. shareholder of a CFC that is a domestic corporation compared to a U.S. shareholder that is an individual. Individual taxpayers that hold a CFC directly are subject to GILTI tax at federal marginal rates of up to 37 percent. Individual shareholders of a CFC are also subject to a 3.8 percent Medicare Tax. In addition, individual shareholders of a CFC cannot claim an indirect foreign tax credit to offset foreign tax liability. On the other hand, domestic corporations that hold CFC shares are generally subject to tax on GILTI at a rate of 10.5 percent. Domestic corporations can also utilize an indirect tax credit of 80 percent of the amount of foreign taxes paid on such GILTI.

In certain cases, federal tax liabilities associated with GILTI inclusions can be significant. This has encouraged many individuals that hold shares of CFCs to place these shares into domestic holding C corporations or to make a so-called Section 962 election. In the short term, these options can significantly reduce an individual’s GILTI tax consequences. However, establishing a domestic holding company or making a Section 962 election has some significant long-term downsides. This article will discuss the short and long term consequences of placing CFC shares into a domestic holding company and the tax consequences of making a Section 962 election. This article will also discuss the newly enacted rules governing the GILTI high tax exemption.

Reducing the GILTI Inclusion through the High Tax Exception

The Internal Revenue Service (“IRS”) and the Department of Treasury have recently promulgated  proposed regulations that permit a shareholder of a CFC to make what is known as a high tax exception to GILTI inclusions. This exception applies to the extent that the net tested income from a CFC exceeds 90 percent of the U.S. federal corporate income rate. Net CFC tested income with respect to any US shareholder is the excess (if any) of the aggregate of the shareholder’s pro rata share of the “tested income” of each CFC with respect to which the shareholder is a US shareholder over the aggregate of that 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 taxable year of the US shareholder. See IRC Section 951A(c). This can be expressed in the following formula:

GILTI = Net CFC Tested Income – Net Deemed Tangible Income Return = [Tested Income – Tested Loss] – [10% of QBAI – Certain Interest Expense].

The tested income of a CFC is the excess (if any) of the gross income of the CFC determined without regard to certain items (listed below) over deductions properly allocable to that gross income. The items excluded from gross income are:

1. Income effectively connected with a U.S. trade or business;

2. Subpart F income;

3. Any gross income under Section 954 excluded from base company income, insurance income as defined under Section 953, and income excluded by reason of the high-tax exception.

4. Any dividends received from a related person;

5. Any foreign oil and gas extraction income of the CFC.

GILTI provides an exception from “tested income” under the high-taxed exception.  If the effective foreign tax rate of the CFC exceeds 18.9 percent, a taxpayer could elect for the high tax exception to apply. Although the high tax exemption reduces the current income tax liability, there could be a long-term price to pay for using this exemption. This because the high tax exception may result in the CFC retaining the undistributed profits as E&P. When a taxpayer utilizes the high tax exemption, he or she must establish a recapture account. See IRC Section 952(c)(2). In the future, if the shareholder of the CFC triggers this account, the same income may be taxed as both GILTI and Subpart F income. Any shareholder utilizing the high tax exclusion must carefully watch their E&P and Section 952(c)(2) accounts to avoid triggering an unwelcome future tax surprise.

The GILTI proposed regulations provide an example of such an unwelcome surprise. In year 1, a CFC has $100x of foreign base company income and a ($100x) loss in foreign oil and gas extraction income, a category of income that is neither subpart F income nor tested income. The CFC has no other items of income, and as a result of having no current E&P, does not include the $100x of Subpart F income under Internal Revenue Code Section 951(a). This $100x is also not taken into account as tested income.

In year 2, the CFC has $100x of income and E&P that is neither Subpart F income nor otherwise excluded tested income. The CFC thus has $100x of E&P in excess of Subpart F income and recaptures the benefit of the E&P limitation by including this $100x as Subpart F income. The Proposed Regulations state that the treatment of this income as Subpart F under the recapture rule is disregarded for applying the tested income. As a result, the same $100x remains tested income and is not excluded by Internal Revenue Code Section 951A(c)(2)(A)(i)(II) as income taken into account in computing Subpart F income. This would result in the taxpayer including the $100x as both Subpart F income and GILTI income. In other words, the taxpayer would recognize double tax on the same excluded income. See The High-Taxed Exception and E&P Limitation to Subpart F Income, By William Skinner, November – December 2018, International Tax Journal.

