On 23 July 2020, the Treasury Department and the IRS published final regulations under Section 951A providing guidance with respect to the high-tax exception, which excepts certain ‘high-taxed’ income from being otherwise taxed as “Global Intangible Low-Tax Income” (GILTI). The final regulations maintain the same foreign tax rate threshold to be eligible for a high-taxed income exclusion while simultaneously modifying operational rules that may affect a U.S. individual’s decision to pursue the exclusion. In combination with these final regulations, Treasury and the IRS issued new proposed regulations conforming aspects of the Subpart F high-tax exception with the newly finalized GILTI high-tax exception, and providing for a single high-tax exception election under Section 954(b)(4).
Similar to the Subpart F High-Tax Exception, individual and corporate taxpayers may exclude from GILTI certain high-taxed income earned by a CFC. For this purpose, GILTI is deemed to be high-taxed if it is subject to an effective foreign tax rate in excess of 90% of the maximum U.S. corporate income tax rate. With a current U.S. corporate income tax rate of 21%, this equates to an 18.9% threshold for high-taxed income.
As compared to the proposed regulations, the final regulations offer more flexibility by allowing U.S. shareholders to elect into the high-tax exception on an annual basis. Generally, this applies for tax years beginning on or after July 23, 2020. This permits taxpayers to apply the election retroactively to any CFC tax year beginning after December 31, 2017, if they apply the final regulations consistently to each year for which the election is made.
U.S. individuals with interests in CFCs should discuss these changes with their U.S. tax advisors to better understand how to optimise the tax efficiency of their structures under these new regulations.