CFC Shareholder Planning Considerations for GILTI

Whenever a U.S. person decides to establish a business abroad that will be conducted by a foreign corporation, the U.S. shareholders of controlled foreign corporations (“CFCs”) must plan for the Global Intangible Low-Taxed Income (“GILTI’) tax regime.

GILTI is a provision that can be found in Internal Revenue Code Section 951A. The Tax Cuts and Jobs Act requires a U.S. shareholder of a CFC to include in income its global intangible low-taxed income or GILTI. The GILTI tax is meant to discourage businesses from avoiding federal taxes by holding intangible assets such as software patents or other intellectual property outside the United States in tax haven countries.

ILTI creates no additional marginal tax rates. Instead, GILTI expands the definition of what items of offshore income are taxable. Think about it like this, Subpart F of the Internal Revenue Code subjects passive income earned outside the United States to taxation. The new GILTI provisions do the same. However, instead of taxing foreign passive income, GILTI subjects certain items of income known as “intangible income” to tax. However, unlike the Subpart F provisions of the Internal Revenue Code which assess a very punitive tax rate and offer little opportunity for planning, there are a number of ways to lower a GILTI liability.

What should be understood of the GILTI regime is that it ends the tax deferral treatment of “intangible income” and subjects “U.S. shareholders” of CFCs, defined as U.S. persons owning at least 10 percent of the vote or value of a specific foreign corporation. A U.S. shareholder’s GILTI is calculated as the shareholder’s “net CFC tested income” less “net deemed tangible income return” determined for the tax year. Because of the way GILTI is computed, it will likely hit tech companies and service providers the hardest. That’s because these types of businesses have the most intangible income producing assets and have benefited the most from creative international tax planning in the past. Many companies in these industries successfully transferred offshore “intangible property” to tax haven countries for tax planning purposes.

number of these tax haven countries completely exempted corporate income tax royalties derived from patents on inventions, regardless of where the patent was patented or where the underlying research and development was carried out. GILTI is designed to curb the tax benefits of transferring “intangible property” offshore. Even though GILTI was designed to only tax “intangible income,” the way GILTI is computed, it has a much broader reach. The broad reach of GILTI is demonstrated in the example discussed below.

Who is Subject to GILTI?

GILTI is assessed on a “United States shareholder” of any CFC for any taxable year of such United States shareholder that receives intangible low-taxed income for such year. See IRC Section 951A(a). A CFC is defined as a foreign corporation in which 50 percent of: 1) the total combined voting power of all classes of stock of such corporation entitled to vote, or 2) the total value of the stock of such corporation is owned (within the meaning of Section 958(a), or is considered as owned by applying the rules of ownership of Section 958(b) during any day of the taxable year of such foreign corporation. See IRC Section 957(a).

A “United States shareholder” can be defined as a “U.S. person” (Section 7701(a)(1) of the Internal Revenue Code defines a “U.S. person” to include an individual, trust, estate, partnership, or corporation) who owns (within the meaning of Section 958(a)), or is considered as owning by applying the rules of ownership of Section 958(b), 10 percent or more of the total combined voting stock entitled to vote of such foreign corporation, or 10 percent or more of the total value of shares of all classes of stock of such foreign corporation. See IRC Section 951(b).

Calculating the GILTI Taxable Amount

So how is GILTI computed? As a general rule, GILTI is determined by first calculating a deemed return on the CFC’s tangible assets. The first part of the GILTI formula is a calculation called the net CFC tested income. The net CFC tested income is the excess of the aggregate of a tested income of each CFC held by a U.S. shareholder (The tested gross income of a CFC excludes Subpart F income, effectively connected income, income excluded from foreign base company income or insurance income by reason of high-tax exception, dividends received from a related person, and foreign gas and oil income less deductions allocable to such gross income). This amount is taken over the aggregate of the shareholder’s pro rata share of a tested loss of each CFC (The tested loss is the excess of deductions allocable to the CFCs’ disregarding tested income exceptions over the amount of gross income).

Next, the net deemed tangible investment income must be determined. The net deemed tangible investment income is 10 percent of a shareholder’s pro rata share of the Qualified Business Asset Investment Income or (“QBAI”) for each CFC, less the amount of interest expense taken into consideration of the CFC tested income. The QBAI is the adjusted basis of a CFC’s depreciable assets used to generate GILTI. To determine QBAI, “specified tangible property” must be identified that produced the tested income of a CFC. These assets must be depreciable. See IRC Section 951A(d)(1)(B). The adjusted basis for each asset must be computed, quarterly and averaged annually. See IRC Section 951A(d)(1). Once the QBAI is determined, specified interest expenses are subtracted from QBAI. See Treas. Reg. Section 1.951A-1(c)(3)(ii).