The above is an extreme example of how the high tax exception can go wrong. Although the high tax exception can trigger a significant tax consequence when a CFC owner recaptures a Section 952(c)(2) account, with proper planning, a CFC shareholder could significantly reduce his or her tax obligations. This is particularly the case if the CFC is incorporated in a country that has entered into a tax treaty with the United States. In these cases CFC retained undistributed profits resulting from the use of the high tax exception may qualify for reduced qualified dividend rates. (Qualified dividends are taxed as capital gains rates of 20%, 15%, or 0% depending on the tax bracket of the individual).

Reducing Taxable GILTI Inclusions by Contributing Shares of a CFC to a Domestic C Corporation or by making a Section 962 Elections

a. Contributing CFC Shares to a Domestic Corporation

In addition to the high tax exception, an individual holding CFC stocks may consider contributing the shares of the CFC to a domestic C corporation. As discussed above U.S. shareholders of a CFC must include any GILTI as ordinary income. The current highest federal tax rate applicable to an individual is 37 percent. On the other hand, the current highest federal tax rate to a corporation is 21 percent. In addition to a significantly lower tax rate, corporate shareholders of CFCs are provided two significant benefits that are not afforded to non-corporate shareholders. First, C corporate structures that hold CFCs can deduct 50 percent through a Section 250 deduction) of their GILTI inclusion. Second, U.S. corporate shareholders of CFCs can offset their U.S. tax liability with foreign tax credits paid by the CFC.

An individual holder of CFC shares may contribute the shares of the CFC to a domestic C corporation which would result in the C corporation becoming a U.S. shareholder of the CFC. An individual shareholder can transfer his or her CFC shares to a U.S. holding company tax-free through a Section 351 contribution. (Section 351(a) provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for its stock if the transferor or transferors of property are in “control” of the corporation “immediately after the exchange”).

GILTI earned by a domestic corporation should receive the benefit of the Section 250 deduction and flow-through of foreign tax credits. Moreover, a distribution of the CFC’s PTEP (PTEPs will be discussed in more detail below) should not be subject to further U.S. income tax.  If the CFC has any E&P (that is not otherwise PTEP) a distribution of such amount from the CFC to domestic corporation may qualify for an exemption that allows for tax-free repatriations of CFC earnings under Internal Revenue Code Section 245A. (In certain cases, Internal Revenue Code Section 245A allows GILTI inclusions realized by a C corporation as dividends from a 10 percent or more foreign subsidiary to be exempt from federal taxation).

On the other hand, a contribution by an individual to a domestic corporation may result in more significant long-term tax consequences. For example, a contribution to a U.S. corporation may give rise to foreign income tax or corporate transfer tax. Placing CFC shares inside a C corporation may also create a second layer of tax on certain gains on the CFC shares in excess of E&P of the CFC. This means if an individual were to sell his or her CFC shares, the sale of the CFC shares may be subject to capital gains taxes, plus applicable Medicare taxes. To the extent that the CFC has E&P, then some or all this gain may be recharacterized as a taxable dividend distribution. In certain cases, these tax consequences can be mitigated by making an election under Section 338(g) of the Internal Revenue Code. Making a Section 338(g) election may reduce CFC’s corporate tax liability associated with its sale to only 10.5 percent. This is because a Section 338(g) election may convert the income associated with the sale of CFC shares to a favorable GILTI rate.

b. Making a Section 962 Election

An Internal Revenue Code Section 962 election is a shareholder level election that is made on an annual basis. The federal income tax consequences of an individual making a Section 962 election are as follows. First, the individual CFC shareholder is taxed on amounts included in his gross foreign income at corporate rates. Second, the individual CFc shareholder is entitled to a deemed-paid foreign tax credit under Section 960 as if the individual were a domestic corporation. Third, when the CFC makes an actual distribution of earnings that has already been included in gross income by the shareholder under Section 951(a) or Section 951A, Section 962(b) requires that the earnings be included in the gross income of the CFC shareholder again to the extent they exceed the amount of U.S. income tax paid at the time of the Section 962 election.

