GILTI High-Tax Exclusion: Planning for US Shareholders of Foreign Corporations

The GILTI Regime: Section 951A Overview

Global Intangible Low-Taxed Income (GILTI) was introduced by the Tax Cuts and Jobs Act (TCJA) of 2017 and is codified in Section 951A of the Internal Revenue Code. It operates as a current-year inclusion of low-taxed foreign earnings by US shareholders of controlled foreign corporations (CFCs), regardless of whether those earnings are distributed.

Prior to TCJA, US shareholders of CFCs could defer US tax on most foreign earnings until those earnings were actually repatriated. GILTI eliminated most of this deferral by requiring annual inclusions of tested income that exceeds a deemed return on tangible assets (the QBAI deduction).

The GILTI calculation:

1. Aggregate "tested income" of all CFCs (net income, with adjustments, positive CFCs only)
2. Minus: net Qualified Business Asset Investment (QBAI) deduction (10% of average tangible depreciable assets of CFCs with positive tested income)
3. Equals: GILTI inclusion amount

The QBAI deduction creates a tangible asset carve-out: income attributable to a routine return on real assets (factories, equipment, property) is excluded from GILTI. Income in excess of that routine return — including IP income, financial income, and other high-return activities — is GILTI income.

Corporate vs Individual GILTI Treatment

The GILTI regime applies both to corporate US shareholders and to individual US shareholders. The treatment, however, is significantly different:

Corporate shareholders (C-corporations): Eligible for a 50% deduction under Section 250, reducing the effective US tax rate on GILTI to 10.5% (at the 21% corporate rate). In addition, corporations can claim a deemed paid foreign tax credit of 80% of the foreign taxes attributable to the GILTI inclusion. If the foreign ETR on the GILTI is 13.125% or above, the 80% credit effectively eliminates any additional US tax.

Individual US shareholders (including through S-corporations and partnerships): Are not eligible for the Section 250 deduction. They include GILTI at their full marginal individual rate (up to 37%), with no equivalent relief. The effective US rate on GILTI for high-income individuals can reach 37%.

This disparity means that the GILTI cost for an individual US shareholder of a CFC is dramatically higher than for a corporate shareholder. A US individual owning 100% of a UAE company with $500,000 of GILTI income faces potential US tax of $185,000 at 37% — on income that is not distributed and may be reinvested offshore.

The High-Tax Exclusion Election

The High-Tax Exclusion (HTE) election under Treasury Regulation Section 1.951A-2(c)(7) (as amended by the July 2020 Final Regulations) allows US shareholders to elect to exclude from tested income any item of income (or a CFC's full tested income) where the effective foreign tax rate on that income exceeds the HTE threshold.

The HTE threshold is 18.9% — 90% of the highest US corporate rate (90% × 21% = 18.9%). If a CFC's income is subject to a foreign effective tax rate above 18.9%, the HTE election allows that income to be excluded from the GILTI calculation entirely.

Foreign ETR	GILTI Inclusion Before HTE	HTE Available?
0% (e.g., UAE free zone)	Full inclusion	No — ETR below 18.9%
9% (UAE corporate tax)	Significant inclusion after QBAI	No — ETR below 18.9%
15% (Singapore, Malta, etc.)	Inclusion after credits	No — ETR below 18.9%
18.9%+ (UK 19%, France 25%+, Germany 30%+)	No inclusion	Yes — HTE applies

Making the HTE Election

The HTE election is:

• Made annually
• Made at the controlling domestic shareholder level (applies to all US shareholders of the electing CFCs)
• Applied on a CFC-by-CFC basis (or, alternatively, on a QBU-by-QBU basis within a CFC)
• Irrevocable for the year it is made but can be changed in subsequent years

The election is made by attaching a statement to the controlling domestic shareholder's US tax return for the year.

HTE Planning Implications

The HTE election is valuable where CFC income is subject to foreign tax above 18.9%, because excluding it from GILTI eliminates the inclusion without affecting the underlying foreign tax position.

However, excluding income from GILTI via the HTE has a trade-off: income that is excluded from GILTI may instead be subject to Subpart F treatment (which does not have an equivalent carve-out for high-taxed income in the same way), and may affect the calculation of other tax attributes.

More importantly, the HTE election for high-taxed income means that income which could otherwise benefit from the foreign tax credit "haircut" mechanism at corporate level is instead simply excluded — which may or may not be more beneficial depending on the group's overall tax position.

The Check-the-Box Election Strategy

One widely used GILTI planning technique for individual US shareholders is the "check-the-box" election under Treasury Regulation Section 301.7701-3, which allows certain foreign entities to elect their US tax classification.

A foreign limited liability company (or equivalent entity) that is classified as a corporation for its local law purposes can elect to be treated as a "disregarded entity" or "partnership" for US federal income tax purposes. If the entity is treated as a disregarded entity of the US individual owner, there is no CFC (since there is no separate entity to be "controlled") — and therefore no GILTI.

Caution: Electing disregarded entity status means that the foreign entity is treated as a branch of the US individual owner for US tax purposes. All the entity's income — including non-US income — is directly includible in the US owner's return. In many cases, the GILTI cost is lower than the branch income cost, making the check-the-box approach counterproductive. Detailed modelling is required.

The Section 245A Participation Exemption

US C-corporations that own 10% or more of a CFC can claim the Section 245A participation exemption to exclude from US tax 100% of the foreign-source portion of dividends from that CFC. This exemption was introduced by TCJA to create a participation exemption regime for US corporations.

The interaction between GILTI and Section 245A creates complexity. Income that is included in GILTI in the year it is earned (and US-taxed at 10.5% effective rate) can then be distributed as a dividend and potentially excluded under Section 245A — but only if it has not already been subject to a GILTI inclusion. The Previously Taxed Earnings and Profits (PTEP) rules under Section 959 prevent double taxation but require careful tracking of previously taxed amounts.

HPT Group advises US-connected business owners on GILTI planning, HTE election timing, CFC restructuring, and the interaction of the US international tax rules with the tax systems of the countries where business is conducted. US individual shareholders of offshore businesses face a uniquely complex planning environment — one where the difference between corporate and individual shareholder treatment alone can be worth hundreds of thousands of dollars annually. For a GILTI impact analysis for your structure, contact our international tax team or apply for a consultation.