Below, please find an Illustration as to how GILTI is computed.

The first part of the formula is to determine the tested income. In order to determine how the tested income is computed, let’s assume hypothetical U.S. C-corporation solely holds CFC 1 and CFC 2. These CFCs have annual gross income of $5,000,000 and $4,250,000. The CFCs have deductions of $3,000,000 and $5,000,000 each. The income and expenses of the CFCs result in net tested income of $1,250,000 ($5,000,000 – $3,000,000 plus $4,250,000 – $5,000,000).

The second part of determining GILTI is to calculate the net deemed tangible income. In our hypothetical, CFC 1 and CFC 2 had a quarterly average specific tangible property of $5,000,000 and $6,000,000 respectively. Applying the 10 percent QBAI test, 10 percent of $5,000,000 and $6,000,000 would be $500,000 and $600,000 (10% of $5,000,000 = $500,000 and 10% of $6,000,000 = $600,000). This results in a net deemed tangible income return of $1,100,000 ($500,000 + $600,000 = $1,100,000).

Applying part one and part two of the GILTI formula determines the GILTI income. In this case, the net CFC tested income exceeds the deemed tangible income return by $150,000 ($1,250,000 – $1,100,000 = $150,000). Therefore, the GILTI income in our hypothetical is $150,000. (It should be noted that the GILTI computation in this hypothetical is relatively simple. It is easy to envision significantly more complex scenarios).

How the $150,000 GILTI income is taxed depends on the classification of the U.S. shareholder. If the U.S. shareholder is an individual taxpayer or S-corporation, the $150,000 of GILTI income would be taxed at the shareholder’s (after the applicable flow-through for subchapter S purposes) marginal tax rates. On the other hand, if the shareholder is taxed as a C-corporation (or an individual making a Section 962 election), the $150,000 GILTI income is taxed at the corporation’s marginal tax rate. However, the impact of the GILTI income can be reduced by foreign tax credits (up to 80 percent of foreign taxes paid) and special GILTI deduction under Section 250 of the Internal Revenue Code. The special GILTI deduction allows a reduction in the sum equal to 50 percent. (This deduction will be reduced to 37.5 percent after December 31, 2025).

In almost every case, a GILTI inclusion to a non-corporate shareholder is taxed at a higher rate than to a corporate shareholder. This is because non-corporate shareholders are not permitted to claim indirect foreign tax credits and the 250 deduction to reduce the GILTI income tax inclusion. This article will discuss two options available to CFC shareholders to reduce their exposure to the GILTI tax. This article will compare and contrast each of these options.

Section 962 Election

Internal Revenue Code Section 962 allows an individual U.S. shareholder of a CFC to elect to be subject to corporate income tax rates on Subpart F inclusions and GILTI. According to the legislative history of Section 962, “[t]he purpose of [Section 962] is to avoid what might otherwise be a hardship in taxing a U.S. individual at high bracket rates with respect to earnings in a foreign corporation which he or she does not receive. Section 962 gives such individuals assurance that their tax purposes, with respect to these undistributed foreign earnings, will be no heavier than they would have been had they invested in an American corporation doing business abroad.” See S.Rep. No. 1881, 87th Cong. 2d Sess. 92 (1962).

Historically, because corporate and individual rates were both so high, Section 962 elections were economically disadvantageous and thus not used. The attractiveness of Section 962 elections changed drastically as of January 1, 2018. This is because corporate rates fell to 21 percent, and the effective tax rate that U.S. C corporations pay on their GILTI income is only 10.5 percent (after accounting for a 50 percent Section 250 deduction). Individuals, on the other hand, pay 37 percent on all their GILTI income, and are not permitted to take a 50 percent deduction under Internal Revenue Code Section 250. CFC shareholders making a 962 election are also permitted to offset some of their federal tax liability with foreign tax credits.