By making a Section 962 election, an individual is treated solely for purposes of GILTI inclusions as if it is taxed as a domestic corporation. Therefore, the applicable tax rate on a GILTI inclusion would be equal to the rates that a corporation receives. Moreover, the foreign tax credit is available to the shareholder. The shareholder may also claim the 50 percent deduction on any GILTI inclusions. However, upon the sale of the CFC stock by an electing 962 shareholder, the non-corporate shareholder is subject to tax as if it were a corporation.

Unfortunately, a Section 962 election comes with strings attached. When the Section 962 election is made, GILTI and Subpart F income of the CFC is treated as PTEP (PTEPs will be discussed in more detail below). This PTEP is classified as either “Excludable Section 962 E&P” to the extent of the income tax paid by the U.S. shareholder, or “Taxable Section 962 E&P” to extent to the excess of Section 962 E&P over Excludable Code Section 962 E&P. A later distribution of the previously excluded Section 962 E&P is not subject to additional federal tax. However, it will incur another layer of tax as a dividend. The most obvious reason why a CFC shareholder would choose to make a Section 962 election is the ability to defer the U.S. income tax on the actual distribution from a CFC, as well as the possibility of obtaining “qualified” dividends on subsequent distributions. 

Introduction to the Section 959 Ordering Rules and the Challengers of the Ordering Rules to Any International Tax Plan

As indicated above, the rules governing previously taxed earnings and profits (“PTEP”) come into play in GILTI planning. Thus, any GILTI planning must consider the rules governing PTEPs and the ordering rules of PTEPs discussed in Internal Revenue Code Section 959. This is because when a CFC generates GILTI, chances are the GILTI will become a PTEP. GILTI is not the only item of foreign income that can become recharacterized as PTEP, other sources of foreign source income such as Subpart F income may also become reclassified as a PTEP. PTEPs get classified into one of four separate baskets under Internal Revenue Code Section 904(d). The exact classification of income will determine which basket it will be placed into.  All PTEPs are subject to a certain set of ordering rules under Section 959. These ordering rules indicate the tax consequences to the recipient.

The classification of PTEPs are also important because these rules determine the US tax creditability of foreign taxes allowed to each PTEP that is eventually placed into a basket. Another way of looking at these rules is that any foreign taxes paid or accrued on GILTI income are allocated to the applicable GILTI basket. If a CFC shareholder has an excess foreign credit allocated to a GILTI basket, the excess credit cannot generally be reallocated to another Section 904 basket. This means any excess foreign tax credits attributable to a GILTI inclusion would effectively become useless; the credit cannot be carried to future or previous tax years.

Section 959 Ordering Rules

Where the E&P of a CFC consists in whole or in part of PTEP, special rules under Internal Revenue Code Section 959 apply in determining the ordering and taxation of distributions of such PTEP. Amounts included in the gross income of a U.S. shareholder as a GILTI inclusion are not included in gross income again when such amounts are distributed to that US shareholder, directly, or indirectly through a chain of ownership. A PTEP distribution is generally sourced in the following order: 1) PTEP attributable to investments in US property under Section 959(c)(1); 2) PTEP attributable to Subpart F income under Section 959 purposes, and subject to recent PTEP guidance discussed below, a distribution is generally attributable to E&P according to the “last in first out” method (“LIFO”) based on the year income was earned. For example, a distribution is treated as if it were first made out of a CFC’s current year E&P, and then the CFC’s prior year accumulated E&P.

On November 28, 2018, the Department of Treasury and the IRS released proposed regulations related to the determination of the foreign tax credit. In addition, Notice 2019-01 announced the Treasury and IRS’ intention to withdraw prior proposed regulations under Section 959 and issue new proposed regulations under Sections 959 and 961. The new proposed regulations described in Notice 2019-01 include rules related to the maintenance of PTEP in annual accounts and within specified regulations under Sections 959 and 961. The new proposed regulations described in Notice 2019-01 include rules related to the maintenance of PTEP in annual accounts and within groups and the ordering of PTEP upon distribution and reclassification. The Notice consists of three parts. Section 3 of the Notice is divided into three subparts. These subparts are referred to as 3.01, 3.02, and 3.03.

