GILTI Controlled Foreign Company Rules

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

6th March 2022

Global intangible low-taxed income (GILTI)

The Inland Revenue Service (IRS) Global intangible low-taxed income (GILTI) Tax is complex. We are often asked to assist with expert tax accountancy advice in this area.

Regarding GILTI Tax, the GILTI tax rate and using QBAI (Qualified Business Asset Investment) to reduce GILTI tax, speaking to specialist US and UK tax advisors can help reduce or completely mitigate your tax liability.

Global intangible low-taxed income is a category of income earned abroad by the US-controlled foreign corporations (CFCs) and is subject to special treatment under US tax law.

The US tax on GILTI is intended to prevent erosion of the US tax base by preventing/discouraging multinational companies from shifting their profits on easily moved assets, such as intellectual property (IP) rights from the US to foreign jurisdictions, with tax rates that are lower than the US.

Americans that need to file an expat tax return to the IRS under form 1040 will need to think about how GILTI affects their calculations.

US & UK Tax return Services (Joined up thinking)

Fed up using an American CPA or EA in one firm to file your 1040 tax return and a UK based accountant to file your UK tax return?

Optimise accountants hires both UK qualified tax accountants and US qualified tax accountants under the same roof to help you streamline your international expat tax affairs.

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Should you speak to a British accountant about GILTI?

The Tax Cuts and Jobs Act (TCJA) brought many changes to US taxpayers, including American ex-pats.

Due to TCJA, US entrepreneurs have become used to the term GILTI.

US shareholders who own at least 10% of Controlled Foreign Corporations are now taxed annually on the CFC’s GILTI.

There has been a negative impact on individual US shareholders of a CFC due to the TCJA’s treatment of individual vs corporate shareholders.

Corporate shareholders have a GILTI tax rate of 10.5% compared to US individual rates of up to 37%.

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We have training programmes for UK tax and US tax. Learn today and save tax tomorrow

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What are the basics of GILTI?

As property accountants serving thousands of landlords that purchase buy to let properties, we know that tax law can be confusing and complex. GILTI tax is no exception.

Before the enactment of TCJA in 2017, US businesses and individuals were subject to US income taxes on their worldwide income.

Income earned by the foreign subsidiaries of US corporations was subject to Tax only when repatriated to America as dividends.

The TCJA changed the tax rules for multinational corporations by generally exempting the earnings of foreign subsidiaries’ active businesses from US taxation, even if repatriated.

Global intangible low-taxed income is typically foreign income earned by Controlled Foreign Corporations from intangible assets such as copyrights, trademarks and patents.

CFCs are foreign corporations in which US shareholders own more than 50% of the value.

Each of these US shareholders owns 10% or more of the Controlled Foreign Corporations.

This type of shareholder is liable for the Tax on GILTI, which usually applies at a rate between 10.5% and 13.125%.

Free Online Tax Calculators

We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

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Who does GILTI apply to?

GILTI rules contained in Section 951A require a 10% US shareholder of a Controlled Foreign Corporation to include in current income the shareholder’s pro-rata share of the GILTI income of the CFC.

The GILTI rules apply to C corporations, S corporations, partnerships and individuals.

The GILTI is allocated between the shareholders, who pay tax on it at their tax rates up to 37%.

Global intangible low-taxed income is calculated on Form 8992.

GILTI came as an unwelcome surprise to many American business owners located outside of the United States in 2017.

US & UK Tax return Services (Joined up thinking)

Fed up using an American CPA or EA in one firm to file your 1040 tax return and a UK based accountant to file your UK tax return?

Optimise accountants hires both UK qualified tax accountants and US qualified tax accountants under the same roof to help you streamline your international expat tax affairs.

See how we can help you

How is GILTI calculated?

Global intangible low-taxed income is calculated as the total active income by a US company’s foreign subsidiaries that exceed 10% of the company’s depreciable tangible property. US Income from a UK perspective is the profits made.

GILTI tax is not aimed directly at income from specific intangible assets.

It operates as a type of minimum tax on the profits of some Controlled Foreign Corporations.

Global intangible low-taxed income taxation requires a complex calculation.

GILTI typically equals the amount of the CFC’s total income over a CFC’s net tangible income return, which equals 10% of the CFC’s investment in depreciable tangible business assets minus specific interest expense.

GILTI tax is significant for Controlled Foreign Corporations whose profits are high due to their investment in intangible fixed assets such as providing services, procurement, distribution and technology.

Special reduced foreign tax credit rules apply concerning GILTI.

The GILTI tax calculations entail challenging and detailed expense and credit allocations.

This can result in higher than 13.125% tax rates, especially where income is subject to high foreign tax rates.

Free Online Tax Courses

Want to save tax in the future?

We have now created free online tac courses to help you build wealth whilst paying less tax. Learn today and save tax tomorrow. We have covered the basics of tax filing with HMRC and IRS. We have created courses on advanced planning strategies that will save you tax in the future.

We have training programmes for UK tax and US tax. Learn today and save tax tomorrow

Free online tax course

Free – Access NOW!!

How does GILTI affect US shareholders in the UK?

GILTI affects many US ex-pats who have formed a corporation in a foreign country.

Many are already filing Form 5471 (Information Return of US Persons Concerning Certain Foreign Corporations) with their annual US tax return.

Free Online Tax Calculators

We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

Free online tax calculators

Can I use QBAI to reduce GILTI?

Qualified Business Asset Investment (QBAI) is the average of a tested income CFC’s aggregated adjusted bases as to the close of each quarter of a CFC’s financial year in specified tangible property.

There is a 10% allowance based on the value of your fixed assets in the company. This helps reduce the UK profits of the CFC for GILTI tax purposes.

What is the Section 962 Election?

American ex-pats who registered their corporation in a low-tax jurisdiction can minimise their tax bill by making a Section 962 Election.

This means that their allocation of the corporate profits will be taxed at the US corporation tax rate but with a 50% deduction applied.

Using Section 962 Election, US taxpayers can take foreign tax credits for corporate Tax paid on their business tax profits.

When corporate profits are extracted as dividends in the future, the shareholders will have to pay US tax on them again, paying a second tax on the same profits and potentially increasing the total tax rate.

If the US ex-pat shareholder pays foreign Tax on future dividends, they can claim US tax credits to offset the US tax due on them. This can make a Section 962 Election worth considering.

These tax calculations are complex and require a detailed appraisal of each foreign business owner’s circumstances.

US & UK Tax return Services (Joined up thinking)

Fed up using an American CPA or EA in one firm to file your 1040 tax return and a UK based accountant to file your UK tax return?

Optimise accountants hires both UK qualified tax accountants and US qualified tax accountants under the same roof to help you streamline your international expat tax affairs.

See how we can help you

How can I avoid GILTI?

There may be options to avoid GILTI depending on a US-expat’s situation.

This could include transferring significant ownership of a foreign corporation to a trusted foreigner such as a spouse. This effectively removes the CFC entirely from the jurisdiction of US tax laws.

What is the Global intangible low-taxed income High Tax Exemption?

One tax mitigation possibility for reducing Global intangible low-taxed income is making a Section 954(b)(4) election, known as the GILTI High Tax Exemption.

This allows US ex-pats who pay foreign corporation tax rates on the profits of their foreign-registered corporation at a tax rate of more than 90% of the US corporate rate to be exempt from paying Global intangible low-taxed income.

Many countries have corporation tax rates above 18%, so making a Section 954(b)(4) election provides American ex-pats relief from GILTI tax by the IRS.

Renounce US Citizenship UK

Americans may wish to renounce US citizenship in the United Kingdom as they are forced to pay the IRS tax on their worldwide income.

There are currently estimated to be more than nine million Americans living overseas.

Giving up US citizenship means they no longer need to file a 1040 tax return to the IRS or pay tax on their worldwide income.

Renouncing US citizenship is a legal process that must be done at a US Embassy or Consulate Office outside the US.

It is permanent. Once US citizenship has been renounced, you cannot rescind, retract or reverse it.

A record 6,075 Americans renounced their US citizenship in 2020, which according to industry sources, represented a 260% increase from 2019.

Renunciations tripled despite US Consulates being closed for large parts of the year due to Covid-19.

This was the highest year of Americans renouncing US citizenship on record.

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