The Mechanics of a 962 Election

The U.S. federal income tax consequences of a U.S. individual making a Section 962 election are as follows. First, the individual is taxed on amounts in his gross income under corporate tax rates. Second, the individual is entitled to a deemed-paid foreign tax credit under Section 960 as if the individual were a domestic C corporation. Third, when the CFC makes an actual distribution of earnings that has already been included in gross income by the shareholder under the Subpart F or GILTI requires that the earnings be included in the gross income of the shareholder again to the extent they exceed the amount of U.S. income tax paid when the 962 election was made. To implement this rule, the regulations describe two categories of Section 962 E&P. The first category is excludable Section 962 E&P (Section 962 E&P equal to the amount of U.S. tax previously paid on amounts that the individual included in gross income under Section 951(a)). The second is taxable Section 962 E&P (the amount of Section 962 E&P that exceeds excludable Section 962 E&P).

Individuals making a 962 election will be permitted to claim a Section 250 deduction for GILTI inclusions. A Section 250 deduction allows U.S. shareholders to deduct (currently 50 percent of a GILTI inclusion (including any corresponding Section 78 gross-up). The Section 250 deduction decreases to 37.5 percent after December 31, 2025.

Examples of 962 Computations

When a CFC shareholder does not make a Section 962 election, he or she is taxed at ordinary income tax rates and the CFC shareholder cannot claim a foreign tax credit for foreign taxes paid by the CFC.

Below please see Illustration 1 which demonstrates the typical federal tax consequence to a CFC shareholder who did not make a Section 962 election.

Illustration 1.

Tom is a U.S. person taxed at the highest marginal tax rates for federal income tax purposes. Tom wholly owns 100 percent of FC 1 and FC 2. FC 1 and FC 2 are South Korean corporations in the business of providing personal services throughout Asia. FC 1 and FC 2 are CFCs. FC 1 and FC 2 do not own any assets. Tom received pre-tax income of $100,000 FC 1 and $100,000 of pre-tax income from FC 2. Tom paid 19 percent corporate taxes to the South Korea government. For purposes of this example,

Since Tom did not make a Section 962 election, for U.S. federal income tax purposes, he cannot receive a deduction for the foreign income taxes paid by his CFC.

As discussed above, CFC shareholders making a Section 962 election are taxed at favorable corporate rates on subpart F and GILTI inclusions. CFC shareholders can also claim foreign tax credits for the foreign taxes paid by the CFC. However, when an actual distribution is made from income previously taxed (“PTEP”), the distribution less any federal taxes actually paid under the 962 election will be taxed again.

Below, please see Illustration 2 which discusses the potential federal tax consequences associated with a Section 962 election if an individual was the sole shareholder of two CFCs.

Illustration 2.

When the $162,000 E&P is distributed in a future year to Tom, the distribution will be subject to federal income tax. In this case, the distribution will be taxed at a favorable rate. This is because South Korea is a country that has entered into a bilateral tax treaty with the United States. Under the tax treaty, the $162,000 distribution will be eligible for a preferential 20 percent qualified dividend rate. Thus, in this case, Tom’s federal tax liability associated with FC 1 and FC 2 (excluding Medicare tax) is only $32,400. ($162,000 x 20% = $32,400). By making a 962 election, Tom saved $27,594 ($59,994 – $32,400 = $27,594) in federal income taxes.

However, making a 962 election does not always result in tax savings. Depending on the facts and circumstances of the case, sometimes making a 962 election can result in a CFC shareholder paying more federal income taxes in the long term.

Below, please see Illustration 3 which provides an example when a 962 election resulted in an increased tax liability in the long run.

For Illustration 3, let’s assume that Tom is the sole shareholder of FC 1 and FC 2.

Only this time, FC 1 and FC 2 are incorporated in the British Virgin Islands. FC 1 and FC 2 are both CFCs. Assume that the foreign earnings of FC 1 and FC 2 are the same as in Illustration 1. Let’s also assume that FC 1 and FC 2 did not pay any foreign taxes.

At the time of the 962 election, Tom will pay $17,010 in taxes (excluding Medicare tax).

However, in the future, Tom must pay a second tax one the E&P from FC 1 and FC 2 associated with the 962 PTEP is distributed to him. In this case Tom will owe an additional $59,994 (assuming federal tax from the first layer of 962 tax cannot be used to offset the second layer of 962 tax) in federal income tax (excluding Medicare tax). Tom’s total federal tax liability associated with the 962 election will be $77,004. In this example, by making the 962 election, Tom increased his tax liability by $17,010 ($77,004 – $59,994 = $17,010). But, Tom has had the benefit of deferring his tax liability.

