• Monte Silver, Tax lawyer

GILTI Relief - Treasury Regs cut us some slack.

Relief from GILTI arising from the recent Treasury Regulations


To many of us, the GILTI tax is a real nightmare. First, the tax is annual, starting in 2018. Second, as opposed to Google and Apple, individual U.S. Shareholders of a Controlled Foreign Corporation (“CFC”), cannot claim any foreign tax credits paid by their company in the country we reside in. Third, we do not enjoy the 50% GILTI deduction that the multi-nationals receive. In other words, double taxation. Ouch!


Two possible solutions – both not recommended in most cases - are (i) operating not through a company, or (ii) transferring the shares in the CFC to a U.S. holding company. The only real solution is to annually make the Section 962 election. However, the 962 election has many drawbacks. In short, a mess.


In the last few months, the Treasury has been very active in issuing proposed and final regulations related to the 2017 Tax Cuts and Jobs Act (TCJA). Among these regulations are highly complex and lengthy regulations relating to the Transition tax and GILTI (248 and 318 pages long respectively). Neither of the proposed or final regulations relating to either tax provided small business owners with any relief whatsoever. In fact, these regulations violated three Federal laws, which serve the basis of our Transition tax lawsuit.


However, as to GILTI, two other proposed regulations have recently been issued. They have direct and positive implications for us.


1. Proposed Regulation relating to 962 election. (Reg 1). See link below. [1]


2. Proposed Regulation relating to High-tax countries. (Reg 2) See link below. [2]


Proposed Reg 1 - 177 pages long – entitles the taxpayer who makes the 962 election to claim the 50% GILTI deduction under IRC 250. In other words, we now get treated not worse than Google or Apple. Very generous. So now, if the small business owner resides in a country where the corporate tax rate is at least 13.125%,[3] by making the 962 election, the person in such country should not be double taxed[4]. Of course, the headache and cost of annual compliance with GILTI remains each year.


Proposed Reg 2 – 74 pages - has a much greater positive impact. In essence, Reg 2 states that if income of your company in your country of residence is taxed at corporate rates of at least 90% of the U.S. corporate tax rate - or 18.9% (21% x 90%), then such income is not even considered GILTI income. IN OTHER WORDS, IF IN ANY GIVEN YEAR YOUR CORPORATION’S INCOME IS TAXED AT A RATE GREATER THAN 18.9%, YOU HAVE NO GILTI INCOME IN THAT YEAR. THE RESULT – YOU DO NOT HAVE TO COMPLY WITH GILTI IN THAT YEAR.


For example, I live in Israel where the corporate tax is 23%. Generally, all my company’s income is taxed at that rate. Thus I would not have to comply with GILTI at all!!


Oh, a few complexities.


A. What about those who live in countries where the corporate tax is less than 18.9% - like Canada, the UK or Singapore? Well, then this Reg 1 does not apply. Back to Reg 1 and annual 962 elections.


B. Both Reg 1 and Reg 2 become effective only once they are final. And they have not become final yet. So what to do in 2018?

I trust everything is clear.

Nothing herein is legal advice. Please contact your U.S. tax professional.

[1] See Reg 1 at https://www.federalregister.gov/documents/2019/03/06/2019-03848/deduction-for-foreign-derived-intangible-income-and-global-intangible-low-taxed-income


[2] See Reg 2 at https://s3.amazonaws.com/public-inspection.federalregister.gov/2019-12436.pdf


[3] In you live in a country where your corporate tax rate is less than 13.125%, then the 962 election will provide you with less than complete relief from double taxation.


[4] That is true until such time as the dividends derived from the GILTI income are distributed to the U.S. Shareholder. At that time, the dividends are subject to U.S. taxation – the double tax. Whether or not actual U.S. taxes are paid on the GILTI dividend depends on various factors, such as the tax rates on dividends in the resident country. In other words, more compliance issues each time you draw a GILTI dividend!

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