Global Intangible Low-Taxed Income (GILTI) is one of the most misunderstood and overlooked international tax rules affecting U.S. business owners. Many small and mid-size business owners are shocked to learn they may owe U.S. tax on foreign company earnings even when no money is distributed. This guide explains how GILTI works, who it applies to, and why proactive planning is essential.
What Is GILTI?
GILTI is a tax regime that requires certain U.S. owners of controlled foreign corporations (CFCs) to include foreign earnings in current U.S. taxable income. It was designed to discourage profit shifting to low-tax countries.
Who Is Subject to GILTI?
GILTI generally applies to U.S. shareholders who own at least 10% of a foreign corporation that qualifies as a CFC. Ownership can be direct or indirect and often surprises business owners with international operations.
How GILTI Is Calculated (High-Level Overview)
GILTI is calculated by comparing foreign tested income to a deemed return on qualified business asset investment (QBAI). While the calculations are complex, the result may be taxable income without any cash distribution.
GILTI vs Subpart F Income
Subpart F targets specific categories of passive or mobile income, while GILTI applies more broadly to operating income. Both can result in current-year U.S. taxation, but the mechanics differ.
Why Small and Mid-Size Businesses Often Miss GILTI
Many small business owners rely on general CPAs unfamiliar with international rules. As a result, GILTI is frequently missed or incorrectly reported, leading to exposure.
Planning Strategies to Reduce GILTI Exposure
Depending on structure, elections, and foreign tax credits, it may be possible to reduce or eliminate GILTI liability. Proper planning must be done before filing.
Common GILTI Compliance Mistakes
Common errors include failing to identify CFC status, incorrect ownership attribution, and not coordinating GILTI with Form 5471 reporting.
When Professional Guidance Is Essential
GILTI involves complex calculations and planning decisions. Professional guidance is critical to ensure accurate reporting and optimized outcomes.
Final Thoughts from Alberto Luna Jr., CPA
GILTI has changed the landscape for U.S. owners of foreign businesses. In my experience, the biggest risk is not the tax itself, but failing to identify that GILTI applies at all. Early planning and proper reporting allow business owners to stay compliant while avoiding unnecessary tax exposure.
