In a somewhat surprising development, yesterday, the US Treasury Department published proposed treasury regulations that explicitly provide that an individual US shareholder of a CFC (controlled foreign corporation) who makes a Section 962 election will be entitled to the 50% Section 250 deduction with respect to his or her GILTI inclusion amount. This means that many (and perhaps even most) Americans who own small businesses overseas will be able to avoid paying any US tax with respect to their business income by making a 962 election.
Enacted as part of the US tax reform in December 2017, the GILTI tax generally requires US shareholders of a CFC to include in income and pay US tax on their share of the CFC’s operating income (even if the income is NOT distributed to the shareholders). The GILTI tax can be particularly onerous for individual US shareholders as the income is subject to tax at ordinary income tax rates (the maximum US Federal income tax rate for individuals is 37%) and no tax credits are allowed for the foreign income taxes paid by the CFC.
However, even prior to the publication of the proposed treasury regulations, an individual US shareholder could mitigate the amount of tax required to be paid by making a 962 election to be treated as a US domestic corporation for purposes of the GILTI tax. As a domestic US corporation, (i) the tax rate imposed on the GILTI inclusion amount would be 21% and (ii) a tax credit equal to 80% of the foreign income taxes paid by the CFC would be permitted. However, it was not clear whether an individual US shareholder who made a 962 election would also be entitled to the 50% deduction against his or her GILTI inclusion amount provided by Section 250 of the Internal Revenue Code. The proposed treasury regulations clear up this ambiguity and clearly state that an individual US shareholder who makes a 962 election will be entitled to the 50% deduction provided by Section 250. This effectively means that as long as the CFC’s effective foreign corporate income tax rate is 13.125% or higher, an individual US shareholder who makes a 962 election will not be required to pay any US tax in respect of his or her GILTI inclusion amount.
For additional information regarding the GILTI tax or any other US tax matters, please contact our office and we will be happy to help you.
