GILTI Tax for Individual CFC Owners: Why the 2017 Tax Act Hurts Expats

Before 2018, a US citizen who owned a foreign corporation could generally defer US tax on active business income until it was distributed as a dividend. The 2017 Tax Cuts and Jobs Act (TCJA) changed that with GILTI — a regime that forces individual shareholders to pay US tax on their share of the CFC's income annually, even if the money never leaves the corporation.

How GILTI Works

The Calculation

1. Tested income: The CFC's gross income minus allowable deductions.
2. QBAI (Qualified Business Asset Investment): The book value of the CFC's depreciable tangible assets.
3. Deemed tangible return: QBAI × 10%.
4. GILTI: Tested income minus deemed tangible return.
5. US shareholder's share: Pro-rata based on ownership.

Example

• Your CFC generates $500,000 in tested income.
• The CFC owns $200,000 in computers and office equipment (QBAI).
• Deemed tangible return: $200,000 × 10% = $20,000.
• GILTI: $500,000 – $20,000 = $480,000.
• You own 50% of the CFC.
• Your GILTI inclusion: $240,000.

Why GILTI Hurts Individual Shareholders

Corporate Shareholders Get a 50% Deduction

US corporations that own CFCs get a 50% Section 250 deduction on GILTI, reducing their effective GILTI rate to 10.5%. They also get indirect foreign tax credits.

Individual Shareholders Get Nothing

Individual shareholders:

• Pay GILTI at ordinary income rates (up to 37%).
• Get no Section 250 deduction.
• Get no indirect foreign tax credits for taxes paid by the CFC.
• May already have paid 20–30% tax in the host country.

Combined tax rate: 20–30% foreign tax + 37% US GILTI = 50–67% total tax on the same income.

The Section 962 Election

Section 962 is the primary relief mechanism for individual CFC owners.

What It Does

• Treats the individual as a corporation for GILTI purposes.
• Provides the 50% Section 250 deduction.
• Provides indirect foreign tax credits.

The Math with Section 962

• GILTI inclusion: $240,000.
• Section 250 deduction: $120,000.
• Taxable GILTI: $120,000.
• Tax at 21% corporate rate: $25,200.
• Foreign tax credit for CFC's host-country tax: up to $25,200.
• US tax on GILTI: $0 (if foreign tax credit fully offsets).

The Catch

When the CFC actually distributes the income, it may be taxed again as a dividend. The Section 962 election does not eliminate double taxation — it defers and reduces it.

Strategies to Reduce GILTI

1. Increase QBAI: Buy equipment, lease office space, or invest in depreciable assets. More QBAI = more deemed tangible return = less GILTI.
2. Section 962 election: Make it annually. Complex but often worthwhile.
3. Restructure as a partnership: Partnerships are transparent — no CFC status, no GILTI.
4. Corporate parent: If a US corporation owns the CFC, GILTI rules are more favorable.

How FileAbroad Helps

FileAbroad models GILTI liability and recommends elections:

• GILTI calculation: We compute tested income, QBAI, and your share.
• Section 962 analysis: We model whether the election reduces your total tax.
• Restructuring advice: We evaluate partnership or corporate alternatives.

For GILTI analysis, start with the free intake.