Section 3.01 of the Notice states that the new regulations to Section 959 will be enacted to changes made by the 2017 Tax Cuts and Jobs Act and will include rules relating to:

1. The maintenance of PTEP in annual accounts and within certain groups;

2. The ordering of PTEP upon distribution and reclassification; and

3. The adjustments required when an income inclusion exceeds the E&P of a CFC.

The Notice goes on to say that existing PTEP regulations will need to be modified to reflect the additional types of Section 959(c)(2) PTEP created under the 2017 Tax Cuts and Jobs Act. This includes PTEP for GILTI inclusions. Section 3.01 of the Notice provides that future regulations are expected to provide that an annual PTEP account must be maintained for each CFC and each PTEP account must be segregated into the 16 PTEP groups in each Section 904 separate limitation category or “basket.” Once a PTEP is assigned to a PTEP group with an annual PTEP account for the year of the income inclusion under Section 951(a)(1), the PTEP will be maintained in an annual PTEP account with a year that corresponds to the year of the account from which the PTEP originated if PTEP is distributed or reclassified in a subsequent tax year. This means that CFC shareholders must maintain PTEP accounts (in some cases PTEP sub-accounts) for each year and those accounts will have to be maintained until they are exhausted.

Thus, starting with Section 959(c)(1) PTEP, under the forthcoming regulations, as an exception to the LIFO approach, distributions will be sourced first from reclassified Section 965(a) PTEP and then reclassified Section 965(b) PTEP. Once the PTEP groups have been exhausted, under the LIFO rules, distributions will be allocated pro-rata from the remaining Section 959(c)(1) PTEP. After these PTEPs are exhausted, distributions will be sourced from Section 959(c)(2) PTEP.  Once those two PTEP groups are exhausted, under the LIFO approach, distributions will be sourced pro rata from the remaining Section 959(c)(2) PTEP groups in each annual PTEP account, starting from the most recent annual PTEP account. Finally, once all the PTEP groups have been exhausted, the remaining amount of any distributions will be sourced from Section 959(c)(3) E&P. Consequently, the proposed regulations would necessitate the ordering of PTEP attributable to a distribution and require the maintenance of a system to track the various forms of PTEP.

Under the proposed regulations promulgated by the Treasury and the IRS, a CFC must establish a PTEP annual account for each Section 904 basket. Under the proposed regulations, a CFC must also assign a PTEP to one of ten different accounts in each Section 904 basket. Unfortunately, the newly promulgated proposed foreign tax credit regulations do not provide any guidance as to the ordering of PTEP distributions. Instead, the introduction to the proposed foreign tax credit regulations provides notice that the IRS and Treasury will address the ordering issue in regulations Internal Revenue Code Section 959. 

As a matter of fact, Notice 2019-01 discusses regulations that Treasury and the IRS intend to promulgate regarding the ordering of PTEP distributions. Notice 2019-01 indicates that subject to the priority rules of Section 965(a) and (b), the Notice applies a LIFO approach to the sourcing of distributions from annual PTEP accounts. Thus, subject to the priority rules of Section 965(a) and (b), the most recent annual PTEP account is treated as distributed first, followed by the second most recent annual PTEP account, and continued through each annual PTEP account, and continued through each annual PTEP account under Internal Revenue Code Section 959(c)(1) until each account is exhausted. The same approach will then apply to Internal Revenue Code Section 959(c)(2) PTEP. Finally, the remaining amount of any distributions are sourced from Internal Revenue Section 959(c)(3).

PTEP Rules for Foreign Tax Credits

Prior to the 2017 Tax Cuts and Jobs Act, former Sections 902 and 960(a)(1) permitted a corporate U.S. shareholder to claim a credit for foreign taxes paid by a CFC when the related income was either distributed to the shareholder as a dividend or included in the shareholder’s income as Subpart F inclusion. In both scenarios, the amount of deemed paid foreign taxes was based on multi-year “pools” of earnings and taxes, with the shareholder generally deemed to have paid the same proportion of the CFC’s post 1986 foreign income taxes as the amount of the dividend or Subpart F inclusion.

