Jul 22, 2020 GILTI update: Some Relief for Citizens Abroad
On July 20th, 2020, the IRS issued the much anticipated final GILTI high tax exclusion regulations.
In short, any foreign corporation that pays foreign tax at a rate of 90% or more of the highest U.S. corporate tax rate will be excluded from GILTI. With the current U.S. corporate tax rate being 21% currently, any foreign corporation paying at least 18.9% foreign tax would be excluded from GILTI. With the Israeli corporate rate being a flat 23%, this is excellent news for Israeli CFCs.
Many individual owners of foreign corporations have already been neutralizing or minimizing the GILTI tax by making a 962 election to utilize the corporate foreign taxes paid as a credit against the GILTI tax. Now, these taxpayers can make a high tax exclusion election, avoiding the burdensome paperwork and reporting involved in making a 962 election.
In an earlier post, we discussed the proposed rules of this exclusion, and we want to highlight some important points, some of which have changed from the proposed regulations.
- The high tax exclusion from GILTI is an election that must be made on your tax return, and can also be made on an amended return.
- The election to exclude high taxed income from GILTI is an annual election. Meaning that you can make the election one tax year and not the next. This is a significant change from the proposed regulations, which stated that if you revoke the election one year, it could not be claimed for another five years.
- The controlling U.S. shareholder makes this election and must then notify all other U.S. shareholders. Control means more than 50% owned.
- CFCs with common ownership will need to maintain consistency, and if one makes the elections, the others must follow.
- The election can already be made on 2019 tax returns. In addition, taxpayers can also amend the 2018 tax returns to elect the exclusion. If you previously filed your 2019 tax return with a tax liability due to GILTI, you may also want to amend it. Still, we would recommend waiting until the IRS opens up electronic filing for 2019 amended returns, which should be by the end of the summer.
In another post, we discussed the three times GILTI still applies to you, and these three scenarios are still relevant, so check out that post before getting too excited about these new regulations. The IRS did contemplate comments requesting that foreign NOLs be taken into account, but those comments were not adopted. Therefore our clients with NOLs in their foreign corporations will still be amongst those that are stuck with GILTI.