Introduction and purpose
GILTI – found in IRC 951A – is one of the most problematic manifestations of U.S. citizenship taxation. It has caused huge compliance problems and costs for Americans abroad. The costs are composed of (1) the compliance costs of Form 5471 and (2) the possibility of the payment of U.S. taxes. All businesses understand that taxes are a cost of running a business. GILTI has imposed costs on the businesses run by Americans abroad that citizens of other countries do not have.
To put it simply:
As explained in the following short video done with Republicans Overseas Tax, GILTI imposes costs on U.S. citizens that citizens of other countries do not have.
Unsurprisingly, organizations representing Americans abroad have (independently of efforts to end citizenship taxation) worked to achieve relief from GILTI for Americans abroad. ACA (“American Citizens Abroad”) has consistently argued that Americans abroad should be exempt from the 2017 TCJA Transition Tax and GILTI provisions. For example:
“ACA continues its advocacy for the application of a de minimis ruling that would take out from the Transition Tax and GILTI regimes small businesses run by US citizens living and working overseas.”
https://www.americansabroad.org/tcja_and_gilti_regimes_us_businesses_overseas
The “Big Beautiful Bill” does NOT include any direct relief targeted for Americans abroad. Nevertheless, the “Big Beautiful Bill” includes some provisions that may be helpful to individual shareholders of CFCs (that include Americans abroad).
The purpose of this post is to identify three respects in which the Big Beautiful Bill impacts Americans abroad. I will refer to them as:
1. The Good – By extending the tax cuts, the GILTI income exclusion will remain at 50% and not be increased to 66 2/3% (as IRC 250 and the 2017 TCJA would require). This is relief for ALL shareholders of CFCs which therefore includes Americans abroad.
2. The Bad – Certain kinds of CFCs – with individual U.S. citizen shareholders – carrying on business in the U.S. Virgin Islands will have their income excluded from the GILTI inclusion. The Virgin Islands are a U.S. territory. There is no comparable provision for:
(a) U.S. citizens running small business corporations in foreign countries; or
(b) U.S. citizens running small business corporations in other U.S. territories
This is bad because it reflects an indifference to the special problems of Americans abroad.
For commentary see the following X.com thread …
3. The Ugly – Some (but not all) CFCs with C corporation shareholders are apparently receiving a “carveout” from GILTI inclusionsl The carveout is for certain kinds of income earned in the U.S. Virgin Islands. Washington Post reporter Jeffrey Stein suggests that this is the result of paid lobbying and not a conclusion based on sound tax policy. This allows for the inference that the application of U.S. tax laws, depends on your ability to “buy” the legislation you want.
For commentary, see the following X.com threads …
The “Big Beautiful Bill” And The Obfuscation Of What The Change Means
Changes to tax laws often appear in large Omnibus bills. Omnibus bills make it easier to hide the changes in tax laws. The ability to hide change is magnified in two ways.
First – Burying The Proposed Change In A Section That Appears To Describe Completely Unrelated Issues
The GILTI changes appear in SEC. 111110 Of The Big Beautiful Bill. Interestingly, SEC. 111110 appears under the following heading:
Part 2–Additional Tax Relief for American Families and Workers
It is quite obvious that the proposed GILTI changes have NOTHING to do with “Additional Tax Relief For American Families and Workers”.
Second – by including in the legislation ONLY the change in the language of the statute.
The language is meaningless without taking the time to go to the original legislation and parse the changes.
Therefore, in the following Appendixes, I have identified the text of the changes and incorporated those changes into the original legislation. This will allow (if you are interested) to see what the legislation will look like after the proposed changes are implemented.