Under the 2017 Tax Cuts and Jobs Act, the pools have now been repealed and replaced with a single year indirect credit for the foreign income taxes “properly attributable to” the item of income under new Internal Revenue Code Section 960(a).  Internal Revenue Code Section 960(a) provides that CFC shareholders include “any item of income under Section 951(a)(1)” with respect to any CFC shall be deemed to have paid “so much of such foreign corporation’s foreign source taxes as are properly attributable to such item of income.” Consequently, Section 960(a) provides a basis for deemed-paid credits with respect to inclusions under Section 951(a)(1)(A)(Subpart F inclusions), Section 951A(GILTI), and Section 956 (investment in U.S. property inclusions). As part of the price of claiming the Section 960 foreign tax credit, a shareholder must gross up the inclusion by the amount of foreign taxes properly attributable to it pursuant to Internal Revenue Code Section 78.

To prevent the use of foreign tax credits to offset federal tax on U.S. source income, Internal Revenue Code Section 904(a) provides a number of limitations. These limitations are expressed in the following formula:

U.S. taxes on worldwide taxable X     Foreign Source Taxable Income
Income (before foreign tax credits)       Worldwide Taxable Income

As indicated above, separate basket limitations are established under Internal Revenue Code
Section 904(d) to prevent foreign taxes paid on low foreign income from being used to offset high taxed domestic income. Foreign source income categorized in one basket cannot be used to offset income in another basket. There are two specific baskets of passive income, GILTI, foreign branch income, and one general, catchall basket for active business income. The limitation formula discussed above is applied separately to each basket, and the results are combined for the total foreign tax credit for each year. For tax credits applicable to the GILTI basket, there is an 80 percent limitation. Any amount includible in the gross income of a domestic corporation under GILTI, such domestic corporation shall be deemed to have paid foreign income equal to 80 percent of the product of such domestic corporation’s inclusion percentage multiplied by the aggregate tested foreign taxes paid or accrued by the CFC.

Excess credit in any category other than GILTI is permitted to be carried back to the one immediately preceding the taxable year and carried  forward to the first ten succeeding years. GILTI credits are ineligible for carryforward or backward. However, the proposed foreign tax credit regulations do not require the same 80 percent limitation for any foreign taxes assigned to the GILTI PTEP group. As a consequence, any foreign taxes paid or accrued on distributions of GILTI PTEP may be deemed paid by the US shareholders without limitation.

PTEP Rules Associated with Section 962 Elections

As discussed above, CFC shareholders making a Section 962 election will be required to account for the election through a PTEP.  These PTEPs are subject to the ordering rules Section 959. The regulations under Section 962 provide a unique set of ordering rules with respect to distributing of PTEP and current year earnings, which modify the traditional Section 959 rules. When a CFC makes an actual distribution of E&P, the regulations distinguish between E&P earned during a tax year in which the individual US shareholder has made an election under Section 962 and other, non-Section 962 E&P. Section 962 E&P is further classified between 1) “Excludable 962 E&P,” which represents an amount of 962 E&P equal to the amount of US federal corporate tax paid on 962 E&P, and 2) Taxable 962 E&P, which is the excess of 962 E&P over Excludable 962 E&P.

Generally, a distribution of E&P that the US shareholder has already included in his or her income is tax-free to the US shareholder. However, when a CFC distributes 962 E&P, the portion of the earnings that compromise Taxable Section 962 E&P is subject to a second layer shareholder level tax. If no Section 962 election has been made, then the distribution of all of the PTEP would be tax-free to the recipient shareholder. Thus, the Section 962 election results in the imposition of an additional layer of tax on the 962 E&P that is considered Taxable 962 E&P. This second layer of tax is consistent with treating the U.S. individual shareholder in the same manner as if he or she invested in the CFC through a domestic corporation.

