The Global Entrepreneur's Guide to Efficient GILTI Taxation

If you own a global business, staying competitive in international tax is a crucial source of competitive advantage.

Businesses that develop tax-efficient global structures can often cut their global taxes to half or less of what they would otherwise owe while deferring certain tax liabilities and reducing strategic risks.

Of course, sustainable businesses must remain in careful compliance with the law, and global businesses face a maze of regulatory challenges when managing international taxes.

Learning to navigate the global tax system effectively, however, can significantly reduce your tax expenses while opening doors to new opportunities.

Until 2018, going offshore was relatively easy.

U.S. business owners could simply open a corporation in the British Virgin Islands, Panama, the UAE, or dozens of other countries with either territorial tax systems or no corporate taxation to, in most cases, legally avoid most forms of immediate U.S. tax liability until profits were repatriated.

In 2018, however, the most significant change to U.S. tax law since 1986—known as the Tax Cuts and Jobs Act—came into effect, introducing an entirely new basis of taxation for U.S. citizens on what the law defines as global intangible low-taxed income.

The headline summary of GILTI taxation is an attempt to impose a minimum global tax on both individual and corporate shareholders of foreign companies. Effective federal GILTI rates vary from zero percent to 40.8 percent or higher depending on how earnings are structured.

Most notably, the tax is due immediately for U.S. shareholders regardless of whether dividends are actually distributed. In return, the law eliminated a second layer of taxation at the corporate level that U.S. companies with subsidiaries in foreign countries formerly had to pay.

One of the most significant elements of the GILTI tax law to keep in mind is that the rate and basis of your tax liability varies widely depending on what type of corporation you earn income through.

If you own your foreign corporation through a U.S. C-corporation, your GILTI tax rate is based on:

ordinary corporate tax rates of 21 percent

minus a credit for 80 percent of foreign corporate taxes paid

minus a 50 percent deduction known as the Foreign Derived Intangible Income deduction (37.5 percent starting in 2026)

Therefore, if your foreign-sourced income originates from a jurisdiction with no corporate taxes, your base GILTI rate before deductions is 10.5 percent. If you do pay foreign corporate taxes, the 80 percent foreign tax credit means you owe no GILTI tax if the foreign corporate tax rate is 13.125 percent or higher.

It's critical to note that only C-corporations can claim the deductions and credits outlined in the previous section, in addition to most of the other advantages the TCJA affords. If you own your foreign corporation in your own personal name or through an LLC, S-corporation, trust, or other entity that's not considered to be a C-corporation, GILTI tax rates can be astronomical unless you make significant tax moves.

To understand this issue, we first need to have a brief look at the history of the GILTI tax law:

When the TCJA first came into effect, business owners were panicked because, among other issues, the law was worded in a way that made it seem as though the aforementioned deductions could only be claimed by actual C-corporations, not individuals or entities electing to be treated as C-corporations for tax purposes by the IRS.

To make matters worse, the GILTI tax law is very clear that non-C-corporations have to pay GILTI at personal income tax rates of 37 percent plus the 3.8 percent net investment income tax.

This interpretation would have been highly irregular in U.S. tax law. Given the astronomical personal income tax rates shareholders other than C-corporations would have to pay on income that was formerly untaxed until distributions were made, there was also a lot riding on whether this potential interpretation would stand.

Thankfully, federal courts ruled that any individual or entity taxed as a C-corporation qualified for the deduction, and the IRS accepted this ruling. There are rare exceptions, such as if you do business in sanctioned nations or certain situations where attempts are made to tax an array of foreign entities differently, but in most ordinary cases, filing form 8621 with the IRS to have yourself or your U.S. holding company taxed as a C-corporation is sufficient to have your foreign earnings taxed at the much lower rate.

In addition to the deductions outlined earlier in this article, the TCJA provides businesses with a very substantial exemption on what it calls Qualified Business Asset Investments.

At least in theory, GILTI is intended to have a significantly reduced impact on conventional capital-intensive foreign businesses earning income on the basis of their physical presence and physical property, such as factories, restaurants, airlines, or real estate businesses.

