As a US expat, you may find yourself navigating the complex landscape of international taxation. One of the key areas of concern is the Global Intangible Low-Taxed Income (GILTI) tax. This article aims to provide an in-depth understanding of GILTI tax, its implications, and strategies to avoid it effectively.
Strategies to Avoid GILTI Tax
There are several strategies that can be employed to mitigate the risk of double taxation posed by GILTI.
1. Bonuses
Some business owners choose to give themselves a bonus up to the GILTI amount, but this plan does not provide any tax deferral because bonuses are subject to current taxation. Many incorporated professionals may find it more advantageous to operate as sole proprietorships to avoid the onerous CFC reporting requirements.
2. High Tax Exclusion
Taxpayers have the option to exclude GILTI income if the Canadian corporate tax rate on GILTI revenue exceeds 90% of the U.S. corporate tax rate. The foreign company tax rate must be higher than 18.9% (in comparison to the current U.S. corporate tax rate of 21%) in order to meet the criteria for this exception. Foreign CFC owners who make over $800,000 may find this option to be a viable alternative, depending on factors such as the taxing province and the availability of the small company rate of tax.
3. Unlimited Liability Companies (ULCs)
Unlimited liability companies are present in certain provinces in Canada, such as Nova Scotia, Alberta, and British Columbia. For U.S. tax purposes, these ULCs are considered disregarded entities. As such, the income received by the ULC being taxed as the owner’s income. Consequently, a ULC’s income is exempt from GILTI. However, since all corporate income is viewed as individual owner income in the U.S., it will be taxable income; the upside is that the individual can now claim a foreign tax credit at the personal level for taxes paid by the company.
Not only do you have to give up some Canadian tax deferral to avoid double taxation, but converting a limited liability company to a ULC is seen as a liquidation transaction in Canada, making the ULC solution impractical for established businesses.
While unlimited liability companies may not always be the perfect fit due to the burden they place on shareholders, by making a check-the-box election, businesses can enjoy the best of both worlds – limited liability and the perks of being treated as disregarded entities.
4. Renunciation
For many Americans, tax reform was the tipping point. A lot of people have opted to merely renounce their citizenship. Reviewing the IRC section 877 and 877A in detail with their a tax advisor is advised.
Navigating the complexities of GILTI tax can be challenging, but with the right knowledge and guidance, you can effectively manage your tax obligations. As experts in US international taxation, we are here to help you understand your tax obligations and plan strategically.
Remember, every individual’s tax situation is unique, and this article provides general information. For personalized advice, please consult with a tax professional.
At 1040 Abroad, we are dedicated to providing expert tax advice to those who need it. We understand that navigating international taxation can be complex, and we’re here to help. If you have any questions or need further clarification on any tax-related matters, please don’t hesitate to reach out to us. You can email us at info@1040abroad.com, and we’ll get back to you as soon as possible. We offer free tax advice to all who seek help because we believe in empowering you with the knowledge to manage your tax obligations effectively.