The Section 962 regulations adopt the general Section 959 ordering rules with respect to a CFC’s distribution of E&P, but modify them by providing a priority between 962 E&P and non-962 E&P. First, distributions of E&P that is PTEP under Section 959(c)(1) (Section 959 inclusions) are distributed second, and all other E&P under Section 959(c)(3) is distributed last. This is the case irrespective of the year in which the E&P is earned. Second, when distributions of E&P that is PTEP under Section 959(c)(1) are made, distributions of E&P comes first from non Section 962 E&P, then excludable 962 E&P, and finally 962 E&P. Finally, within each subset of PTEP, the ordering rule is LIFO. In other words, E&P from the current year is distributed first, then E&P from the prior year, and then E&P from all other prior years in descending order.

An excellent example of how the PTEP and ordering rules apply to Section 962 election is discussed in “The Modern Day Closely Held Foreign Corporation-Post-Tax Reform by Steve Hadjilogiou of McDermott Will & Emery, LLP and Fred Murray, Chief Counsel, International Revenue Service.

Assume that an individual U.S. shareholder wholly owns FC, which is a CFC. CFC has never made distributions to the US shareholder. The US shareholder makes a Section 962 election for year 2018, but not for year 2017. In year 2017, FC’s total earnings for 2017 were $200. The US shareholder had a Section 951(a)(1)(B) inclusion of $100 (attributable to Section 956 income inclusion), which became PTEP under Section 959(c)(1). The US shareholder had a Section 951(a)(1)(A) inclusion of $100 (attributable to Section 965 income inclusion), which became PTEP under Section 959(c)(2). The US shareholder paid full tax on these inclusions, which result that when the E&P is distributed it should not be subject to a second layer of tax.

In year 2018, FC’s total earnings were $80. The U.S. shareholder had Section 951A(a) inclusion of $50, which becomes PTEP under Section 959(c)(2). The US shareholder pays US federal corporate tax of $5 on such inclusion. At this point, for 2018, the Excludable 962 E&P is $5 and the Taxable 962 E&P is $45. The remaining $30 of FC’s earnings ($80 less $50) represented the net deemed tangible return amount, which was not currently taxable to the US shareholder. This amount falls within 959(c)(3).

On January 1, 2019, FC distributes $180 to the U.S. shareholder. Under Section 962 PTEP ordering rules, the first $100 of the distribution is considered to come out of Section 959(c)(1) PTEP, which represents the non-962 E&P compromised of the Section 951(a)(1)(B) inclusion of $100 in 2017 (relating to Section 956). The next $5 of the distribution is considered to come out of Section 959(c)(2) PTEP, which is first from 962 E&P compromised of excludable 962 E&P from 2018 (attributable to the Section 951A9a) amount of $50 subject to U.S. federal corporate tax). The next $45 of the distribution is also considered to come out of Section 959(c)(2) PTEP, but is from the 962 E&P compromised of the taxable 962 E&P from 2018 (attributable to the Section 951A(a) amount not subject to U.S. federal corporate tax). This $45 of E&P distributed is subject to a second layer shareholder tax. The next $30 of the distribution is considered to come out of the Section 959(c)(2) PTEP, but from non-962 E&P from 2017 (attributable to the Section 951(a) amount of $100 resulting from Section 965 applying).


There are currently three ways to to reduce the tax consequences of a GILTI inclusion. First, a CFC shareholder can utilize the high tax exception. Second, a CFC shareholder can contribute CFC shares to a domestic holding company. Finally, a CFC shareholder can make a Section 962 election. All of these options will likely result in reducing the CFC shareholders immediate income tax consequences associated with the CFC shares. However, each of these options will have long term tax consequences. These consequences can result in significant long term tax liabilities. Anyone considering claiming a high tax exception, dropping CFC shares into a C corporate structure, or making a Section 962 election, must consider the CFC’s country of incorporation, the ability to utilize a bilateral tax treaty to obtain “qualified” dividends under Section 1(h)(11), and Section 959 ordering rules before determining the course of action to mitigate their GILTI inclusion.

Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP located in San Francisco, California. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in tax matters domestically and internationally throughout the United States, Asia, Europe, Australia, Canada, and South America. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.