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1. What Is GILTI?
GILTI stands for Global Intangible Low-Taxed Income. It was introduced by the U.S. Tax Cuts and Jobs Act of 2017 as part of a broader effort to prevent U.S. taxpayers from shifting profits to low-tax jurisdictions. GILTI works by taxing certain foreign income earned by U.S. shareholders of foreign corporations even if that income hasn’t been brought back (repatriated) to the U.S.
2. Who Is Affected by GILTI?
GILTI affects any U.S. person (including individuals, corporations, and certain trusts or partnerships) that owns 10% or more of a Controlled Foreign Corporation (CFC). A CFC is a non-U.S. corporation where more than 50% of the shares (by vote or value) are owned by U.S. shareholders.
3. How GILTI Is Calculated
In simple terms, GILTI targets income above a “routine” return (defined as 10%) on a foreign company’s tangible assets—such as buildings or equipment. The idea is that income above this threshold likely comes from intangibles like intellectual property and may be more mobile and easier to shift to tax havens.
The formula for GILTI is:
GILTI = Net Tested Income – 10% of QBAI
Where:
- Net Tested Income is the total active income from CFCs (excluding Subpart F and certain other types).
- QBAI (Qualified Business Asset Investment) is the average value of tangible business assets.
4. Tax Treatment: Corporations vs. Individuals
- U.S. Corporations benefit from a 50% deduction (reduced to 37.5% starting in 2026) and can use up to 80% of foreign tax credits, leading to an effective tax rate of about 10.5%.
- U.S. Individuals, however, don’t automatically get the same benefits. Without planning, they are taxed on GILTI at their ordinary income tax rate (up to 37%) with no foreign tax credit or deduction.
5. The §962 Election for Individuals
U.S. individuals can make a §962 election, which allows them to be taxed as if they were a corporation for purposes of GILTI and Subpart F. This means:
- Access to the 50% deduction and 80% foreign tax credits
- However, if the foreign company later distributes dividends, that income may be taxed again in the U.S., resulting in potential double taxation
The §962 election can reduce overall tax burden but needs to be modeled carefully.
6. Downward Attribution: A Hidden GILTI Trap
The 2017 tax reform introduced a rule change that expanded how ownership of foreign companies is attributed for tax purposes. This is known as “downward attribution”.
Under these rules, stock owned by a foreign person can be treated as if it’s owned by a related U.S. person, even if that U.S. person doesn’t own it directly.
Why does this matter?
Imagine this setup:
- A foreign parent company owns a foreign subsidiary (ForeignCo) and also owns a U.S. subsidiary (USCo).
- Even if USCo owns no shares in ForeignCo, the law may now attribute ownership downward from the foreign parent to USCo.
- As a result, ForeignCo may be treated as a CFC, and USCo or other U.S. affiliates might have to:
- File Form 5471
- Calculate and report GILTI or Subpart F income
- Pay U.S. tax on income they didn’t actually receive
This creates compliance headaches and surprise tax exposure especially for multinational families or groups with U.S. subsidiaries involved.
In practice, downward attribution has caused many unintended CFCs to appear on the radar of U.S. tax authorities, even when no U.S. shareholder had direct control or economic interest.
7. Is the IRS Pushing Back on §962 Elections?
Yes in recent years, the IRS has shown increased scrutiny of §962 elections, especially where they are used by U.S. individuals to dramatically reduce or eliminate tax on GILTI or Subpart F income.
What’s the controversy?
While the §962 election is legally valid and has been in the tax code since 1962, recent aggressive use particularly by individuals using foreign structures to avoid or defer U.S. tax has drawn attention. Some concerns include:
- Taxpayers using the §962 election without properly modeling the second layer of U.S. tax on distributions.
- Attempts to claim foreign tax credits under §962 where none are available or substantiated.
- Treating §962 income as Qualified Dividends (20% tax) instead of ordinary income (up to 37%) when distributed which the IRS generally rejects.
Recent IRS Challenges
There are audit cases where the IRS has:
- Disallowed the §962 election retroactively due to improper form filings or timing.
- Recharacterized distributions as dividends taxable at full rates, not capital gains or QDI.
- Demanded documentation showing foreign taxes paid, especially where no withholding was made by the foreign company.
There is no formal regulation denying §962 benefits, but the IRS is clearly signaling that it will challenge elections that appear abusive or unsupported.
What Does This Mean for You?
If you’re relying on §962 to reduce your GILTI or Subpart F exposure:
- Document everything, especially ownership and foreign taxes paid.
- Understand that you may be taxed again when receiving a dividend, depending on how the foreign entity is treated.
- Be prepared to defend the election on audit with full disclosure and correct reporting on Forms 1116, 8992, and 5471.
Working with a professional is critical to ensure your §962 election is respected, especially as IRS scrutiny intensifies.
8. Common Exceptions to GILTI
Certain types of income are excluded from GILTI:
- Subpart F income
- Effectively Connected Income (ECI) with a U.S. trade or business
- Income already taxed at a high rate in the foreign jurisdiction (via the High Tax Exclusion election)
Also, individuals who elect §962 may benefit from deductions and foreign tax credits indirectly, though they must watch out for the second layer of taxation on distributions.
9. Compliance and Reporting
Even if no tax is due, GILTI often brings new reporting obligations, including:
- Form 8992 (GILTI computation)
- Form 5471 (for CFC ownership)
- Form 1116 or 1118 (for claiming foreign tax credits)
Failure to file these forms can result in steep penalties, so it’s essential to identify all ownership relationships and indirect interests especially under the downward attribution rules.
10. Planning Ahead
If you or your business holds interests in a non-U.S. company, consider:
- Whether GILTI or Subpart F apply
- Whether you can make a §962 election
- Whether the foreign company can make a “check-the-box” election to be treated as a disregarded entity (thus eliminating GILTI)
- How downward attribution could affect you, especially if there are U.S. and foreign entities in the same group
11. Conclusion
GILTI is a complex area of international taxation that affects more taxpayers than originally intended especially individuals, startups, and closely held businesses. The downward attribution rules make it even more confusing, pulling U.S. taxpayers into CFC reporting even when they don’t own foreign shares directly.
Working with a tax advisor who understands international structures and elections like §962 is critical to avoid costly mistakes and uncover planning opportunities.
