“An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (Public Law 115-97 a.k.a. the Tax Cuts and Jobs Act H.R.1) introduced, into the United States Internal Revenue Code (IRS) new section 951A, “Global Intangible Low-Taxed Income Included in Gross Income of United States Shareholders” a.k.a. “GILTI”.
Many U.S. multi-national entities (MNEs) have, historically, held their patents and other intellectual property in low tax foreign jurisdictions, Ireland being an example. The GILTI provisions are viewed as imposing a minimum tax on the MNE’s foreign earnings generated by these off-shore assets. Under these rules, the amount of GILTI will be included, annually, in the United States shareholder’s gross income whether the income is actually distributed or not. It is an expansion of the U.S. subpart-F rules.
The problem, however, is that these rules go far beyond this as they will impact all “United States shareholders” (a defined term under the Internal Revenue Code) of controlled foreign corporations (CFC) not only U.S. based MNEs. So if you are a U.S. citizen, resident in Canada and own shares in a Canadian company these rules may impact you. It would appear that either the U.S. congress did not think about the impact on U.S. citizens living abroad or simply didn’t care.
The new law also changed the definition of when a U.S. person is a “United States shareholder” for these purposes. Prior to January 1, 2018, “… the term “United States shareholder” means, with respect to any foreign corporation, a United States person…who owns…10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation.”
As such, if the U.S. person only held non-voting preferred shares (say equating to 80% of the value of the Canadian company), and assuming there is no share attribution, they would never be a “United States shareholder” for CFC purposes and would not be subject to these rules.
The Act, however, expands this definition, as of January 1, 2018, to also include any U.S. person that owns 10% of the value of the stock in a foreign corporation. The test is now a ≥ 10% votes or a ≥10% value test. This change accordingly expands the circumstances in which a foreign corporation will be treated as a CFC including situations where a U.S. person owns “low vote” stock that represents at least 10% of the value of the foreign corporation. In the hypothetical example above, the U.S. person would now be a “United States shareholder” since the non-voting preferred shares represent ≥10% of the value of the company. As such, Canadian corporations should review their share registry to determine whether any shareholders have now become “United States shareholder” for U.S. tax purposes.
How do the GILTI provisions work?
“GILTI” is defined as the excess of the United States shareholder’s net CFC tested income over a net deemed tangible income return.
“Net CFC tested income” generally means the CFC’s gross income, other than income that is subject to U.S. tax as effectively connected income, Subpart F income (including income that would be Subpart F income but for the application of certain exceptions), and foreign oil and gas extraction income, less allocable deductions. The exceptions, in general, represent types of income that are already subject to specific U.S. tax rules. The remaining income represents foreign source income that, historically, has been deferred for U.S. tax purposes.
The “net deemed tangible income return” generally is an amount equal to (i) 10% of the aggregate of the United States shareholder’s pro rata share of a CFC’s qualified business asset investment (generally, a quarterly average of the CFC’s tax basis in depreciable property used in its trade or business) over (ii) the amount of interest expense taken into account to determine such U.S. shareholder’s net CFC tested income.
Where the United States shareholder is a U.S. domestic corporation, two other provisions arise. First, the company may deduct an amount equal to 50% of the GILTI inclusion (per above). This reduces the -new U.S. corporate effective tax rate to 10.5% [(100%-50%) x 21%]. As of 2026, the GILTI deduction will be reduced from 50% to 37.5%. This will have the impact of increasing the effective U.S. corporate tax rate to 13.185% [(100%-37.5%) x 21%].
Second, the U. S. domestic corporation, is entitled to a credit for 80% of its pro rata share of the foreign corporate income taxes attributable to the income of the CFC that is taken into account in computing its net CFC tested income. The foreign tax credit limitation rules apply separately to such taxes, and any taxes that are deemed paid under these rules may not be carried back or forward to other tax years.
These two provisions do NOT apply if the United States shareholder is not a U.S. domestic corporation, i.e., a U.S. citizen. For these taxpayers there will only be the GILTI inclusion and the “normal” foreign tax credit provisions will apply. That is, absent any planning, there could be a timing mismatch for Canadian and U.S. tax purposes.
U.S. citizens, who are United States shareholders as defined under the IRC, who have established Canadian corporations may now have to include in U.S. gross income their share of GILTI. Any type of service corporation, whether a provincially allowed Professional Corporation or not, will probably have GILTI as their “net deemed tangible income return” may be nominal. 10% of zero is still zero.
The Cadesky U.S. Tax team can help determine whether the GILTI provisions are applicable to you and can assist in planning to mitigate any impact.