What is GILTI (Global Intangible Low-Taxed Income)?

Definition

Global Intangible Low-Taxed Income (GILTI), codified in IRC Section 951A, is a provision introduced by the Tax Cuts and Jobs Act (TCJA) of 2017 that requires US shareholders of Controlled Foreign Corporations (CFCs) to include in their current US taxable income the CFC's earnings that exceed a 10% deemed return on its qualified business asset investment (QBAI). Despite its name suggesting it targets 'intangible' income, GILTI functions as a broad minimum tax on virtually all CFC income not already captured by Subpart F. How GILTI Is Calculated: A US shareholder's GILTI inclusion equals the shareholder's pro rata share of CFC 'tested income' minus 10% of the CFC's QBAI (qualified business asset investment — essentially the depreciated book value of tangible depreciable assets used in the business) minus the CFC's 'specified interest expense.' In simplified terms: GILTI = CFC Net Income - (10% x Tangible Assets). A service business with few tangible assets (common for Canadian consulting firms, software companies, or professional practices) will have nearly all its income treated as GILTI because QBAI is minimal. Corporate vs. Individual Shareholders: The TCJA designed GILTI primarily for corporate shareholders of CFCs. C corporations receive a 50% deduction on GILTI (IRC Section 250), reducing the effective tax rate to 10.5% (50% x 21% corporate rate). They also receive an 80% foreign tax credit for foreign taxes attributable to GILTI, meaning if the CFC pays foreign taxes at a rate of approximately 13.125% or higher, the GILTI tax is fully offset. However, individual US shareholders — which includes every US citizen or green card holder who owns a Canadian corporation — receive NO Section 250 deduction and NO foreign tax credit unless they make a Section 962 election. Without this election, individual shareholders face GILTI taxation at their marginal ordinary income rate (up to 37% federal), with no mechanism to offset Canadian corporate taxes already paid. The Section 962 Election: Individual US shareholders can elect under Section 962 to be taxed on GILTI at corporate rates, gaining access to the 50% Section 250 deduction and the 80% foreign tax credit. This typically reduces or eliminates the GILTI tax for shareholders of CFCs in countries with moderate-to-high corporate tax rates like Canada (where the combined federal/provincial corporate rate is approximately 25-31%). The election is made annually on the tax return by attaching a statement to Form 1040, and it requires additional reporting on Form 8993 (Section 250 Deduction for FDIA and GILTI). The 962 election does not convert the individual to a corporate taxpayer for all purposes — it only applies to the GILTI and Subpart F inclusions. Interaction with Subpart F: GILTI and Subpart F income are separate but related CFC inclusion regimes. Subpart F captures specific categories of passive or mobile income (e.g., foreign personal holding company income, foreign base company sales income). GILTI captures the remaining CFC income that exceeds the 10% QBAI return. Income included under Subpart F is excluded from the GILTI calculation to avoid double inclusion. In practice, many small Canadian corporations owned by US expats have both Subpart F income (if the corporation earns passive investment income) and GILTI (on the remaining active business income). Impact on US Expats with Canadian Corporations: GILTI has been devastating for US citizens and green card holders who own Canadian private corporations — a common structure for professionals, consultants, and small business owners in Canada. Before TCJA, CFC income was generally not taxed in the US until distributed as a dividend. After TCJA, GILTI forces current US taxation on all CFC income exceeding the QBAI return, regardless of whether any distribution is made. A US citizen running a Canadian consulting firm through a CCPC (Canadian-Controlled Private Corporation) with $200,000 in annual net income and minimal tangible assets would have virtually the entire $200,000 included as GILTI. Without a Section 962 election, this income is taxed at the individual's marginal rate — potentially 37% federally — with no offset for Canadian corporate taxes paid. Forms Required: GILTI is reported on Form 8992 (US Shareholder Calculation of Global Intangible Low-Taxed Income) and flows to Form 1040. The underlying CFC information is reported on Form 5471 (Information Return of US Persons with Respect to Certain Foreign Corporations). Both forms are complex and must be filed for each CFC owned. Penalties for failure to file Form 5471 are $10,000 per form per year, and the statute of limitations does not begin to run until the form is filed. Planning Strategies: Beyond the Section 962 election, strategies to manage GILTI include: increasing the CFC's tangible asset base (raising QBAI) to increase the 10% deemed return exclusion, distributing CFC earnings as salary rather than retaining them (salary is not CFC income and avoids GILTI), and in some cases restructuring the business to operate as a sole proprietorship or partnership rather than a corporation (avoiding CFC status entirely). Each strategy has trade-offs with Canadian tax planning, making cross-border specialist guidance essential.

Related Forms

Common Mistakes to Avoid

• 1Individual CFC shareholders not making a Section 962 election, resulting in GILTI taxed at 37% with no offset for Canadian corporate taxes — the 962 election can reduce this to near zero
• 2Not realizing that a US citizen owning a small Canadian consulting corporation is subject to GILTI on virtually all corporate income, since service businesses have minimal QBAI
• 3Confusing GILTI with Subpart F income — they are separate inclusion regimes with different calculations, and income captured by Subpart F is excluded from GILTI

Related Terms