For a U.S. shareholder of a profitable foreign corporation, the Tax Cuts and Jobs Act of 2017 fundamentally changed the calculus of offshore business ownership. The old planning assumption — that active income earned by a controlled foreign corporation could accumulate offshore until distribution, deferring U.S. tax indefinitely — no longer holds. Global intangible low-taxed income, or GILTI, requires U.S. shareholders to include their share of the CFC's excess earnings every year, whether or not a dollar is distributed. Understanding how GILTI is calculated, how it interacts with the older Subpart F regime, and what planning options remain is now foundational for any U.S. person with a stake in a foreign operating company.

What GILTI Is and Why It Exists

GILTI — global intangible low-taxed income — is the inclusion that the Tax Cuts and Jobs Act of 2017 added to the CFC rules. Before TCJA, U.S. shareholders of controlled foreign corporations were taxed on Subpart F income (passive income and certain other categories) as it was earned, but active business income earned by a CFC could accumulate offshore without U.S. tax until it was actually distributed. TCJA ended the deferral benefit for active CFC income by requiring U.S. shareholders to include their share of GILTI annually.

The theory behind GILTI is that a CFC earns a "normal" return on its tangible assets — the 10% deemed return on qualified business asset investment (QBAI) — and that income above that normal return is the excess return attributable to intangible assets such as patents, software, trademarks, and customer relationships. That excess return is GILTI, and TCJA requires it to be included in the U.S. shareholder's income each year, regardless of distribution.

In practice, GILTI hits any profitable CFC with low tangible assets relative to income — including many service businesses, technology companies, financial services firms, and professional practice companies owned by LATAM entrepreneurs or investors who become U.S. tax residents.

How GILTI Is Calculated — the Mechanics

The starting point is net CFC tested income: the CFC's gross income less certain deductions, after excluding Subpart F income, income from U.S.-source dividends, and income effectively connected with a U.S. trade or business.

From net CFC tested income, subtract 10% of QBAI — the CFC's qualified business asset investment, broadly equal to the average adjusted tax basis of depreciable tangible business property used in the CFC's trade or business at the end of each quarter. The 10% QBAI reduction is the "deemed tangible income return" — it represents the portion of CFC income attributable to tangible assets, which Congress chose not to subject to GILTI.

The result — net CFC tested income minus 10% of QBAI — is the GILTI inclusion amount. For a CFC that earns $5M in tested income and has $10M in QBAI, the calculation is: $5M − (10% × $10M) = $5M − $1M = $4M GILTI inclusion.

For U.S. corporate shareholders, the inclusion is then reduced by the Section 250 deduction (50% of GILTI, bringing the effective rate to 10.5%), and offset by foreign tax credits under Section 960 (limited to 80% of the credits attributable to GILTI). For individual shareholders, neither the Section 250 deduction nor the indirect foreign tax credit is available under the default rules — unless the individual makes a Section 962 election.

Subpart F vs. GILTI — How the Two Regimes Interact

GILTI does not replace Subpart F — both apply simultaneously, and income can potentially be subject to both regimes. Subpart F income (passive income, certain sales income, certain services income) is excluded from the GILTI calculation, so income characterized as Subpart F is taxed under those rules rather than as GILTI.

For U.S. shareholders of CFCs with both Subpart F income and active business income, the planning question is which income falls where. Subpart F income carries specific sourcing rules and may be fully offset by foreign tax credits available in the Subpart F basket. GILTI income sits in a separate foreign tax credit basket with an 80% credit limitation and the Section 250 deduction benefit for corporate shareholders.

Understanding the interaction between Subpart F and GILTI is essential for CFC structures involving mixed income — for example, a CFC that provides services to U.S.-related parties (Subpart F services income), earns investment returns (Subpart F passive income), and conducts a local operating business (potential GILTI). Each income stream is analyzed separately.

The GILTI High-Tax Exclusion

The GILTI high-tax exclusion, available under Treasury regulations, allows U.S. shareholders to elect to exclude from GILTI any tested income of a CFC that is subject to a foreign effective tax rate exceeding 18.9% — 90% of the current 21% corporate rate — for a given year.

The high-tax exclusion is a powerful planning tool for CFCs in high-tax jurisdictions. A CFC operating in Germany, France, the United Kingdom, or other countries with corporate tax rates above 18.9% may qualify for the exclusion on all or most of its income — resulting in zero GILTI inclusion for U.S. shareholders. For LATAM jurisdictions with rates above 18.9% (Colombia, Brazil, Mexico under certain circumstances), the high-tax exclusion may similarly shelter CFC income from GILTI.

The exclusion is made at the CFC level, on an annual basis, and applies to individual tested units — a CFC and its qualified business units — rather than to the CFC as a whole where the CFC has operations in multiple jurisdictions. The tested unit approach requires detailed analysis of the effective rate at each geographic level.

The high-tax exclusion requires consistent application: once made, it applies to all CFCs of the U.S. shareholder group. It cannot be applied selectively to high-tax CFCs while excluding low-tax ones.

Planning Strategies for U.S. Shareholders with CFCs

Several planning approaches can reduce GILTI exposure, each with distinct trade-offs:

Increase QBAI. More depreciable tangible property in the CFC reduces GILTI dollar-for-dollar (10% of the increased QBAI). For CFCs that can legitimately invest in tangible assets — equipment, vehicles, real property used in the business — this reduces the GILTI inclusion without changing the underlying economics.

Check-the-box elections. U.S. shareholders sometimes elect to treat a foreign entity as a disregarded entity or partnership rather than a corporation for U.S. tax purposes. A disregarded entity has no CFC or GILTI issues — its income is included directly in the shareholder's return as if earned directly. The trade-off is loss of deferral and potential exposure of all the entity's income (not just excess returns) to current U.S. tax.

U.S. holding company structure. Individual shareholders who own CFCs through a U.S. C corporation access the Section 250 deduction and indirect foreign tax credits that individuals cannot. The trade-off is a second level of tax when dividends are paid from the C corporation to the individual — the double-tax cost of corporate ownership. For shareholders who plan to keep income inside the corporate structure for reinvestment, the corporate holding company model often produces a lower effective GILTI rate than direct individual ownership.

Section 962 election. Individual shareholders who do not want to restructure their CFC ownership can elect Section 962 annually to access corporate-rate treatment on GILTI for that year. The 962 election allows individuals to claim the Section 250 deduction and indirect foreign tax credits that would otherwise be unavailable. The mechanics and limitations of the 962 election, including the second-level tax it creates on actual distributions, are analyzed in a companion post on this site.