- Flow-through shareholders of CFCs, especially when the CFC has a low fixed asset base, and
- US Corporate shareholders of CFCs in low tax jurisdictions or that have a low fixed asset base.
- A US person who owns directly or constructively 10% or more of the total voting stock of the foreign corporation or more than 10% of the total value of all classes of stock of the foreign corporation.
- A US person includes US citizens and residents, domestic partnerships, corporations, estates and trusts.
- More than 50% of the total combined voting power of all classes of stock entitled to vote, or total value of the stock of such corporation, is owned (directly or constructively) by US shareholders on any day during the taxable year of the foreign corporation.
- Tested Income is the gross income of the CFC with certain adjustments including appropriately allocated expenses[i]. Net CFC Tested Income is the sum of each CFC Tested Income less the sum of each CFC Tested loss.
- Qualified Business Asset Investment (QBAI) is the average at each quarter end of the aggregate adjusted bases in tangible property used in the trade or business and depreciable property.
- Interest expense adjustment relates to the ultimate net income expense inclusion related to the shareholder’s Net CFC Tested Income. If the interest expense taken exceeds the interest income included in determining tested income an adjustment is needed.
In some cases this calculation is simple; in others it is not. It is necessary to determine the Net CFC Tested Income and the QBAI of the CFC and the attributable interest expense. If the Net CFC Tested Income exceeds 10% of the QBAI, adjusted for interest expense, the US shareholder may have an income inclusion.
If the answer to the GILTI equation is positive then this is the income to be included in the US shareholders taxable income. Individual shareholders and non-corporate investors of flow-through entity shareholders include their allocated share of GILTI in their US taxable income and it is subject to the applicable ordinary tax rate for that shareholder.
- C-Corporations are eligible for a special deduction under the new IRC code section 250 equivalent to 50%[ii] of the GILTI inclusion, with special limitations based on taxable income. Thus, the US effective tax rate for C-Corporation shareholders may be effectively reduced to 10.5%.
- C-Corporations are eligible to claim an indirect foreign tax credit against the net income. This credit is at 80% of the standard deemed paid credit allowed. GILTI has its own separate foreign tax credit limitation basket and excess credits cannot carryforward. Thus, if the CFC paid taxes in their home jurisdiction in excess of 80% of 10.5% the C-Corporation will likely not have a US tax due on the GILTI income.
[i] Types of income that are subtracted from the gross income of the CFC: Effectively Connected Income, Gross Income of Subpart F, Gross income excluded due to the High Tax Exception, Dividend income from a related party, Foreign oil and gas extraction income, and Deductions (including taxes) properly allocable under IRC 954(b)(5)
[ii] Effective for tax years after 2025 the deduction is reduced to 37.5%.