Specifically:
Appendix A – Identifies the relevant text in the Big Beautiful Bill
Appendix B – Identifies the existing legislation (IRC 951A)
Appendix C – Incorporates Appendix A into Appendix B which results in the identification of what 951A (the GILTI rules) would be AFTER the changes proposed in SEC. 111110 of the Big Beautiful Bill
John Richardson – Follow me on X.com @ExpatriationLaw
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Appendix A – The GILTI Section In The Big Beautiful Bill – SEC. 111110 (a) and (b)
SEC. 111110. GLOBAL INTANGIBLE LOW-TAXED INCOME DETERMINED WITHOUT
REGARD TO CERTAIN INCOME DERIVED FROM SERVICES PERFORMED
IN THE VIRGIN ISLANDS.
(a) In General.–Section 951A(c)(2)(A)(i) is amended by striking
“and” at the end of subclause (IV), by striking “, over” at the end
of subclause (V) and inserting “, and”, and by adding at the end the
following new subclause:
“(VI) in the case of any specified
United States shareholder, any
qualified Virgin Islands services
income, over”.
(b) Definitions and Special Rules.–Section 951A(c)(2) is amended
by adding at the end the following new subparagraph:
“(C) Provisions related to qualified virgin
islands services income.–For purposes of subparagraph
(A)(i)(VI)–
“(i) Qualified virgin islands services
income.–The term `qualified Virgin Islands
services income’ means any gross income which
satisfies all of the following requirements:
“(I) Such gross income is
compensation for labor or personal
services performed in the Virgin
Islands by a corporation formed under
the laws of the Virgin Islands.
“(II) Such gross income is
attributable to services performed from
within the Virgin Islands by
individuals for the benefit of such
corporation.
“(III) Such gross income is
effectively connected with the conduct
of a trade or business within the
Virgin Islands.
“(ii) Specified united states
shareholder.–The term `specified United States
shareholder’ means any United States
shareholder which is–
“(I) an individual, trust, or
estate, or
“(II) a closely held C corporation
(as defined in section 469(j)(1)) if
such corporation acquired its direct or
indirect equity interest in the foreign
corporation which derived the qualified
Virgin Islands services income before
December 31, 2023.
“(iii) Regulations.–The Secretary shall
prescribe such regulations or other guidance as
may be necessary or appropriate to carry out
this subparagraph and subparagraph (A)(i)(VI),
including regulations or other guidance to
prevent the abuse of such subparagraphs.”.
(c) Effective Date.–The amendments made by this section shall
apply to taxable years of foreign corporations beginning after the date
of the enactment of this Act, and to taxable years of United States
shareholders with or within which such taxable years of foreign
corporations end.
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Appendix B – 951A Before The Big Beautiful Bill Amendments
(a) In General.–Section 951A(c)(2)(A)(i)
(2) Tested income; tested loss For purposes of this section—
(A) Tested income The term “tested income” means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of—
(i) the gross income of such corporation determined without regard to—
(I) any item of income described in section 952(b),
(II) any gross income taken into account in determining the subpart F income of such corporation,
(III) any gross income excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4),
(IV) any dividend received from a related person (as defined in section 954(d)(3)), and
(V) any foreign oil and gas extraction income (as defined in section 907(c)(1)) of such corporation, over
(ii) the deductions (including taxes) properly allocable to such gross income under rules similar to the rules of section 954(b)(5) (or to which such deductions would be allocable if there were such gross income).
(b) Definitions and Special Rules.–Section 951A(c)(2) is amended 951A(c)(2)
(2) Tested income; tested lossFor purposes of this section—
(A) Tested incomeThe term “tested income” means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of—
(i) the gross income of such corporation determined without regard to—
(I) any item of income described in section 952(b),
(II) any gross income taken into account in determining the subpart F income of such corporation,
(III) any gross income excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4),
(IV) any dividend received from a related person (as defined in section 954(d)(3)), and
(V) any foreign oil and gas extraction income (as defined in section 907(c)(1)) of such corporation, over
(ii) the deductions (including taxes) properly allocable to such gross income under rules similar to the rules of section 954(b)(5) (or to which such deductions would be allocable if there were such gross income).
