GILTI Explained Without the Tax Jargon: The Tax You May Owe on Money You Never Received

Imagine your company in Mexico earns $500,000. You leave every dollar in the business, receive no dividend, and never transfer money to the United States. Then your CPA tells you that some of that income may still show up on your U.S. tax return. How is that possible?

Imagine this.

You own 100% of a successful company in Mexico. It has employees, a warehouse, equipment, inventory, customers, bank accounts, and a Mexican accountant.

After expenses, the company earns the equivalent of $500,000 and pays Mexican income tax. You leave the remaining profit in the company because you want to expand next year.

You personally receive $0. There is no dividend.

Then your U.S. CPA tells you: “We need to calculate GILTI.”

Your first reaction is probably: “Calculate tax on what? I didn't receive anything.”

Welcome to GILTI. It is one of the most confusing concepts for U.S. taxpayers who own businesses outside the United States. But you do not need to become an international tax expert to understand the basic idea.

First: What Does GILTI Stand For?

GILTI stands for Global Intangible Low-Taxed Income.

The word “intangible” makes many business owners assume the rule only applies to companies that own patents, software, trademarks, technology, or intellectual property. That is not the right way to think about it.

A transportation company, manufacturer, hotel, restaurant group, warehouse, medical business, distributor, or construction company can potentially be affected.

A practical way to think about GILTI is: a U.S. international tax regime that can cause certain U.S. owners of foreign corporations to recognize foreign corporate earnings before receiving the cash.

Why Would the United States Do This?

Imagine a U.S. taxpayer owns a foreign corporation that earns $1 million every year but never distributes the money.

If U.S. tax always waited for a dividend, certain foreign corporate earnings could potentially remain outside the shareholder's current U.S. taxable income for years.

Congress created anti-deferral regimes to address this. GILTI is one of them, and Subpart F is another.

The basic business concept is simple: sometimes the U.S. tax system does not wait for the foreign corporation to write you a dividend check.

Before GILTI, We Need a CFC

GILTI is closely connected to the Controlled Foreign Corporation, or CFC, rules.

A CFC is not a special corporation you form. It is a U.S. tax classification that arises because of ownership.

Generally speaking, a foreign corporation can be a CFC when more than 50% of its stock, measured under applicable vote or value rules, is owned by qualifying U.S. shareholders under the relevant ownership rules.

If you are a U.S. citizen and own 100% or 60% of a Mexican corporation, the CFC rules should immediately be considered. The same can happen when multiple qualifying U.S. shareholders collectively own enough of the company.

This is why your CPA needs the complete shareholder list.

Being a CFC Does Not Mean the Company Did Anything Wrong

CFC is simply a U.S. tax classification.

Your company can be completely legitimate, profitable, paying all of its Mexican taxes, operating a real business, and employing hundreds of people—and still be classified as a CFC.

The classification tells us which U.S. international tax rules need to be considered.

Now Let's Put Numbers to It

Imagine your Mexican company has $3,000,000 of revenue and $2,500,000 of operating expenses, leaving $500,000 of profit.

Assume it pays Mexican income tax and retains the remaining cash. You take no dividend.

Your instinct might be: personal cash received, $0; personal U.S. taxable income from the company, $0.

But if the company is a CFC, its earnings may need to go through a GILTI calculation. That calculation can potentially produce an amount included in your U.S. taxable income even though the cash is still sitting in the company's Mexican bank account.

Is the Entire $500,000 Automatically GILTI?

No.

GILTI is not simply foreign company profit multiplied by your ownership percentage.

The actual calculation involves specific tax concepts and, depending on the applicable law and tax year, can involve tested income, tested losses, deductions, foreign income taxes, business assets, interest expense, ownership periods, multiple CFCs, and other adjustments.

The purpose here is not to teach you to prepare Form 8992 by hand. It is to explain why your CPA needs detailed information about the foreign company.

“The company made $500,000” may not be enough to complete the U.S. calculation.

What Is “Tested Income”?

Tested income is one of the building blocks of the GILTI calculation.

Very broadly, certain income and deductions of a CFC are analyzed under specific rules to determine tested income or tested loss.

Not every dollar appearing as book income necessarily receives identical treatment for GILTI purposes.

The foreign financial statements are the starting point. Then the U.S. international tax analysis begins.

What If You Own Two Foreign Companies?

Imagine Company A has $600,000 of tested income and Company B has a $200,000 tested loss.

Does the loss matter? Potentially, yes.

Tested income and tested losses can interact under the applicable rules.

Now imagine you own five CFCs—three profitable, one breaking even, and one with a large loss. The calculation becomes considerably more involved.

This is why your CPA needs to know about all of your foreign companies.

“But I Paid 30% Tax in Mexico.”

This is the question almost every Mexican business owner asks.

The U.S. tax system has foreign tax credit mechanisms intended to mitigate certain double-tax situations, but ownership structure matters.

An individual U.S. shareholder and a domestic U.S. corporation can have different tax treatment when they own a CFC. The treatment of foreign taxes in connection with GILTI can also be subject to special rules and limitations.

So the answer is not automatically “You paid Mexican tax, so there is no U.S. tax,” nor is it automatically “You pay full tax twice.”

The actual answer requires a calculation.

Why Individuals Can Face an Awkward Result

Imagine you personally own the Mexican company rather than owning it through a U.S. corporation.

Certain tax benefits available in a domestic corporate context may not automatically apply in the same way to an individual shareholder.

This is where Section 962 becomes an important planning conversation.

Section 962 in Plain English

Section 962 allows certain individual U.S. shareholders to make an election that changes how certain CFC income inclusions are taxed for U.S. purposes.

In simplified terms, it can allow an individual shareholder to access aspects of the tax treatment that would apply if a domestic corporation were recognizing certain CFC income.

That can matter because of the tax rate applied to certain inclusions, certain deductions, and the treatment of certain foreign taxes.

It can sometimes produce a significantly different current-year result—but there is an important warning.

Section 962 Is Not Free Money

Imagine your CPA calculates two alternatives: no Section 962 election and a Section 962 election.

The election produces much lower U.S. tax this year. Easy decision, right?

Not necessarily.

A Section 962 election can affect the tax treatment when the Mexican company eventually distributes its earnings.

We therefore need to consider not only which option produces the lowest tax today, but also when the company will distribute money, whether profits will remain invested, the shareholder's long-term plans, potential sale or ownership changes, and future U.S. tax status.

International tax planning requires looking forward.

Let's Imagine Two Business Owners

Both own identical Mexican corporations. Both companies earn the same amount and pay the same Mexican tax.

Owner A expects to distribute most earnings every year.

Owner B plans to reinvest profits for ten years to expand the business.

Should they automatically make the same Section 962 decision? Not necessarily.

Their long-term distribution plans are different. The current-year tax calculation is only one part of the decision.

What Happens When the Company Finally Pays a Dividend?

Suppose your CFC earns money in 2026 and certain income is recognized on your U.S. return, but the company keeps the cash.

In 2029, the company finally distributes the money.

Now we need to ask whether some of those earnings were already taxed to you in the United States.

This is where previously taxed earnings and profits, commonly called PTEP, becomes important.

The tax system needs a way to track earnings that were previously included in U.S. income. The concept makes sense; the accounting can become complicated.

Why PTEP Records Matter

Imagine your foreign company has been a CFC for 12 years.

Some income was GILTI, some was Subpart F, some earnings were distributed, some were retained, foreign taxes changed, ownership percentages changed, and Section 962 elections may have been made in certain years.

Now the company distributes $1 million.

Your CPA needs historical records. Without them, determining the proper U.S. treatment becomes much harder.

Each year's international tax reporting helps build the history needed for future years.

What Is Form 8992?

When GILTI applies, you may hear about Form 8992.

Form 8992 is used to calculate a U.S. shareholder's GILTI inclusion under applicable rules. The information often begins with the foreign corporation's reporting on Form 5471 and its relevant schedules.

A simplified flow is: foreign-company financial information → Form 5471 reporting → CFC tested income and related information → Form 8992 / GILTI calculation → U.S. tax return.

The exact forms and calculations depend on the taxpayer.

What Does Form 5471 Have to Do With This?

A lot.

Form 5471 is one of the central international information returns for certain U.S. owners of foreign corporations.

For a CFC, it can contain information necessary for the broader U.S. international tax calculation, including income, balance-sheet information, ownership, foreign taxes, related-party transactions, earnings and profits, Subpart F, tested income, previously taxed earnings, and other CFC information.

Preparing it properly can require substantially more work than simply entering the company's name and address.

Your Mexican Financial Statements Are the Starting Point

A balance sheet, income statement, trial balance, and Mexican annual tax return are an excellent start.

But the U.S. CPA may need additional details: which taxes were income taxes, related-party transactions, shareholder loans, dividends, payments to related U.S. companies, ownership changes, fixed assets, and transactions with other foreign companies owned by the shareholder.

International tax requires understanding what is behind the numbers.

Currency Conversion Adds Another Layer

Your Mexican company's books may be maintained in pesos while your U.S. tax return is reported in dollars.

Applicable amounts therefore need to be translated using appropriate exchange-rate rules.

This is another reason international tax preparation is not simply attaching the Mexican tax return to Form 1040. The foreign financial information has to be translated into the U.S. reporting system.

What If the Company Has a Lot of Equipment?

Historically, qualified business asset investment, often called QBAI, has been relevant to the GILTI framework.

However, international tax law changes. The rules applicable to the particular tax year must be checked rather than assuming a calculation used several years ago still applies exactly the same way.

The practical takeaway is simple: use the rules for the actual tax year being prepared. Do not rely on an old spreadsheet or an old article.

What If My Company Has a High Foreign Tax Rate?

Business owners often assume, “Mexico isn't a tax haven, so GILTI shouldn't matter.”

That is not necessarily how the analysis works.

The foreign tax rate can be important, and high-tax rules or elections may need to be considered depending on the income and applicable tax year.

But operating in a country with a substantial corporate income tax does not mean CFC reporting can simply be ignored.

International compliance and ultimate U.S. tax liability are separate questions.

GILTI Is Not Just a Tax-Return Problem

Imagine it is November and your company has had a great year.

That is a much better time to discuss U.S. consequences than the following April.

Before year-end, your CPA can begin analyzing projected foreign income, foreign taxes, ownership changes, potential distributions, other CFCs, relevant elections, U.S. income, and long-term plans for foreign earnings.

Once December 31 passes, many facts are already fixed.

Don't Make a Business Decision Solely for GILTI

Tax planning should support the business—not control every business decision.

Distributing all of the company's cash may be a terrible decision if the business needs it for inventory and payroll. Changing ownership percentages can create control, estate planning, legal, and foreign-tax consequences.

The goal is to understand the tax consequences of business decisions and plan intelligently around them.

The Question You Should Ask Your CPA

Instead of asking only, “Do I owe GILTI?” ask, “I own a foreign company. Can you show me how the company's earnings affect my U.S. tax return?”

Then ask what happens if the money stays in the company, what happens if it is distributed, how foreign taxes affect the calculation, whether Section 962 should be considered, and what happens when the money is eventually taken out.

Those questions turn GILTI from a mysterious acronym into an actual planning conversation.

A Simple Way to Remember GILTI

You do not need to remember every formula.

Remember this scenario: a foreign company earns money; you are a qualifying U.S. shareholder; the company may be a CFC; the company keeps the money; and the United States may still require you to recognize certain income.

That is the basic problem GILTI creates for many foreign business owners. Everything after that is calculation and planning.