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

INTRODUCTION

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.

COMPONENTS OF THE G.I.L.T.I. PROVISION

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.

Footnote

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions