How to avoid or lower GILTI - Global Intangible Low Tax Income
by: Anthony Parent
The new GILTI tax regime is quite a complicated mess. US shareholders of foreign corporations could be in for a very nasty surprise as GILTI really made a mess of things. In this article we will discuss six possible way to eliminate or reduce GILTI tax surprises.
1. Characterize GILTI as Subpart F
First, you can elect to covert GILTI to subpart F income. Now you might be scratching your head on this. If you understand a little about international taxation you know that Subpart F is something to be avoided. However GILTI can be so bad, that it can make Subpart F seem good!
2. Increase QBAI
The second way is a little bit more opaque. You can increase something call QBAI. QBAI stands for Qualified Business Asset Investments. There are a few ways to do this. For instance you can purchase equipment that has been previously leased.
The downside is that just because someone is a shareholder in a Controlled Foreign Corporation (CFC) it does not mean that they can actually control the corporation enough in order to implement this strategy. Management might not be found of this idea - especially if they aren't US persons.
And second, this is a business decision that could have negative effects to cash flow. You might solve a GILTI problem but you could end up with a business problem.
3. Combine Controlled Foreign Corporations into one
Third, GILTI is NOT calculated on a company basis. It is done on a shareholder basis. And what’s worse is that losses in one CFC may not get full credit against gains of another CFC. The way to make sure you don’t miss out on any of your losses is by combining CFCs.
4. Avoid CFC or US shareholder status.
This can be the easiest solution -- simply avoid either CFC status or US shareholder status. The problem with this is tax reform expanded the definition of what it means to be have a CFC status. However, by adjusting ownership levels with non-US owners, you may be able to find a great solution that avoids this entire mess. The downside is this is not feasible for many people and second, you need to watch those attribution rules (including downward attribution) — which also have changed for the worse. When you have related parties, you might be considered to have CFC even though you would otherwise not if the parties were not related.
5. Create a US holding company to own all CFC shares
The fifth way, and this is proving to be the winner for many of our clients, is to funnel all shares in foreign corporations into a domestic US holding company. This was an overriding theme of the 2017 Tax Cuts & Jobs Act — bring capital back to the US. The reason it works is that US “C” corporations are allowed to do something US individuals are not. Take what is known as a Section 250 deduction of 50% of GILTI. The downsides are that this does require extra hurdles of having a US domestic corporation which you must honor the corporate formalities of and an additional tax filing requirement of the domestic corporation. However, if your GILTI liabilities are even as low as say $20,000 or even $10,000, it still could be worth the hassle to create this structure.
6. What about putting CFC shares into a Private Placement Life Insurance Policy
A sixth way I can think of is this. What about putting shares of a CFC into a Private Placement Life Insurance Policy (PPLI)? PPLIs are used by the most sophisticated investors for what I consider to be the ultimate tax structure. Essentially how it works is that your assets go into a life insurance policy and you borrow from the death benefit while you are alive. And because death benefits are tax free, you’ve essential avoided all income taxes — both federal and state. This is an even better move to make if you happen to be in a high tax jurisdiction like California or New York.
The downside is that life insurance turns most people off, and these are complicated structures and require a flexibility and relinquishing so some control that so many business owners and investors are unwilling to do.
Additionally the costs are intense. Typically it only starts making sense when you have about $10 million in assets, altough we've been hearing of ways to reduce the amount needed to get into such a powerful platform.
There are diversity requirements of a PPLI’s portfolio that could force you to sell your stock so much so that you could no longer have that CFC or US shareholder status. Also you must be very committed to following the structure. People get into trouble with PPLIs when they don’t take the rules seriously. But when you do, it is truly magical.
If you or your client needs help figuring out what to do about GILTI, please contact us.