This information is based on the statutes and guidance available as of the date of publication and is subject to change. 

Somewhat of a misnomer, the new provisions to tax the Global Intangible Low-Taxed Income (“GILTI”) of U.S. shareholders of Controlled Foreign Corporation (“CFC”) will undoubtedly capture more than just traditional intangible income. For tax years beginning after December 31, 2017, the GILTI provisions generally require U.S. CFC shareholders to include in their currently taxable Subpart F income their share of the CFC’s deemed intangible income return for the tax year. Given the expanded CFC definition under the new law (possible CFC status anytime there is a U.S. shareholder of a foreign corporation anywhere in the group), the possibility for a GILTI inclusion or any other Subpart F inclusion should be closely evaluated. 

GILTI Overview

In order to compute the GILTI inclusion, a U.S. shareholder of a CFC must first determine the amount of its net deemed tangible income return for the year (defined below). Any earnings above and beyond the deemed tangible income return (subject to certain modifications discussed below) are automatically considered GILTI, regardless of the actual character of the earnings. 

GILTI Formula

U.S. shareholder’s share of net CFC tested income (A)

(U.S. shareholder’s net deemed tangible income return) (B)
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Global Intangible Low-taxed Income (“GILTI”)

 

(A) Net CFC Tested Income

For any U.S. shareholder of any CFC, the net CFC tested income is the excess (if any) of:

  • The aggregate of such shareholder’s pro rata share of the tested income of each CFC in which the shareholder is considered a U.S. shareholder, over
  • The aggregate of such shareholder’s pro rata share of the tested loss of each CFC in which the shareholder is considered a U.S. shareholder

    > Big picture: Net CFC Tested Income = aggregate pro rate share of CFC income minus CFC losses

Tested income is defined as the excess (if any), of:

  •  The CFC’s gross income determined without regard to:
    • Effectively connected income under §952(b)
    • Subpart F income of the CFC
    • Gross income of the CFC excluded from foreign base company income (determined under §954) and insurance income (determined under §953) by reason of the high tax exception under §954(b)(4)
    • Any dividend received from a related person (as defined in §954(d)(3)), and
    • Any foreign oil and gas extraction income (determined under §907(c)(1)), over

   • The deductions (including taxes) properly allocable to such gross income under rules similar to the rules of §954(b)(5)

        > Big picture: Tested Income = gross income of the CFC less deductions 

Tested loss is essentially the converse of tested income (i.e. the excess of properly allocable deductions over the CFC’s gross income without regard to the items described above).

(B) Net Deemed Tangible Income Return

The earnings deemed to be attributable to tangible property are generally equal to 10% of the shareholder’s pro rata share of the “qualified business asset investment” of each CFC. This amount is reduced by the amount of interest expense taken into account in determining the shareholder’s net CFC tested income to the extent attributable to interest income not included in tested income.

 The term qualified business asset investment generally refers to the average aggregate adjusted bases of the CFC’s specified tangible property used in a trade or business and property subject to depreciation under §167, computed as of the close of each quarter of the tax year. The adjusted basis in any property is determined by using the alternative depreciation system under §168(g) and by allocating the depreciation deduction with respect to the property ratably to each day during the period in the tax year to which the depreciation relates.

If a CFC holds an interest in a partnership at the close of the tax year of the CFC, the CFC must take into account under the CFC's distributive share of the aggregate of the partnership's adjusted bases (determined as of that date in the hands of the partnership) in tangible property held by the partnership to the extent the property:

A. is used in the trade or business of the partnership, 

B. is of a type with respect to which a deduction is allowable under Code Sec. 167, and 

C. is used in the production of tested income (determined with respect to the CFC's distributive share of income with respect to the property).

        > Big picture: Net Deemed Tangible Income Return = 10% times Adjusted bases of tangible property of the CFC using ADS

Once the U.S. shareholder has determined its net deemed tangible income return for the year, it subtracts this amount from its pro rata share of the CFC’s net tested income or loss to determine GILTI.

Corporate Shareholders Allowed a Partial Deduction for GILTI and FDII Under §250

U.S. corporate shareholders will generally be allowed a deduction equal to:

  • 50% of the GILTI inclusion amount (reduced to 37.5% in 2026) and any amount treated as a dividend under §78 (gross-up for foreign taxes paid), plus 
  • 37.5% of the corporation’s foreign-derived intangible income (“FDII” – Refer to BDMaC 2018-16 for further details). 

If the combined deduction would reduce the domestic corporation’s taxable income below zero, each deduction is reduced proportionately to limit the overall deduction to taxable income. Regulated Investment Companies (“RICs”) and Real Estate Investment Trusts (“REITs”) cannot claim this deduction.

Although this provision helps lessen the blow of GILTI for most corporations, the deduction is not available for U.S. individuals with GILTI inclusions.

Foreign Tax Credit Considerations

If any amount is includible in the gross income of a domestic corporation under the GILTI provisions, a deemed paid foreign tax credit is allowed under §960, but it is limited to 80%. This is more restrictive than the normal Subpart F provisions which do not scale down the deemed paid foreign tax credit. The deemed paid foreign tax credit is only available for corporate shareholders and is not available for individuals, absent an election for the individual to be taxed as a corporation under §962.

Additionally, a separate foreign tax credit basket must be used for the GILTI foreign tax credit. Furthermore, excess credits cannot be carried back or carried forward.