A foreign corporation is a CFC if its stock is more than 50 percent owned by US shareholders. The general rule was that earnings of a CFC are not subject to U.S. taxation until such earnings are distributed as dividends, which allowed opportunities for U.S. shareholders to defer U.S. tax on the foreign income earned by the CFC.
Under the Tax Cuts and Jobs Act (TCJA), a U.S. shareholder of a CFC is taxed on the global intangible low-taxed income (GILTI) of the CFC. The GILTI inclusion amount can be summarized as all of the CFC’s net income, less a deemed 10 percent return on the CFC’s adjusted basis in its tangible, depreciable business assets.
C corporations are eligible for a special 50 percent deduction (37.5 percent starting in 2026) against the GILTI inclusion amount as well as a deemed paid foreign tax credit. Thus, the effective tax rate on a C corporation’s GILTI inclusion is 10.5 percent and is further reduced by available foreign tax credits.
Individuals, including partners in partnerships and shareholders in S corporations, must include their pro-rata share of GILTI income on their individual income tax returns. This GILTI income is subject to ordinary federal income tax rates as high as 37 percent. Individuals are not entitled to the special 50 percent deduction or deemed paid foreign tax credits. Thus, the tax consequences associated with GILTI inclusions to individuals are more severe than similar inclusions to C corporations.
The proposed regulations (REG-104464-18) provide relief from some of the provisions of the U.S. tax reform that apply to individual U.S. citizens or tax residents and U.S. trusts and estates who own stock in a CFC, as this regulation would allow the 50-percent GILTI deduction where a U.S. individual makes the Section 962 election.