Translation of Foreign Currency Issues

Anyone considering making a 962 election must understand there will likely be foreign conversion issues. A CFC will probably use a foreign currency as its functional currency. Anytime a 962 election is made for a CFC which has a functional currency that is not the dollar, the rules stated in Section 986 of the Internal Revenue Code must be used to translate the foreign taxes and E&P of the CFC. Section 986 uses the average exchange rate of the year when translating foreign taxes. The average exchange rate of the year is also used for purposes of 951 inclusions on subpart F income and GILTI. In the case of distributions of the CFC, the amount of deemed distributions and the earnings and profits out of which the deemed distribution is made are translated at the average exchange rate for the tax year. See IRC Section 986(b); 989(b)(3).

Making a 962 Election on a Tax Return

The Internal Revenue Service or (“IRS”) must be notified of the Section 962 election on the tax return. There are no special forms that need to be attached to a tax return. However, the individual making a 962 election file the federal tax return with an attachment. According to the 962 regulations, the attachment making the 962 election must contain the following information:

1. Names, address, and taxable year of each CFC to which the taxpayer is a U.S. shareholder.
2. Any foreign entity through which the taxpayer is an indirect owner of a CFC under Section 958(a).
3. The Section 951(a) income included in the Section 962 election on a CFC by CFC basis.
4. Taxpayer’s pro-rata share of E&P and taxes paid for each applicable CFC.
5. Distributions actually received by the taxpayer during the year on a CFC by CFC basis with details on the amounts that relate to 1) excludable Section 962 E&P 2) taxable Section 962 E&P and 3) E&P other than 962.

We will now discuss the pros and cons of making a Section 962 election.

Pros to Making a Section 962 Election

The benefits of making a 962 election is that it provides the CFC shareholder with an opportunity to be taxed for federal income tax purposes at 10.5 percent on GILTI inclusions. It also allows the CFC shareholder the opportunity to claim 80 percent of foreign tax credits. When a 962 election is made, GILTI and subpart F income of the CFC is treated as PTEP which is classified as with “Excludable Section 962 E&P” to the extent of the income paid by the U.S. shareholder, or “Taxable Section 962 E&P” to the extent of the excess of Section 962 E&P over Excludable Section 962 E&P.

Generally, a distribution of E&P that the U.S. shareholder has already included in his or her income is tax-free to the U.S. shareholder. However, when a CFC distributes 962 E&P, the portion of the earnings that compromises Taxable 962 E&P is subject to a second layer shareholder level tax.

A 962 election provides simplicity in that a CFC shareholder can potentially obtain more favorable rates without the cost of restructuring a CFC. In addition, a 962 election provides flexibility. It can be made annually.

Cons to Making a Section 962 Election

Although a 962 election is less complicated than restructuring a CFC to obtain beneficial tax rates and allows a deferral of some foreign source income from taxation, its calculations can be tedious and thus there typically is an added compliance cost. A 962 election also subjects the CFC shareholder to a second layer of tax. This may result in the CFC paying more federal tax than doing nothing in the long run. Furthermore, this second layer of tax may or may not qualify for reduced corporate dividend rates under a tax treaty.

For example, the Section 962 regulations adopt the general Section 962 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 are PTEP under 959(c)(1) (i.e., 956 inclusions) are distributed first, E&P that is PTEP under Section 959(c)(2) (e.g. GILTI and Subpart F inclusions) is distributed second, and all other E&P under Section 959(c)(3) (i.e. E&P related to the net deemed tangible return amount, high-taxed exception) 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) (e.g. Section 956 inclusions) are made, distributions of E&P come from Non-962 E&P. The distributions of E&P that is PTEP under Section 959(c)(1) then comprise Excludable 962 E&P, and finally Taxable 962 E&P. The same ordering rule applies to distributions of E&P that is PTEP under Section 959(c)(2) (e.g. GILTI and Subpart F inclusions). That is, distributions that are PTEP under Section 959(c)(2) come first from Non-962 E&P, then Excludable 962 E&P, and finally 962 E&P. Finally, within each subset of PTEP (e,g., Sections 959(c)(1) and 959(c)(2))), the ordering rule is LIFO, meaning that E&P from the current year is distributed first, then the E&P from the prior year, and then E&P from all other prior years in descending order.

As indicated above, the tax accounting associated with a 962 election can be extremely complicated and costly.

