It's Time to Re-evaluate U.S. Ownership of Controlled Foreign Corporations
Starting in 2018, tax reform under “The Tax Cuts and Jobs Act” requires each U.S. shareholder of Controlled Foreign Corporations (CFC) to include in income Global Intangible Low-Taxed Income (GILTI) under new section 951A.
The expanded definition of U.S. shareholder includes any U.S. person who owns 10% or more of CFC’s. This means that there is a possibility of GILTI inclusion, irrespective of distribution received, even if the U.S. person owns only 10%. It will be important to closely evaluate whether there is a GILTI inclusion.
GILTI rules are more favorable to U.S. corporate owners of CFC’s than for the individual owners of CFC’s (whether owned directly by them or by pass-through entity). For U.S. corporate taxpayers, the new rules provide for a 50% deduction against the GILTI income, resulting in an effective corporate tax rate of 10.5%. Further, corporate taxpayers are entitled to claim up to 80% of the foreign taxes imposed on GILTI income as a foreign tax credit.
Individuals owning 10% or more of a CFC, are not eligible for the 50% deduction or the indirect foreign tax credit. As such, individual taxpayers may be subject to U.S. tax on their foreign corporate earnings at the ordinary tax rates, which could be as high as 37% plus any foreign tax imposed on the CFC.
To further evaluate your U.S. ownership in a CFC and to determine if you will be subject to the new GILTI inclusion, please contact your RINA representative.