Foreign corporations and the “GILTI” trip

Some readers may be share-holders in “foreign” (non U.S.) corporations that run businesses. Others use Mexican corporations to hold title to real property, especially where non-Mexicans must use fideicomisos (coasts and border zones) seeking savings on fees.

The IRS knows that foreign corporations that stay away from the U.S. can’t be reached. If they have enough percentage of U.S. shareholders, the IRS gets very interested.

Their profits could be “parked” indefinitely inside the corporation and not distributed as dividends. Congress got wise, putting in place “Subpart F” rules, imputing earnings to US shareholders of “Controlled Foreign Corporations”, as if those earnings were actually distributed. CFCs are controlled by vote or value, by US persons. More than fifty percent=control=CFC.

If you are a 10% shareholder of a CFC, Subpart F applies to you. What? You are the sole share- holder? Well, you are in—all the way! Bait, hook, and sinker.

This CFC thing is important because those U.S. sharehol- ders may also be subject to the “repatriation tax” imposed on the earnings of CFCs.

There may not be any earnings to pay tax but you, CFC-greater-than-10% shareholder, will have to go through the complex computations…well beyond most do it yourself tax programs.

In an effort to bring more business ‘home,’ Congress also just invented a new category of Subpart F income: Global Intangible Low-Taxed Income, or—you guessed it—“GILTI”. Tax writers do have a sense of humor, after all. GILTI assumes foreign corporations have some reasonable rate of return based on their fixed, depreciable assets—10%.

If they exceed that return, it is generally treated as GILTI. As you learned earlier, Subpart F income (now with the new GILTI) is included (the year it is earned) in the greater-than-10%-CFC-shareholders’ federal income tax return. You get taxed on more. At a minimum, there’s more number crunching.

Does the IRS not know you are a 10% shareholder? You are supposed to tell them annually. You may be supposed to as well if you are an officer or director of these corporations. If you contributed capital or cash to a foreign corporation, you may have additional, separate reporting requirements.

These international rules were originally meant for “big” corporations.

Expanded definitions now mean many provisions apply to smaller ‘fish.’ Don’t run afoul of them; the consequences can be substantial.

For a U.S. person, ownership of foreign corporations entails understanding complex U.S. tax rules that are in flux as this very moment….

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Orlando Gotay
Lawyer
Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies.
His love of things Mexican has led him to devote part of his practice to the tax matters of U.S. expats in Mexico. He can be reached at tax@orlandogotay.com, online radio at mixlr.com/orlandogotay