The Internal Revenue Service and US Department of Treasury recently released proposed regulations that may provide relief to individual US shareholders of controlled foreign corporations" (CFCs).
Currently, CFC's are harshly taxed under the global intangible low-taxed incom (GILTI) rules enacted as part of the Tax Cuts and Jobs Act.
The Proposed Regulations provide an individual US Shareholder of a CFC who makes a "Section 962 election" the same 50% deduction from GILTI available to corporate US Shareholders.
Section 962 Explained
Under the TCJA, U.S. corporations are in general taxed at a flat corporate tax rate of only 21 percent. They are also allowed a 50-percent deduction for GILTI income, which results in a tax rate of 10.5 percent. This 50 percent GILTI deduction is not currently allowed to U.S. individuals.
U.S. individuals have been hoping to minimize these adverse consequences by making an election under Section 962 of the Internal Revenue Code. The Section 962 election allows a U.S. individual (including trusts and estates, which are treated as individuals) to be taxed on CFC income inclusions (such as GILTI) as a U.S. corporation.
It appears certain that the Section 962 election would allow a U.S. individual to benefit from 80 percent foreign tax credit for the foreign taxes paid by the CFC on GILTI income.
However, there has been a lot of uncertainty as to whether the 50-percent deduction for GILTI income would apply where a Section 962 election is made. The lack of a 50-percent GILTI deduction would cause serious tax inefficiencies to many U.S. individuals, and the uncertainty has left U.S. individuals who own stock in a CFC in a difficult position.
Fortunately, the proposed regulations answer this question and allow the 50-percent GILTI deduction where a U.S. individual makes the Section 962 election.
Freeman Tax Law Can Help
If you are a US shareholder of a controlled foreign company, please contact our office for information and guidance on how to proceed. We specialize in all matters of international and domestic taxation.