If you are a resident alien, own more than 10% of the vote or value of a foreign corporation deemed to be a Controlled Foreign Corporation, and show income from that company, you may be in for a very unpleasant US taxation surprise unless ….  

Prior to the Tax Cuts and Jobs Act, if you held a greater than 50% ownership in a foreign company classified as a “Controlled Foreign Corporation” (CFC) for US tax purposes, you could likely get a deferral from US taxes on income earned from that corporation.

With the new Act, that has changed, and frankly, that change is onerous for individual owners of foreign companies. Without an appropriate tax strategy and plan, you will face an unwelcome and unpleasant surprise.

The Consequences of GILTI for an Individual Taxpayer

Now, the new Act expands the types of income of the CFC that certain US shareholders must include on their tax returns. In addition, there is a new anti-deferral provision (the Global Intangible Low-Taxed Income "GILTI" tax) that may result in additional taxes being imposed on US shareholders who hold an interest in a CFC. The downside is that if you (1) are a resident alien and therefore classified as a US citizen for tax purposes, (2) have an ownership position in a CFC, (3) own more than 10% of the vote or value of that corporation, and (4) show income from that corporation, you will likely be subject to additional annual income inclusions that will result in a larger tax bill.

The GILTI provision is designed to subject greater amounts of CFC income to a minimum tax, and if you are a US shareholder of a CFC, in your annual income disclosure to the IRS you will be required to include your pro rata share of the CFC's GILTI. However, determining ownership can be a complex endeavor, especially in situations where the foreign corporation is owned by funds or other investment vehicles where the level of ownership by specific individuals is difficult to ascertain.

In effect, there are new consequences of being a US Shareholder of a CFC, and it is prudent to discuss these consequences with your advisors.

Download our complimentary eBook, 6 Overlooked (and Troublesome) US Tax Obligations for Expats, for five different alternative strategies that will help you minimize taxes, defer some taxes, and avoid duplicate taxation regarding GILTI.

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