If you’re a US expat who owns a foreign corporation, you’re likely aware of how complex the US tax system becomes once your business qualifies as a controlled foreign corporation. One of the more burdensome rules is the Global Intangible Low-Taxed Income (GILTI) regime. However, a powerful planning tool exists: the GILTI high tax exception.
Key Takeaways
HTE allows U.S. taxpayers to exclude high-taxed foreign income from GILTI.
It applies to income from tested units with foreign tax rates above 18.9%.
It’s claimed annually, must be applied consistently, and results in no GILTI inclusion.
Best for expats with CFCs in high-tax countries, offering a simple, complete relief from U.S. tax on active foreign earnings.
What Is the GILTI High-Tax Exclusion (HTE)?
The GILTI High-Tax Exclusion (HTE) is a regulatory election (not in the statute, but in Treas. Reg. §1.951A-2(c)(7)) that allows U.S. shareholders to exclude certain foreign income from GILTI if it has already been taxed at a sufficiently high foreign rate.
The GILTI high tax exclusion (also referred to as the GILTI high tax exception) allows controlling domestic shareholders of a controlled foreign corporation to exclude certain income from their GILTI tax liability if that income is already taxed at a sufficiently high foreign tax rate.
This high tax exception aligns with a principle of fairness: if you’ve already paid a high foreign income tax, you shouldn’t be penalized by additional GILTI tax in the US.
According to the final regulations, income is excluded under the GILTI high tax exception if the effective foreign tax rate on that income is above 90% of the US corporate tax rate. With the US corporate tax rate currently at 21%, this means an effective foreign tax rate of at least 18.9% qualifies.
How It Works?
HTE removes foreign income from the GILTI calculation entirely if:
1) It’s part of a CFC’s tested income
2) That income is taxed by a foreign country at an effective rate greater than 90% of the U.S. corporate tax rate
Since the U.S. corporate rate is 21%, the threshold is:
18.9% effective foreign tax rate
If met, that tested income is excluded from:
GILTI inclusion
§78 gross-up
FTC calculations
What Is an Effective Foreign Tax Rate?
It measures how much foreign tax a Controlled Foreign Corporation (CFC) pays on its tested income — expressed as a percentage of that income — for federal income tax purposes. It’s used to determine whether foreign income qualifies for the GILTI high tax exception, also called the high tax exclusion.
The GILTI High Tax Exception example
Imagine you’re a US expat who owns 100% of a business in Germany (a foreign country). Your German controlled foreign corporation generates $500,000 in gross tested income. Germany imposes a corporate tax rate of 30%.
In this case:
The effective foreign tax rate on the income is 30%.
Since 30% exceeds the 18.9% threshold, this foreign income qualifies for the GILTI high tax exclusion.
You make a high tax exclusion election, and that $500,000 is excluded from your GILTI calculation.
➡️ No additional GILTI tax liability on that foreign income, thanks to the high tax exception.
What Income Does HTE Apply To?
It applies to:
Tested income (i.e., income that would otherwise be included in GILTI)
At the level of a tested unit, not the entire CFC
A tested unit can be:
The CFC itself
A disregarded entity or partnership owned by the CFC
A branch of the CFC subject to a different foreign tax regime
HTE applies separately to each tested unit — not to the entire entity — which allows for more targeted exclusions (or complications, depending on the structure).
What HTE Does Not Apply To
Subpart F income — this is always taxed when earned, regardless of foreign tax rate
Income that’s not “tested” (e.g., income excluded for other reasons)
Effects and Benefits of Electing HTE
1. Complete Removal from GILTI
The income is not included in the U.S. shareholder’s GILTI computation
Therefore, no U.S. tax is owed on that income
2. No Need for FTCs
Since income is excluded, there’s no need to claim foreign tax credits
3. No §78 Gross-Up
You avoid artificially inflating income through the Section 78 inclusion (which normally represents the foreign taxes claimed)
4. Simplifies Compliance for High-Tax Jurisdictions
Countries like Germany, France, Australia, and the Netherlands typically tax corporate income above 18.9%
For U.S. expats operating in these countries, HTE often eliminates U.S. GILTI tax exposure altogether.
How to Claim the GILTI High-Tax Exclusion?
To elect the HTE, the taxpayer must:
Annually elect it on their tax return (Form 5471 and/or 8992)
Apply the election consistently across all CFCs in the same “CFC group” (meaning you can’t cherry-pick which CFCs use it)
Calculate effective tax rates per tested unit
This means allocating income and taxes precisely under Treas. Reg. §1.951A-2(c)(7)
Exclude qualifying high-taxed income from the tested income pool in Form 8992
Important: The election must be made each tax year — it does not carry forward.
When Is the HTE Better Than Other Options?
HTE is often the most effective choice when:
[table “40” not found /]Compared to a §962 election, HTE is often simpler, cleaner, and avoids the double taxation trap if distributions are made later.
When HTE Is Not the Best Choice
If foreign tax rates are below 18.9%, the income cannot qualify.
If tested units are paying very different rates, consistent application across CFCs may hurt more than help.
In low-tax jurisdictions (e.g., Singapore, UAE, Ireland) — §962 with FTCs and §250 is usually better.
Example
Let’s say a U.S. expat owns 100% of a German GmbH:
Net tested income: $1,000,000
German tax: $300,000 → 30% tax rate
QBAI: $0 (no adjustment needed)
HTE threshold: 18.9%
Without HTE:
GILTI inclusion = $1M
§250 deduction only if §962 is made
Gross-up + FTCs necessary
Potential double taxation later on dividends
With HTE:
GILTI = $0 (excluded)
No deduction, no FTC, no §78
No future dividend tax risk (unless other income exists)
✅ In this case, HTE is the cleanest and best option.
Key Requirements for the High Tax Exclusion Election
To utilize the GILTI high tax exception, certain conditions must be met:
The income must be tested on a tested unit basis.
The effective foreign tax rate must exceed 90% of the US corporate tax rate.
The election must be made on an annual basis.
All controlling domestic shareholders must make a consistent election.
The election is binding for all foreign corporations in the same foreign country.
The IRS published final regulations and proposed regulations under §1.951A-2(c)(7) that detail these criteria.
How to Avoid GILTI Tax
To minimize or avoid GILTI tax, expats can:
Use the GILTI high tax exclusion when eligible.
Maximize foreign tax credits on their foreign income taxes paid.
Adjust the entity structure to avoid classification as a controlled foreign corporation.
Work with a tax professional to analyze the tested income, gross income, and qualified business asset investment under the Internal Revenue Code.
Ensure the CFC is in a foreign country with a foreign tax rate above 18.9%.
Maximize Tax Relief with Expert Guidance
If you’re a U.S. citizen living abroad and own foreign corporations, the GILTI high-tax exception is a critical strategy to reduce your tax burden. When applied properly, it can eliminate your GILTI tax liability on high-taxed foreign income—especially in foreign countries with a strong corporate tax rate.
The final regulations retain this important tax exception, and making the high-tax exclusion election annually can provide substantial relief to expats with foreign income already subject to significant foreign income taxes.
We offer free tax advice to all U.S. expats—contact us today to understand how the GILTI high-tax exclusion applies to your specific situation and to ensure your tax planning is both compliant and optimized.
