United States: US Individuals (Apparently) Are More GILTI Than Large Corporations.

Last Updated: March 9 2018
Article by Maya (nee Ladno) Buckland

Recently enacted US tax reform was touted by President Trump and many Republicans as change meant to benefit the 'ordinary' American people by, amongst other things, targeting large corporations with significant offshore activities. A substantial portion of the legislation makes changes to the Controlled Foreign Corporation ('CFC') regime which historically imposed adverse US tax consequences upon US Persons (including US individuals and corporations) who directly or indirectly owned CFC stock. The legislation does not change the classic 'Subpart F' regime which generally results in immediate taxation of Subpart F income (typically passive income such as rents, interest, dividends and royalties). However, the changes do expand the scope of income subject to immediate taxation through a new tax charge on globally intangible low-taxed income ('GILTI'). The name of the new regime is inherently deceiving as the tax change targets more than 'intangible' income and aims to tax all income other than an exemption for some 'high-taxed' income and a few other narrow categories as discussed below. Additionally, the GILTI regime results in higher levels of taxation for individuals who own CFC stock (directly or indirectly) than for C corporations.

GILTI Calculation

Most notably, the GILTI inclusion rules now subject ordinary operating income to immediate US federal income taxation. Prior to these legislative changes, US shareholders of foreign corporations were not subject to tax on CFC earnings until the income was distributed as a dividend (which in some instances would qualify for reduced capital gains tax rates under a US income tax treaty). However, the GILTI tax charge is imposed on most business income of a CFC other than income that is considered 'high-taxed' (i.e. income subject to a local tax rate above 18.9%). As explained below, whether a foreign tax credit is available largely depends on how the CFC stock is held, and by whom.

GILTI includes most of a CFC's business income, reduced by 10% of the adjusted tax basis of its depreciable tangible income. GILTI is calculated by taking the excess of all 'net tested income' over a 'net deemed intangible return'. Net tested income is generally defined as the gross income of a CFC (other than Subpart F income and income that is high-taxed) reduced by certain deductions such as interest expense and taxes. (Perhaps of less relevance to many CFC's, net tested income also does not include any income effectively connected to a US trade or business, dividends from related persons, and certain income from oil and gas extraction). A CFC's net deemed intangible return is calculated as 10% of 'qualified business asset investment' which is depreciable tangible property used in the trade or business. GILTI is allocated to a US shareholder on a pro rata share of CFC ownership.

Result for C corporation shareholders

Once the amount of GILTI is calculated, the amount of tax that a US shareholder must pay will largely depend on whether the shareholder is a US C corporation shareholder or not. When calculated as to a C corporation, GILTI will result in tax at the new US corporate tax rate of 21%. Additionally, C corporation shareholders may reduce their GILTI inclusion by 50% (this deduction will be reduced to 37.5% in 2026). A credit also is allowed for up to 80% of the foreign taxes paid (or accrued) by the CFC on the GILTI inclusion. For years 2018 through 2026, this results in a GILTI tax of 10.5% (50% of 21%); the tax may be reduced further (up to zero) to the extent foreign tax credits are available.

Result for non-corporate shareholders

In contrast, non-corporate US shareholders (e.g., individual business owners) will pay tax on GILTI at ordinary income tax rates, up to 37%. These shareholders also are neither allowed a deduction on the GILTI tax charge nor are they allowed to offset the GILTI tax charge by any foreign tax credits. However, individual US shareholders could mitigate (but not eliminate) some of these tax consequences by making an election under Code Section 962 which allows an individual shareholder to be taxed at corporate rates of 21%. The benefit of foreign tax credits is allowed to offset a portion of the GILTI tax charge, however it still is unclear whether the 50% (or 37.5%) deduction is allowed under this approach. While the exact interaction of the GILTI inclusion with a Section 962 election is not entirely clear, it may be more sensible to insert a US holding company in between the CFC and the individual US shareholder. The US holding company would receive the benefits outlined above, and the US individual shareholder would not be taxed on the GILTI inclusion until a distribution is made to the individual from the holding company.


Whether intended or not, the new GILTI inclusion taxes individuals more harshly than C corporations, particularly on ordinary income. If the purpose of President Trump's tax reform was to punish large US corporations operating offshore, he potentially has missed the mark by allowing (and in particular denying to US individuals) a tax rate that is half of the new 21% corporate tax rate, and allowing foreign tax credit deductions.

Individuals with ownership interests in CFCs should meet with their US tax advisors to determine the amount of their GILTI inclusion and to discuss potential ways to mitigate the imposition of US tax, including a Section 962 election or introducing a US holding company into their structures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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