Whose GILTI Is It Anyway?

After the Supreme Court ruling in the Moore case, it seems apparent GILTI is here to stay. U.S. taxpayers will continue to have their pro rata portion of net CFC-tested income included in their U.S. tax returns. In cases in which there are both direct and indirect 10% shareholders, the question is, “whose GILTI is it anyway?”. In other words, if both an ultimate U.S. shareholder and a U.S. corporation (in a non-affiliated group structure) it owns are in the same chain of ownership of a CFC, which one has to report the GILTI inclusion?

Under Internal Revenue Code Section 951A, a U.S. Shareholder (a U.S. person who owns at least 10% of a CFC) who “owns by means of Section 958(a) stock of a controlled foreign corporation” is required to include their proportionate share of net tested income or loss. Section 958(a) provides that such ownership may be directly or indirectly through other foreign corporations, partnerships, trusts, or estates. This effectively means a CFC’s first U.S. shareholder must include their proportionate amount of tested income and loss and other elements to calculate its GILTI inclusion.

Consider Figure 1, where USP 1 and USP 2 are United States persons (not in a consolidated return group) and CFC 1 and CFC 2 are foreign corporations. Assuming 100% ownership throughout the chain, USP 2 would include the net tested income or loss of both CFC1 and CFC2 for any given year. USP1 would not be required to include any of the tested income in this structure.

Section 958(a) does not require indirect ownership through a foreign entity to be through a CFC. Consider Figure 2, where USP 1 is a United States Person, FP 1 and FP 2 are unrelated foreign persons, and FC1, FC2, and FC3 are foreign corporations. Even though FC1 and FC2 are not CFCs, USP1 owns their proportionate shares of FC3. Because FC3, through direct and indirect ownership, is owned over 50% by a U.S. person, it is a CFC. Accordingly, in this structure, USP1 only has an inclusion related to FC3.

As noted, GILTI is here to stay. However, we always want to get the “right man,” in this case, the U.S. Person.

McGuire Sponsel will continue to monitor this case and provide updates when available. Contact our Global Business Services team with questions on the Moore case or any other international tax issue.