United States: A New Tax Regime For C.F.C.'s: Who Is G.I.L.T.I.?

Last Updated: February 2 2018
Article by Ruchelman PLLC and Stanley C. Ruchelman


The 2017 Tax Cuts and Jobs Act introduces a new tax regime applicable to controlled foreign corporations ("C.F.C.'s"). As discussed in detail below, Code §§951A and 250 will generally result in the following:

  • A C.F.C.'s global intangible low-taxed income ("G.I.L.T.I.") will pass through to its "U.S. Shareholders" (a term broadened under the new law) as a current year income inclusion.
  • In the case of a U.S. corporation (other than a regulated investment company or real estate investment trust), a deduction for foreign-derived intangible income ("F.D.I.I.") and G.I.L.T.I. will be allowed against its G.I.L.T.I. inclusion.

The G.I.L.T.I. regime is designed to decrease the incentive for a U.S. group to shift corporate profits to low-tax jurisdictions. In this way, it protects the new participation exemption regime1 by preventing mobile intangible income from being used to reduce U.S. taxable income for the payer while preventing the payer's group from obtaining the benefit of the dividend received deduction for dividends from a C.F.C. that received G.I.L.T.I. As stated in the Conference Committee Report:

Changing the U.S. international tax system from a worldwide system of taxation to a participation exemption system of taxation exacerbates the incentive under present law to shift profits abroad. Specifically, under present law, most foreign profits earned through a subsidiary are not subject to current taxation but will eventually be subject to U.S. taxation upon repatriation. Under the participation exemption system provided for in the bill, however, foreign profits earned through a subsidiary generally will never be subject to U.S. taxation. Accordingly, new measures to protect against the erosion of the U.S. tax base are warranted.

The deduction allowed for F.D.I.I. and G.I.L.T.I. provides a reduced effective tax rate for G.I.L.T.I. of 10.5%, which is increased to 13.125% after 2025.

This article takes a question and answer approach to examining the new Code §§951A and 250, and revised Code §960. Throughout, new terms are used, new concepts of taxation are applied, and the rules zigzag between looking at C.F.C.'s in the aggregate and looking at each individually.


1. What is a C.F.C. and how has the definition been changed?

Under prior and current law, a C.F.C. is any foreign corporation in which U.S. Shareholders (defined below) own more than 50% of the foreign corporation's stock by value or vote.

Under prior law, a foreign corporation was required to be controlled for 30 days before the Subpart F rules applied. Under the new law, the 30-day requirement is no longer in effect.

Under prior law, a U.S. Shareholder was defined as a U.S. person that owned 10% or more of the foreign corporation's voting stock. Under the new law, the definition includes a U.S. person that owns 10% or more of the foreign corporation's stock by value. In addition, the attribution rules for determining constructive ownership of a foreign corporation by a U.S. person are expanded to include attribution from a foreign person to a U.S. person.

2. How does the Subpart F tax regime treat a U.S. Shareholder of a C.F.C. with regard to Subpart F income?

The Subpart F tax regime identifies certain income of a C.F.C. as "tainted" income and requires a U.S. Shareholder of that C.F.C. to automatically include the earnings from that income in its U.S. tax return. When those earnings are distributed in the form of a dividend, the U.S. Shareholder generally treats the dividend as previously taxed income, which is not taxed a second time.

Several forms of tainted income are included in the definition of Subpart F income. Included are items of passive income and mobile income, known as Foreign Personal Holding Company Income ("F.P.H.C.I."). F.P.H.C.I. includes dividends, interest, royalties, and certain gains. From the viewpoint of legislative policy, F.P.H.C.I. can easily be transferred from a company in one country to an affiliated company in another country, pursuant to a search for an acceptably low rate of income tax.

3. How is the traditional policy of Subpart F changed by the G.I.L.T.I. Provision?

In comparison to the traditional approach that looks for specific items of tainted income, the G.I.L.T.I. provision provides a "safe zone" for a portion of the entire pool of C.F.C. earnings. The safe zone is based principally on a hypothetical yield generated by the C.F.C. on its Qualified Business Asset Investment ("Q.B.A.I."), determined on a pre-tax basis. Once the safe zone is computed, all additional earnings of the C.F.C. not otherwise taxed under Subpart F or specifically excepted by the statute are considered to be attributable to G.I.L.T.I.

4. When does the G.I.L.T.I. regime first becomes effective?

For foreign corporations, the G.I.L.T.I. regime is effective for tax years beginning after December 31, 2017. For U.S. Shareholders, the regime is effective for tax years in which or with which the tax year of the foreign corporation ends.

