In somewhat of a surprise, the U.S. Treasury Department and IRS have taken a first step towards further lessening the burden of the new GILTI tax on US shareholders of a controlled foreign corporation (“CFC”).
On Friday, June 14, the Treasury Department and IRS issued proposed regulations that would expand the existing GILTI high tax exclusion to include not only subpart F income but also active business income. Under the proposed regulations, an election may be made for a CFC to exclude from gross tested income (and thus from the GILTI calculation), any income that is subject to an effective rate of foreign tax that is greater than 90% of the highest US Federal corporate income tax rate (based on the current US Federal corporate income tax rate of 21%, income subject to foreign tax at an effective rate of 18.9% would qualify for the exclusion). The election is made by the controlling US shareholders of a CFC attaching a statement to an originally filed or amended US Federal tax return. If made, the election is binding on all of the CFC’s US shareholders and is effective for the current tax year as well as all subsequent tax years, unless revoked.
While this is obviously a very important development, it is important to keep in mind that it is only a first step. The regulations still need to be finalized and, based on the effective date in the proposed regulations, it looks like the newly expanded exclusion would not apply to the 2018 and 2019 tax years (the proposed regulations currently provided that the new rules will only apply to taxable years of foreign corporations beginning on or after the date final regulations are published). Nonetheless, this is a very significant development and US shareholders of a CFC should be cautiously optimistic that the burdens associated with the GILTI tax will be substantially reduced.
For further information regarding GILTI or any other US tax matters, please contact us and we will be happy to help you.
