GILTI regulations issued

26.06.2019

As final GILTI regulations are issued, new proposed regulations potentially provide further relief - but not yet.

On 14 June, the Internal Revenue Service ("IRS") belatedly issued eagerly awaited final regulations with respect to the Global Low-taxed Income ("GILTI") legislation, over 17 months after the effective date.

Whilst the final regulations themselves are complex, there are no major differences from the proposed regulations published earlier this year which affect our client base.

More interestingly, a new set of proposed regulations has been issued that, if adopted, may give further relief to US owners of Controlled Foreign Corporations ("CFCs").

The CFC rules were originally enacted to create a discentive to the shifting of profits to low-tax foreign jurisdictions. The new proposed regulations expand on that theme to state that US shareholders can elect for 'high taxed' income to effectively be eliminated from exposure to the GILTI regime. 'High taxed' income is defined as that with an effective foreign tax rate above 18.9%. The election itself is binding for five years.

Practically, this means that a US owner of a CFC should be able to avoid GILTI where they own an active non-US business that pays more than 18.9% in local corporation tax, and they make a positive election that they utilise this exception.

Where the CFC is a UK company, should the UK corporation tax rate drop to below 19% (as is currently planned) then the 'high taxed' exception would not apply.

Nonetheless, this in itself is welcome news and appears to be a reasonable development for many US owners of CFCs.

But now the bad news. The proposed regulations make clear that the 'high taxed' exception only applies for CFC taxable years beginning after the date that the proposed regulations become final. Realistically, that may not be until 2020.

As a result US taxpayers will still need to navigate through the 2018 and 2019 tax years without this helpful relief.

Should you be affected by the new 2018 CFC and GILTI rules and require advice, please contact Alex Straight.