The Section 954 High-Tax Exception

For many years, CFC shareholders and U.S. multinational corporations were able to utilize a high-tax election to defer Subpart F income. However, when the GILTI taxing regime was announced in late 2017, a corresponding high-tax election was not available. Shortly after the enactment of the GILTI taxing regime, CFC shareholders, U.S. multinational corporations and their advisors began lobbying the Department of Treasury (“Treasury”) and the IRS to issue regulations to permit the use of a high-tax election for GILTI income. On July 20, 2020, the Treasury promulgated final regulations which permit a high-tax election for GILTI. This was welcome news to many CFC shareholders and their advisors. In general, the Final Regulations enable CFC shareholders to exclude amounts that would otherwise be tested income from its GILTI computation if the foreign effective tax rate on such amounts exceeds 90 percent of the top U.S. corporate tax rate (currently 18.9 percent based on the current 21 percent corporate tax rate).

In order to make a GILTI high-tax foreign exclusion, the shareholder must be subject to an effective foreign tax rate of 18.9 percent. This is calculated by dividing the U.S. dollar amount of foreign income taxes paid or accrued by the U.S. dollar amount of the tentative tested income item increased by the U.S. dollar amount of the relevant foreign income tax. This requires determining the tentative gross tested income and the tentative tested income.

Pros to Making a Section 954 Election

The regulations promulgated by the IRS and Treasury allows a CFC shareholder to make a high tax exception to Subpart F income or GILTI inclusions. This exception applies to the extent the foreign income from the CFC exceeds 90 percent of the U.S. federal corporate tax rate. Consequently, if the effective foreign tax rate exceeds 18.9 percent, the CFC shareholder can elect to utilize the high tax exception. This option is far more simple than the 962 election. Thus, the compliance cost should be less than a 962 election. When a high tax exception is used, the CFC retains undistributed profits as E&P. If the CFC is incorporated in a country that has entered into a double tax treaty with the United States, it is possible that the dividend may result in a reduced qualified dividend rate. Making a Section 954 election also eliminates the second layer of tax associated with making a 962 election.

Cons to Making a Section 954 Election

The high tax exception results in the CFC retaining undistributed profits as E&P. This classification difference makes a big difference for cross-border tax planning. In addition, foreign tax credits may be lost through the use of a 954 election. Finally, a 954 election must be made with respect to all CFC’s controlled by the CFC. The election cannot be made on a CFC basis. This may result in the loss of cross-crediting of high-taxed CFC’s foreign taxes.

Contributing CFC Shares to a Domestic C Corporation

In order to reduce the sting of a GILTI inclusion, an individual CFC shareholder may contribute his or her shares to C corporation. This would result in the C corporation becoming a U.S. shareholder of the CFC. The short-term benefits of this strategy are clear. The contribution, when structured properly, should qualify as a tax-free Section 351 contribution. (Shareholders in an incorporation transaction will not recognize any gain or loss on the exchange if they satisfy three requirements of Internal Revenue Code Section 351(a)). First, there must be a contribution of property. Second, the contribution must be solely in exchange for stock and, third, the contributors must control the corporation immediately after the exchange).

GILTI earned by a domestic C corporation should receive the benefits of the Section 250 deduction and flow-through of foreign tax credits. In addition, a distribution of the CFC’s PTEP should not be subject to further U.S. federal tax. Moreover, if the CFC has any E&P (that is not otherwise PTEP) a distribution of such an amount from the CFC to a domestic corporation may qualify for the Section 245A participation exemption. Internal Revenue Code Section 245A allows an exemption for certain foreign income of a domestic C corporation that is a U.S. shareholder by means of a 100 percent dividends received deduction for the foreign-source portion of the dividends. Proper planning may also result in dividend distributions from the C corporate holding company qualifying for reduced qualified dividend rate of 20 percent (plus medicare, state, and local taxes).

However, anyone considering transferring CFC shares into a domestic C corporate holding company must understand there are significant long term costs. First, typically, if an individual were to sell CFC shares, the gain on such sale would likely be classified as long-term capital gain for federal tax purposes. Long-term capital gains are subject to federal income tax at a preferential 20 percent rate. To the extent that the CFC has E&P, then some or all of this gain may be recharacterized as a dividend under Section 1248. Under Section 1248(a) of the Internal Revenue Code, gain recognized on a U.S. shareholder’s disposition of stock in a CFC is treated as dividends to the extent of relevant E&P accumulated while the person held the stock. With respect to individual U.S. shareholders who sell shares of a C corporation holding CFC shares, recharacterization is significant due to the rate differential between long-term capital gains, (maximum 20 percent) and ordinary income (maximum 37 percent).