As a result, TCJA introduced the QBAI exemption in an attempt to limit penalties on earnings derived from tangible property. In effect, therefore, by strategically increasing QBAI, you can greatly reduce your GILTI tax liability.

GILTI is calculated by subtracting a corporation's foreign income by an automatic 10 percent deemed return on its physical business assets, known as QBAI.

Therefore, if your corporation makes $1 million in a year while owning $10 million worth of equipment and real estate, you would not owe any GILTI tax because the income of $1 million would be reduced by your corporation's 10 percent deemed return on its $10 million in assets.

The QBAI exemption applies regardless of whether assets are leveraged, so you get the benefits of this exemption even if you buy assets with loans featuring little-to-no down payment.

There are some potholes to avoid when seeking to maximize your QBAI exemption, such as anti-abuse and anti-erosion rules, but with proper planning and structuring, the strategic use of tangible assets can reduce or eliminate GILTI tax liability, including for companies whose core business involves intangible products or services.

Unlike in most areas of the tax code, the 80 percent foreign tax credit for GILTI purposes cannot be carried forward or backward between tax years, making timing especially critical when it comes to GILTI tax planning.

Of course, it's critical to align income recognition with foreign tax payments to maximize credits in a given year. You'll also want to carefully time capital expenditures to account for them when income is earned.

As a result, accounting method changes to accelerate deductions or defer income are often an important consideration for companies seeking to minimize GILTI taxation.

While GILTI's foreign tax credit and QBAI deduction are valuable tools, there's another strategy that can be even more beneficial in certain scenarios: the high-tax exception.

This lesser-known provision offers an alternative approach to minimizing your GILTI tax liability. It functions as a fallback total deduction that's especially useful for businesses in nations with relatively high corporate taxes or when carrying income forward or backward.

The high-tax exception allows you to exclude certain income from GILTI altogether. Specifically, if your foreign income is subject to an effective tax rate of 18.9 percent or higher, the high-tax exception allows you to exclude all of this income from GILTI altogether without relying on foreign tax credits, FDII, or other strategies.

Using this exception might seem counterintuitive at first. After all, why would you want to give up the 80 percent foreign tax credit? The answer lies in the nuances of how GILTI is calculated and how it interacts with other parts of the tax code.

There are several situations where the high-tax exception can be more advantageous than relying on foreign tax credits:

It can simplify your tax calculations significantly: In most cases, your GILTI rate is automatically zero percent as long as you're paying an effective corporate tax rate of at least 18.9 percent to foreign governments.

It may help you avoid limitations on foreign tax credits: Expense allocation rules can often create a mismatch in how foreign tax credits are calculated, so there can be certain years where using the high-tax exception as a fallback can be more advantageous than using other deductions.

Reducing state GILTI taxes: In states with higher corporate tax rates and unfavorable GILTI tax rules, state GILTI rates are often effectively higher than federal rates due to a lack of recognition for many TCJA-related deductions. However, nearly all of these states recognize the high-tax exception.

Dealing with the complexities of GILTI taxation is a serious challenge for small and medium-sized U.S. businesses and their owners when operating globally. While the rules can seem daunting, they also present opportunities for savvy business owners to optimize their global tax strategies.

By leveraging strategies such as C-corporation structuring, strategic use of QBAI, and careful timing of income recognition and expenditures, you can substantially reduce your GILTI tax burden.

It's important to remember, however, that tax planning is not a one-size-fits-all endeavor. The global tax landscape is constantly evolving, and there are other considerations that may take precedence over GILTI tax structuring, such as:

U.S. rules on Effectively Connected Income

the structuring of earnings from domestic U.S. operations, and

rules impacting liability for foreign corporate or dividend taxes.

Staying compliant while minimizing tax liability requires ongoing attention and expertise.

As you move forward, consider working closely with tax professionals who specialize in international taxation. They can help you navigate the nuances of GILTI and develop a tailored strategy that aligns with your business goals and global operations.

Ultimately, effective GILTI planning is not just about reducing taxes—it's about creating a sustainable, compliant global business structure that positions your company for long-term success in the international marketplace.

By mastering these strategies, you can turn what might seem like a tax burden into a competitive advantage, allowing your business to thrive on the global stage.