Prior to the enactment of the 2017 Tax Cuts and Jobs Act (\u201c<\/span>TCJA<\/b>\u201d), the United States generally taxed US taxpayers on their worldwide income. However, US tax on foreign subsidiaries\u2019 active business earnings could be deferred until such earnings were repatriated to the United States. The Global Intangible Low-Taxed Income (\u201c<\/span>GILTI<\/b>\u201d) provision, added by TCJA, significantly broadened the scope of foreign earnings that are subject to current US taxation, regardless of whether such earnings are distributed to a shareholder. Effectively, the GILTI regime subjects <\/span>US shareholders <\/span><\/i>of a controlled foreign corporations (\u201c<\/span>CFC<\/b>\u201d) to current taxation on most income earned by the CFC to the extent that such income is in excess of a 10% return on the CFC\u2019s tangible assets (\u201c<\/span>QBAI<\/b>\u201d), reduced for certain interest expense. A <\/span>US shareholder <\/span><\/i>for this purpose generally is a US person that directly, indirectly, or constructively owns at least 10% of the voting power or value of a CFC on any day during the year, and who directly or indirectly owns any amount of CFC stock on the last day of the CFC\u2019s taxable year during which it is a CFC.<\/span><\/p>\n The annual GILTI inclusion is generally computed by determining the taxable income\/loss of a CFC as if the CFC were a US person. The following is then subtracted:<\/span><\/p>\n The resulting amount is further reduced by:<\/span><\/p>\n A US shareholder calculates a single GILTI inclusion based on all of its CFCs. A GILTI inclusion increases US shareholder\u2019s basis in its CFC stock and results in \u201cpreviously taxed earnings\u201d (PTI) equal to the GILTI inclusion. PTI is not subject to US tax when it is distributed to a US shareholder.<\/span><\/p>\n US shareholders that are corporations are allowed to reduce their GILTI inclusion (and related gross-up for foreign taxes paid) by 50%, subject to a taxable income limitation. When a full deduction is allowed, the domestic corporation\u2019s effective tax rate on its GILTI inclusion is 10.5% (without taking into account foreign tax credits). The deduction percentage is reduced to 37.5% in 2026, which results in the effective tax rate of 13.125%. Additionally, US shareholders that are C corporations are allowed to claim an indirect foreign tax credit (limited to 80%) with respect to foreign taxes paid on the earnings of the CFC.\u00a0 Neither the 50% reduction of the GILTI inclusion nor an indirect foreign tax credit is available to an individual US shareholder under general rules applicable to individual US shareholders.\u00a0\u00a0<\/span><\/p>\n What is available to an individual US shareholder, however, is an Internal Revenue Code section 962 election. In general, an individual that makes a section 962 election is subject to US tax on the individual\u2019s GILTI inclusion as if the individual was a domestic corporation \u2013 i.e., making a section 962 election allows an individual US shareholder to claim both the 50% deduction and an indirect foreign tax credit.<\/span><\/p>\n On July 20, 2020, the Treasury and the IRS finalized regulations for the GILTI high tax exception (the \u201c<\/span>Exception<\/b>\u201d).\u00a0 The Exception allows a US shareholder of a CFC to exclude GILTI tested income from the US shareholder\u2019s US taxable income. It applies in instances where a CFC is taxed on its earnings in a foreign jurisdiction at an effective rate that is greater than 90% of the US federal income tax rate \u2013 i.e., 18.9%.<\/span><\/p>\n\n
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Corporate versus individual US shareholders<\/b><\/h4>\n
GILTI high tax exception<\/b><\/h4>\n