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Welcomed Tax Relief to U.S. Individuals Owning Stock in “Controlled Foreign Corporation”

The US Department of the Treasury last week clarified that US individual shareholders will be eligible for 50 percent relief from the new global intangible low-taxed income (GILTI) tax.

GILTI was introduced by the Tax Cuts and Jobs Act 2017 (TCJA) in order to encourage large multinational enterprises to repatriate profits stored offshore. The TCJA introduced a ‘participation exemption’ incentive whereby US corporations owning controlled foreign corporations (CFCs) could repatriate profits tax efficiently.

However, it also invented a new category of income called global intangible low-taxed income (GILTI). This income is included in the US shareholder’s federal gross income and is taxed at federal rates of up to 37 percent in the shareholder’s hands.

US domestic corporate shareholders were not worried by this because the TCJA granted them 50 percent relief from GILTI tax giving them a 10.5 percent effective GILTI rate. But individual shareholders, members of partnerships, and S-corporation shareholders were not offered this relief. Thus, in order to avoid paying the full GILTI levy, many of them have been preparing to restructure their CFC shares into a new US corporation so that they could claim the 50 percent relief, even though such a course would incur significant expense.

The new Treasury guidance states that they will no longer have to do this. Instead, individuals, including trusts and estates, will be able to claim the concessionary 50 percent relief just by making a so-called s962 election to be taxed as a domestic corporation with respect to their CFC inclusions.

Moreover, applying foreign tax credits could significantly reduce or eliminate the GILTI tax. The new rule also helps to simplify the US shareholders’ tax reporting obligations, as they can still file US individual tax returns rather than the more complicated US corporate tax returns. The new relief will apply to taxable years of a foreign corporation ending on or after 4 March 2019, and the taxable year of a US person in which or with which such taxable year ends. Taxpayers can also rely on it for the 2018 taxable year. This is good news.