(B) Tested loss
(i) In general
The term “tested loss” means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of the amount described in subparagraph (A)(ii) over the amount described in subparagraph (A)(i).
(ii) Coordination with subpart F to deny double benefit of losses
Section 952(c)(1)(A) shall be applied by increasing the earnings and profits of the controlled foreign corporation by the tested loss of such corporation.
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Appendix C – SEC. 111110 (a) and (b) Amendments Incorporated Into 951A
(a) In General.–Section 951A(c)(2)(A)(i) – Section 951A(c)(2)(A)(i) ….
(2) Tested income; tested loss For purposes of this section—
(A) Tested income The term “tested income” means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of—
(i) the gross income of such corporation determined without regard to—
(I) any item of income described in section 952(b),
(II) any gross income taken into account in determining the subpart F income of such corporation,
(III) any gross income excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4),
(IV) any dividend received from a related person (as defined in section 954(d)(3)), and
(V) any foreign oil and gas extraction income (as defined in section 907(c)(1)) of such corporation, over AND
“(VI) in the case of any specified
United States shareholder, any
qualified Virgin Islands services
income, over”.
(ii) the deductions (including taxes) properly allocable to such gross income under rules similar to the rules of section 954(b)(5) (or to which such deductions would be allocable if there were such gross income).
(b) Definitions and Special Rules.–Section 951A(c)(2) is amended 951A(c)(2)
(2) Tested income; tested lossFor purposes of this section—
(A) Tested incomeThe term “tested income” means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of—
(i) the gross income of such corporation determined without regard to—
(I) any item of income described in section 952(b),
(II) any gross income taken into account in determining the subpart F income of such corporation,
(III) any gross income excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4),
(IV) any dividend received from a related person (as defined in section 954(d)(3)), and
(V) any foreign oil and gas extraction income (as defined in section 907(c)(1)) of such corporation, over
(ii) the deductions (including taxes) properly allocable to such gross income under rules similar to the rules of section 954(b)(5) (or to which such deductions would be allocable if there were such gross income).
(B) Tested loss
(i) In general
The term “tested loss” means, with respect to any controlled foreign corporation for any taxable year of such controlled foreign corporation, the excess (if any) of the amount described in subparagraph (A)(ii) over the amount described in subparagraph (A)(i).
(ii) Coordination with subpart F to deny double benefit of losses
Section 952(c)(1)(A) shall be applied by increasing the earnings and profits of the controlled foreign corporation by the tested loss of such corporation.
“(C) Provisions related to qualified virgin
islands services income.–For purposes of subparagraph
(A)(i)(VI)–
“(i) Qualified virgin islands services
income.–The term `qualified Virgin Islands
services income’ means any gross income which
satisfies all of the following requirements:
“(I) Such gross income is
compensation for labor or personal
services performed in the Virgin
Islands by a corporation formed under
the laws of the Virgin Islands.
“(II) Such gross income is
attributable to services performed from
within the Virgin Islands by
individuals for the benefit of such
corporation.
“(III) Such gross income is
effectively connected with the conduct
of a trade or business within the
Virgin Islands.
“(ii) Specified united states
shareholder.–The term `specified United States
shareholder’ means any United States
shareholder which is–
“(I) an individual, trust, or
estate, or
“(II) a closely held C corporation
(as defined in section 469(j)(1)) if
such corporation acquired its direct or
indirect equity interest in the foreign
corporation which derived the qualified
Virgin Islands services income before
December 31, 2023.
“(iii) Regulations.–The Secretary shall
prescribe such regulations or other guidance as
may be necessary or appropriate to carry out
this subparagraph and subparagraph (A)(i)(VI),
including regulations or other guidance to
prevent the abuse of such subparagraphs.”.
(c) Effective Date.–The amendments made by this section shall
apply to taxable years of foreign corporations beginning after the date
of the enactment of this Act, and to taxable years of United States
shareholders with or within which such taxable years of foreign
corporations end.