In addition, on the sale of the CFC stock by a domestic C corporation, the shareholder of the domestic C corporation is subject to two layers of tax. First, the sale of CFC stock by the domestic C corporation would be subject to 21 percent federal corporate tax rate. A second layer of tax is assessed when the C corporation makes a distribution of the CFC gains to its shareholders. Planning opportunities may be used to reduce or even eliminate the 21 percent corporate rate on the sale of CFC shares. This could be done by making an election under Section 338(g) of the Internal Revenue Code. When a Section 338(g) election is made, the target CFC is deemed to sell its assets and must recognize any gain resulting from the deemed asset sale. If the seller is a domestic C corporation, the CFC target’s gain on non-trade or business assets typically is classified as Subpart F income, and the remaining gain (with respect to trade or business assets) instead is classified as tested income for GILTI purposes. The CFC’s tax year closes, and its Subpart F income and GILTI through the date of sale are included in the gross income of the domestic C corporate seller.

With a Section 338(g) election, the domestic seller also will be taxed on the gain from the sale of the CFC stock, with the basis of such stock being increased to account for any inclusions under Subpart F or GILTI for the year (including the Subpart F and GILTI income generated by the deemed asset sale). Subject to holding period requirements, the stock gain will be recharacterized as a dividend under Section 1248 and generally will be deductible under Section 245A to the extent of the CFC’s prior year untaxed earnings and profits and current year earnings that are not Subpart F income or tested income, as well as earnings arising from gain on deemed sale of assets that are not subject to Subpart F or GILTI. Because of the dividends received under Section 245A, there may be a preference for C corporate sellers toward dividend characterization under Section 1248 (i.e., a stock sale), which may be exempt from U.S. tax under Section 245A, as compared to gain that may be classified as GILTI income (i.e., an asset sale), which would trigger a 10.5 percent corporate tax. However, if sufficient E&P exists, corporate sellers will likely prefer stock sales over asset sales. In this case, utilizing a Section 338(g) election will convert gains to GILTI tax which will be taxed 10.5 percent.

The liquidation or distribution of the sale proceeds of CFC would be subject to an additional tax at the shareholder level. As discussed above, this may be reduced to 20 percent for federal income tax purposes. A word of caution when using C corporate structure to hold CFC shares. Some holding corporations are developed to avoid shareholder level tax by simply failing to make corporate distributions. In these cases, the IRS may assess penalty taxes under the provisions of the accumulated earnings tax and the personal holdings company tax.

The accumulated earnings penalty tax is imposed upon corporations “availed of for the purpose of avoiding the income tax with respect to its shareholders…by permitting earnings and profits to accumulate instead of being divided or distributed.” See IRC Section 532(a). Once the IRS determines that a corporation is subject to the accumulated earnings penalty tax, a tax imposed upon “accumulated taxable income” at the 37 percent top marginal tax rate imposed on individuals. See IRC Sections 532, 535. Under the personal holding company tax provisions of the Internal Revenue Code, a penalty tax is imposed upon undistributed personal holding company at the top individual marginal tax rate of 37 percent. See IRC Section 541.

Contributing CFC Shares to a Partnership or S Corporation

CFC shareholders may also contribute CFC shares to flow-through structures such as partnerships or S corporations through tax-free transactions. Compared to utilizing a C corporate corporation, placing CFC shares through flow-through structure does not result in a second layer of tax. Individuals that place CFC shares into flow-through structures may also be able to foreign tax credits without an 80 percent limitation. However, flow-through structures are not likely eligible to utilize the Section 250 deduction. Thus, a flow-through structure may not be an optimal structure if the CFC is operating in a zero or low tax country. There still remains some under certainty regarding S corporations holding CFC shares with accumulated E&P and PTEPs. As a result, the IRS intends to issue regulations addressing these issues in the near future.

Conclusion

There is no one size fits all solution when it comes time for GILTI planning. Careful modeling should be done by a qualified international tax attorney prior to making any planning decisions.

Anthony Diosdi is an international tax attorney at Diosdi & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.

He has assisted companies with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or 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.