Tag Archives: SEC. 111110

A #GILTI Carveout For INDIVIDUAL CFC Shareholders Of Certain Virgin Islands Corps

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Introduction and purpose:

The Big Beautiful Bill (“BBB”) Contains many surprises. Yesterday, I wrote a first post about a section of the BBB that addressed the application of the GILTI rules.

GILTI, Americans Abroad And SEC. 111110 Of The Big Beautiful Bill: The Good, The Bad And The Ugly

That post was largely based on an interesting expose in the Washington Post. This called attention to the fact that a provision in the BBB appears to provide a GILTI carveout to a U.S. C Corp. That expose failed to mention that the same section of the BBB also created an ongoing carveout for individual shareholders of Virgin Islands CFCs that appear to be “service oriented” businesses. So that the implications of this are clear, I will put it this way:

The BBB creates an opportunity for “United States Shareholders” of Controlled Foreign Corporations who are INDIVIDUALS – regardless of where they live in the world – to avoid the GILTI tax on certain kinds of income. Interestingly, U.S. citizens living abroad are still required to pay GILTI on the service oriented CFCs in their country of residence. There comes a certain point (we are well past it) where there should be an acknowledgement (even from the tax compliance community) that the U.S. tax system is deserving of nothing more than scorn and ridicule. It’s quite obvious that the “service businesses” owned by U.S. citizens abroad are exactly the same kinds of businesses that are based in the Virgin Islands and owned by U.S. residents.

Unpacking the proposed legislation

“(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.”.

What does this mean? What would be an example of a CFC that would qualify?

Let’s break this down. Imagine a tax preparation firm owned by a resident of the State of New York. Let’s imagine that he incorporates a Virgin Islands Corporation. The U.S. resident is the sole shareholder. The Virgin Islands Corporation is clearly a CFC. The purpose of the corporation is to provide tax preparation services for Americans abroad. He names the business “Virgin Islands Tax Prep”.

He then visits the Virgin Islands for the purpose of hiring and training individuals who are residents of the Virgin Islands. He trains them in the art of U.S. tax return preparation (including GILTI), forms and penalty abatement. They are being trained for the purpose of being employed by “Virgin Islands Tax Prep”.

The business is a spectacular success. Let’s consider whether “Virgin Islands Tax Prep” qualifies for the GILTI carveout.

Again, here are the rules:

“(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.

JR Commentary: Clearly “Virgin Islands Tax Prep” is formed under the laws of the Virgin Islands. The gross income of the company is solely payment for the labor and personal services required to file U.S. Expat Tax Returns.

“(II) Such gross income is attributable to services performed from within the Virgin Islands by
individuals for the benefit of such corporation.

JR Commentary: The whole purpose of going to the Virgin Islands to hire and train tax preparation employees is to prepare tax returns in the Virgin Islands for the benefit of “Virgin Islands Tax Prep”.

“(III) Such gross income is effectively connected with the conduct of a trade or business within the Virgin Islands.

JR Commentary: Obviously the gross income is compensation for services performed by a Virgin Islands company from inside the Virgin Islands.

Notice also that competitors of “Virgin Islands Tax Prep” in any other part of the world will pay the GILTI tax.

Now, close your eyes and substitute for “Virgin Islands Tax Prep” any other kind of service business. Also, reflect on the fact that Americans broad will pay GILTI tax on CFC service income in their country of residence. But, U.S. residents can avoid the GILTI tax by incorporating a company in the Virgin Islands.

My point:

The services businesses of CFCs located ANYWHERE should be exempt from GILTI!

Why is the Virgin Islands the only “Possession” that receives this benefit?

John Richardson – Follow me on X.com @Expatriationlaw

GILTI, Americans Abroad And SEC. 111110 Of The Big Beautiful Bill: The Good, The Bad And The Ugly

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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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