hen dealing with controlled foreign corporations (CFCs), U.S. taxpayers—especially American expatriates—must understand the intricacies of GILTI income. GILTI, or Global Intangible Low-Taxed Income, was introduced under the Tax Cuts and Jobs Act (TCJA) of 2017 as part of a broader effort to limit tax avoidance and ensure U.S. taxation on low taxed income GILTI from foreign subsidiaries.
This article explains what GILTI income is, how it differs from Subpart F income, what triggers the GILTI tax, and most importantly, how to mitigate it.
What Is GILTI Income?
GILTI income, short for Global Intangible Low-Taxed Income, is a category of income introduced by the Tax Cuts and Jobs Act (TCJA) of 2017. It applies to most types of foreign earnings generated by controlled foreign corporations that exceed a standard 10% return on the CFC’s qualified business asset investment (QBAI)—which is based on tangible assets. While GILTI was conceptually aimed at capturing income linked to intangible assets like patents, trademarks, and licenses, in practice, it broadly includes active foreign income, regardless of whether it’s derived from intangibles.
The GILTI tax effectively imposes a minimum tax on U.S. shareholders of foreign corporations, ensuring they pay U.S. tax on certain foreign income, even if it is not distributed. The regime was designed to discourage the shifting of taxable income to low tax countries or no tax jurisdictions through offshore entities, and to limit the deferral of U.S. taxation on foreign earnings.
What Triggers the GILTI Tax?
The GILTI tax is triggered when a U.S. person owns at least 10% of a controlled foreign corporation and the CFC earns foreign income that exceeds a deemed tangible return—calculated as 10% of the CFC’s qualified business asset investment (QBAI).
The net CFC tested income, which is the CFC’s gross income minus allocable deductions, is aggregated across all CFCs owned by the U.S. shareholder. This pool of tested income is subject to the GILTI tax formula, resulting in additional federal taxable income on the shareholder’s U.S. tax return.
Subpart F Income vs. GILTI
While both Subpart F income and GILTI income aim to tax undistributed foreign earnings, there are key distinctions:
Subpart F income targets passive and mobile types of foreign based company income (e.g., passive income, foreign personal holding company income).
GILTI income, by contrast, targets income in excess of a routine return on tangible assets, regardless of whether it is passive or active.
Thus, Subpart F income is narrower and more targeted, while intangible low taxed income under GILTI has a broader reach.
How is GILTI Tax Calculated?
To determine your GILTI tax liability, the IRS follows a formula that includes:
Calculating net CFC tested income for all CFCs.
Subtracting the 10% return on QBAI.
Applying the GILTI tax rate (effective tax rate after deductions and credits).
Allowing partial foreign tax credits for foreign taxes paid by CFCs (up to 80%).
Corporate shareholders receive a 50% deduction under Section 250, lowering the effective GILTI tax rate to 10.5%. They can also claim an 80% foreign tax credit, though this foreign tax credit system lacks carryforwards and carrybacks.
Required IRS Forms: 8992 and 8993
To comply with the GILTI regime, U.S. shareholders must file the following:
Form 8992 – U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)
The Form 8992 is used to determine a U.S. shareholder’s share of tested income, net CFC tested income, and total GILTI inclusion. It also calculates the amount of GILTI income that must be reported in the shareholder’s gross income annually, regardless of whether the income was distributed.
Key components include:
Each CFC’s tested income/loss
Total QBAI and related asset calculations
Application of foreign taxes paid for credit consideration
Form 8993 – Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and GILTI
Form 8993 calculates the Section 250 deduction, allowing a U.S. corporate shareholder to claim a 50% deduction for GILTI income and foreign derived intangible income (FDII). This deduction effectively reduces the GILTI tax rate to 10.5% for corporations, though it will drop to a 37.5% deduction in 2026, increasing the effective rate to over 13%.
Together, these forms represent a crucial compliance step and contribute to the increasingly complex tax system facing Americans with foreign affiliates.
Strategies to Mitigate GILTI Income
Mitigating GILTI income exposure is essential for U.S. shareholders of foreign corporations. Here are proven strategies discussed in detail on our CFC article:
1. Make a Section 962 Election
Individual shareholders may elect to be treated as a U.S. corporate taxpayer via a Section 962 election. This allows them to:
Benefit from the 50% GILTI deduction (for a reduced gilti tax rate),
Claim foreign tax credits like corporations,
Avoid double taxation.
However, this may increase taxable income due to inclusion of dividends received deduction limitations and the complexity of the tax code.
2. Use the High-Tax Exclusion
The GILTI high tax exception applies when the effective foreign tax rate exceeds 90% of the U.S. corporate tax rate (i.e., 18.9% or higher). When this threshold is met:
The low taxed income GILTI is excluded.
This prevents double taxation and reduces your gilti tax liability.
3. Increase Foreign Taxes or Foreign Source Income
Structuring to generate higher foreign income taxes through better local corporate income taxes can reduce tested income via the 80% foreign tax credit mechanism. Structuring to increase foreign source income may also optimize U.S. foreign tax credit limitations.
Why GILTI Matters for U.S. Expats and Small Businesses
The GILTI regime changed the landscape of international taxation. It expanded the U.S. tax net to include active foreign income, burdening expats and small business owners with added tax obligations and complex tax calculations.
Before the Tax Cuts and Jobs Act, most U.S. persons could defer U.S. taxes on income earned by foreign affiliates until repatriated. Under current law, this deferral is largely eliminated.
Important Considerations
Tax professionals can assist with accurate tax calculations and ensure the foreign tax credit system is optimized.
Analyze whether the GILTI provisions or Subpart F income rules apply to your foreign earnings.
Track foreign taxes paid and prepare for possible minimum tax exposure, even when operating in low tax jurisdictions.
Be aware that interest expense, business expenses, and depreciation can reduce tested income, affecting your gilti tax.
Facing GILTI? Get Trusted Guidance Today
U.S. shareholders of controlled foreign corporations must navigate a complex tax system under GILTI. With proper planning—through the high tax exemption, Section 962 election, or strategic use of foreign tax credits—you can manage or significantly reduce your GILTI income exposure.
If you own a CFC and are unsure how GILTI impacts your federal taxable income, reach out to our expert team at 1040 Abroad. We’re here to help you decode the tax law, mitigate your tax consequences, and stay compliant with international tax obligations.
