GILTI applies to any non-U.S. corporation where over 50% of the combined voting power or value of shares is owned by U.S. persons who hold 10% or more of the corporation’s shares. U.S. attribution rules may result in the attribution of shares to meet these tests.
GILTI is the corporation’s net income minus a calculated rate of return from its tangible assets. The excess will be taxable income on qualifying U.S. shareholders’ US tax returns. GILTI will apply most significantly to corporations that have limited tangible assets such as professional corporations, like doctors, lawyers and engineers but also to others with a similar asset profile. GILTI does not include corporate income already attributable to U.S. shareholders, so-called “Subpart F” income.
GILTI will diminish but not necessarily eliminate the value of U.S. persons owning a Canadian corporation to conduct business in Canada. Despite GILTI, using a Canadian corporation may provide limited liability protection, Canadian income tax deferral, and income splitting opportunities. However, GILTI will result in an acceleration of U.S. tax without a matching Canadian tax. Without effective tax planning, taxpayers could experience tax rates up to 85% on their corporation’s income which may eliminate all the tax benefits of using a Canadian corporation.
Strategies and solutions exist to help minimize the high tax rates and potential double taxation including changes to owner compensation, certain U.S. tax elections, renunciation of U.S. citizenship, transfer of shares, change of entity and other alternatives that may eliminate or minimize the impact of the new GILTI rules.
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