The GILTI High-Tax Exception was first introduced in the proposed regulations that were issued a little over a year ago. This exception allows a U.S. taxpayer that is a U.S. shareholder in a CFC to elect to exclude income earned by a CFC if the income is taxed at a rate of more than 18.9% (which is 90% of the 21% corporate tax rate). The technicalities of how the calculation to determine if the CFC’s income is taxed at more than 18.9% are addressed in the proposed and now final regulations.
The good news is that the High-Tax Exception is now available for taxpayers to reduce their GILTI tax liability. The better news, which many had been hoping for, is that these final regulations allow taxpayers to make this election retroactively to tax years beginning after December 31, 2017. (Note some restrictions apply where the U.S. taxpayer is not the only U.S. Shareholder for that particular CFC).
And even more good news is the ability to make this election on an annual basis. While the proposed regulations made the election binding for five years locking a taxpayer in to a specific tax position, the final regulations give the taxpayer more flexibility.
The final regulations also contain additional guidance on calculating the High-Tax and technicalities for making the actual election.