What is GILTI - Global Intangible Low-Taxed Income?
GILTI stands for Global Intangible Low-Taxed Income and is a minimum tax provision applied to the U.S. shareholders of controlled foreign corporations (CFCs).
Before the Tax Cuts and Jobs Act (TCJA) launched in 2017, for the majority of cases, the United States taxed both residents and firms on their worldwide income. However, US businesses had the ability to defer the tax payments on earnings from foreign subsidiaries, until the funds were repatriated back in to the United States in the form of dividends. Congress recognised that this may encourage US multinationals with foreign earnings to move the funds offshore and take advantage of alternate low-tax jurisdictions.
Under the 2017 changes, individual U.S. Shareholders of CFCs are subject to a tax on their pro rata share of relevant income at a top marginal rate of 37%. Individual U.S. Shareholders are not entitled to the 50% deduction of the relevant GILTI income or to credit for foreign taxes paid by the CFC which are automatically available to US
There is however an available election which permits an individual U.S. Shareholder to be taxed on their share of income subject to the GILTI provisions in substantially the same manner as a U.S. corporation. By making this election they would therefore receive a 50% GILTI deduction and foreign tax credit or 80% of the foreign taxes paid by the CFC They will also be subject to tax on their remaining GILTI inclusion at the corporate income tax rate. An
individual who makes such an election, however, will be subject to a second level of tax following an actual distribution of cash by the CFC. This may be at the qualified dividend rate of 15% or 20% depending on individual circumstances.
Final regulations released in late July 2020, also included details of a GILTI high-tax exception will exclude from GILTI income of a CFC that incurs a foreign tax at a rate greater than 90% of the U.S. corporate rate, currently 18.9%. A GILTI high-tax election must be made by the “controlling domestic shareholder” of a CFC, generally the U.S. Shareholder(s) owning more than 50% or more of the total combined voting power of all classes of stock (or, where there are no such shareholders, all of the U.S. Shareholders of the CFC
Where available, the GILTI high-tax election may be advantageous to an individual U.S. Shareholder who is concerned that, even if he or she were to make the election to be treated , there will still be a significant GILTI inclusion remaining on which a substantial liability will arise. The considerations for an individual U.S. Shareholder may include that he or she is not able to utilise the 50% GILTI deduction and sufficient GILTI foreign tax credits to eliminate all or most of the U.S. tax imposed on the GILTI inclusion
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