I own shares in a foreign corporation. Am I GILTI?
A U.S. person owning shares in a foreign corporation may be subject to GILTI (Global Intangible Low-Taxed Income) tax, but this depends on several factors related to your ownership in the foreign corporation. Here’s what you need to consider:
- What is GILTI?
- Answer – GILTI is a tax on certain types of income earned by CFCs (similar to Subpart F). It was introduced by TCJA in 2017 aimed at preventing U.S. companies from shifting profits to low-tax jurisdictions.
- Definition: A foreign corporation is classified as a Controlled Foreign Corporation (CFC) if U.S. shareholders collectively own more than 50% of the total combined voting power or value of its stock.
- U.S. Shareholder: A U.S. person who owns 10% or more of the voting stock or value of the foreign corporation is considered a U.S. shareholder.
- Answer – GILTI is a tax on certain types of income earned by CFCs (similar to Subpart F). It was introduced by TCJA in 2017 aimed at preventing U.S. companies from shifting profits to low-tax jurisdictions.
- Who is subject to GILTI?
- Answer – U.S. shareholders of a CFC
- Ownership Check: If you own at least 10% of the voting stock or value of the foreign corporation, you are a U.S. shareholder.
- Collective Ownership: For GILTI rules to apply, the foreign corporation must be a CFC, meaning U.S. shareholders collectively must own more than 50% of it.
- Answer – U.S. shareholders of a CFC
- How is GILTI calculated?
- Answer – If the foreign corporation is a CFC and you are a U.S. shareholder, then GILTI is calculated as the excess of the corporation’s net tested income over the net deemed tangible income return. This is calculated as the CFC’s income, excluding certain income items like Subpart F income and income effectively connected with a U.S. trade or business, and reduced by 10% of the CFC’s Qualified Business Asset Investment (QBAI).
- What are the tax implications?
- Answer – U.S. shareholders must include their share of GILTI in their income and are taxed at a reduced effective rate through a 50% reduction (37.5% for tax years beginning after December 31, 2025). Corporate shareholders can also claim a foreign tax credit for 80% of the foreign taxes paid on GILTI.
- How do I comply?
- Answer – U.S. shareholders must report their GILTI inclusion on Form 8992 and also file Form 5471 to provide information about their CFC.
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