If you are a U.S. person (which includes citizens and residents) and you own a corporation outside the U.S., you may be subject to the Global Intangible Low-Taxed Income (GILTI) provisions under certain conditions. GILTI was introduced as part of the Tax Cuts and Jobs Act (TCJA) signed into law on December 22, 2017. It is designed to prevent U.S. persons from shifting profits to foreign corporations to defer or avoid U.S. taxation.
Here are the key points to understand whether you are subject to GILTI:
1. Controlled Foreign Corporation (CFC)
GILTI applies to U.S. shareholders of Controlled Foreign Corporations (CFCs). A foreign corporation is considered a CFC if more than 50% of the corporation's stock (by vote or value) is owned by U.S. shareholders. A U.S. shareholder, for these purposes, is defined as a U.S. person who owns 10% or more of the foreign corporation's stock by vote or value.
2. U.S. Shareholder of a CFC
If you are a U.S. shareholder of a CFC, you may be subject to GILTI. GILTI essentially subjects the income of the CFC exceeding a 10% return on certain tangible assets to U.S. taxation in the hands of the U.S. shareholder, regardless of whether the income is distributed.
3. Calculation of GILTI
GILTI is calculated at the shareholder level and includes the net income of the CFC, less a deemed tangible income return (10% of the CFC's qualified business asset investment), and certain other adjustments. The income included under GILTI is taxed at the U.S. shareholder's tax rate, with corporate shareholders eligible for a deduction (subject to certain limitations) and a foreign tax credit for taxes paid by the CFC.
4. Exceptions and Exclusions
Not all income earned by a CFC is subject to GILTI. For example, income effectively connected with a U.S. trade or business is not included in GILTI. Additionally, certain high-taxed income may be excluded under the high-tax exception.
5. Reporting Requirements
U.S. shareholders of CFCs subject to GILTI must report this income on their U.S. tax returns, typically using Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), along with other required forms such as Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
Owning a corporation outside the U.S. does not automatically subject you to GILTI. The application of GILTI depends on specific factors, including the structure of ownership and the amount of income earned by the foreign corporation.
Know more about GILTI here: What is GILTI? Examples to Understand GILTI