5. Which U.S. Shareholders of a C.F.C. must include G.I.L.T.I. in taxable income and how much must be included?

Under Code §951A(a), each person that is a U.S. Shareholder of a C.F.C. for any tax year is the U.S. person that must include in gross income such shareholder's G.I.L.T.I. for such tax year. In Code §951A(e)(3), the statute provides that a foreign corporation is treated as a C.F.C. for any tax year if it is a C.F.C. at any time during such tax year. The statute provides, in Code §951A(e)(2), that a person is treated as a U.S. Shareholder of a C.F.C. for a given tax year only if it owns stock in the foreign corporation on the last day in the tax year of the foreign corporation on which it is a C.F.C. Ownership includes direct ownership and indirect ownership under Code §958(a).

Finally, the statute provides in Code §951A(e)(1) that in determining pro rata shares of G.I.L.T.I., including net C.F.C. tested income in Code §951A(b) and Code §951A(c)(1)(A) and (B), the rules of Code §951(a)(2) apply in the same manner as to Subpart F income. Under that provision, Subpart F income is prorated to account for part-year ownership and dividend payments to prior owners, including amounts that are treated as dividends by reason of Code §1248.

These rules, apparently, are designed to provide a straightforward answer, but that answer is not always clear when ownership changes occur.

No Change in Ownership

If ownership does not change during the year, the same U.S. Shareholders that included G.I.L.T.I. in income for the prior year, will do so again. The amount takes into account each U.S. Shareholder's proportional amount of net C.F.C. tested income and the deemed return on Q.B.A.I. Pro rata presumably refers to the percentage of ownership interest and rights to dividend flow.

Acquisition of Ownership Interest During the Year

Now, the computation becomes somewhat unclear.

If we assume that all the shares of the target foreign company are purchased from a single seller that is a foreign member of a foreign-based multinational group, it seems that the reference to the pro rata rule of Code §951(a)(2) should mean that the computations are prorated to take into account part-year ownership. Thus, the acquirer is a U.S. Shareholder at the end of the year, the foreign corporation is a C.F.C., and G.I.L.T.I. is included on a pro rata basis.

On the other hand, if we assume that all the shares of the target foreign company are purchased from a single seller that is a U.S. corporation or that is a foreign member of a U.S.-based multinational group, it seems that the reference to the pro rata rule of Code §951(a)(2) contains uncertainty. In principle, the acquisition company is a U.S. Shareholder for only a portion of the year. Hence, G.I.L.T.I. could only be prorated to the tested income and return on Q.B.A.I. for the period of ownership. This would make sense but for the fact that it is not clear that the seller has any G.I.L.T.I. to report for the portion of the year it is a U.S. Shareholder of the C.F.C.: Only U.S. Shareholders on the last day of the year include G.I.L.T.I. and the seller is not a U.S. Shareholder on the last day.

Disposition of Ownership in the Middle of a Year

Comparable issues apply at the time of a disposition of shares of a C.F.C. If there is a disposition transaction that takes place in the middle of a year and all U.S. Shareholders sell their shares to a foreign acquisition company that is a member of a foreign-based multinational group, the U.S. Shareholders of the C.F.C. on the last day in the year on which the foreign corporation is a C.F.C. must include G.I.L.T.I. The statute is clear.

On the other hand, if the purchaser is a member of a U.S.-based group, the status of the foreign corporation as a C.F.C. continues on and the U.S. Shareholder does not have a taxable event under Code §951A(a). From a policy standpoint, a literal application of the statute would place the entire burden on the purchaser, except that it could benefit from the proration rule.

It is unlikely that Congress intended there to be a tax benefit bestowed on the selling party that is not offset by a tax cost on the purchasing party when unrelated U.S. groups are on both sides of a stock purchase transaction. Presumably, this can be addressed in a technical corrections bill.

6. What taxable events are deemed to occur for a U.S. Shareholder when a C.F.C. has G.I.L.T.I.?

Under Code §951A, a U.S. Shareholder of a C.F.C. must include in its gross income its G.I.L.T.I. inclusion in a manner similar to inclusions of Subpart F income. In broad terms, this means that a U.S. Shareholder must include in income the amount of income that would have been distributed with respect to the stock that it owned (within the meaning of Code §958(a)) in the C.F.C. if, on the last day in its tax year on which the corporation is a C.F.C., it had distributed pro rata to its shareholders an amount equal to the amount of its G.I.L.T.I.

When a U.S. Shareholder is a corporation, several rules apply in addition to the income inclusion. First, a deemed-paid foreign tax credit is allowed under Code §960 for foreign income taxes allocable to G.I.L.T.I. at the level of the C.F.C. Second, the Code §951A inclusion includes a "gross-up" under Code §78 for the foreign income taxes claimed as a credit. Third, the U.S. corporation is entitled to a 50% deduction (reduced to 37.5% in later tax years) based on the G.I.L.T.I. included in income. As a result, a corporate U.S. Shareholder's effective tax rate on G.I.L.T.I. plus the gross-up will be 10.5% (increased to 13.125% in later tax years).

To read this article in full, please click here.


1 See "Impact of the Tax Cuts and Job Act on U.S. Investors in Foreign Corporations" in this edition of Insights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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