GILTI High-Tax Exclusion
The Final Regulations give U.S. persons who own at least 10%, directly or indirectly, of the vote or value of a controlled foreign corporation (CFC) (U.S. Shareholders) the option to opt out of the GILTI regime if such CFC is subject to tax in a foreign country at an effective rate greater than 90% of the maximum U.S. corporate rate (i.e., currently a foreign effective tax rate of 18.9%, based on a U.S. corporate tax rate of 21%).
The election is effective for the year in which it is made and all subsequent tax years, unless the election is revoked, and can be retroactively applied for tax years beginning after December 31, 2017 and before July 23, 2020.
The Final Regulations Also Allow For Elections To Be Made On Amended Returns, Though U.S. Shareholders Must Then Also File Amended Tax Returns Within Specific Time Frames.U.S. Shareholders must apply the GILTI high-tax exclusion consistently, such that an election made by a U.S. Shareholder will generally apply to all 10%-owned CFCs.
For purposes of the high-tax exclusion, a tested unit includes (i) a CFC; (ii) an interest in certain pass-through entity held, directly or indirectly, by a CFC; or (iii) certain branches whose activities are carried on directly or indirectly by a CFC. Additionally, if a tested unit makes a disregarded payment to another tested unit, the Final Regulations require gross income to be reallocated among the tested units to appropriately associate the income with the tested unit in which it is subject to tax.
Coordination with the Subpart F High-Tax Exception
the complementary Subpart F high-tax exception, a controlling U.S.
Shareholder of a CFC may elect to exclude an item of the CFC's foreign
base company income or insurance income from Subpart F income when the
relevant income item is subject to tax in a foreign country at an
effective rate of more than 90% of the maximum U.S. corporate rate
(i.e., currently a foreign effective tax rate of 18.9%, based on a U.S.
corporate tax rate of 21%).