This document summarizes a presentation by William Skinner on new tax rules under the Tax Cuts and Jobs Act that impact individual owners of controlled foreign corporations (CFCs). Key changes include the introduction of a global minimum tax called GILTI on the foreign income of CFCs, which is currently taxed at ordinary rates to US shareholders. GILTI applies to the net income of CFCs in excess of a 10% return on depreciable tangible assets. The presentation provides examples of how GILTI is calculated and discusses the impact of making an election under Section 962 to be taxed at corporate rates on GILTI income. It also notes some advantages of GILTI for US corporate shareholders,

1. Presented as part of Strafford Webinar
February 2018
By William Skinner
GILTI and Other New Rules for
Individual Owners of Controlled Foreign Corporations (CFCs)

2. William R. Skinner, Esq. is a tax partner with
Fenwick & West LLP, in Mountain View, CA.
He graduated from Stanford Law School and
was recognized as a Rising Star in Tax by
California Super Lawyers. He focuses his
practice on U.S. international corporate
taxation, M&A taxation and tax controversies.
William R. Skinner
Partner, Tax Group
Phone: 650.335.7669
Fax: 650.938.5200
E-mail: wrskinner@fenwick.com
Emphasis:
International Tax
Tax Planning
Tax Controversy
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3. Tax Reform’s New Regime for Cross-Border Income
 Tax Reform Act revolutionizes the taxation of foreign income of U.S.
resident individuals and entities in several respects:
• Global minimum tax on “GILTI” of controlled foreign corporations (CFCs)
• Significant deduction for U.S. C corporations earning GILTI and certain
export income (“FDII”)
• Base Erosion & Minimum tax
• New Foreign Tax Credit Baskets and calculations
 The new rules were designed with U.S. multinational corporations in
mind and thus may not achieve their intended purposes when applied
to non-corporate shareholders of CFCs.
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4.  Tax consequences to an individual U.S. person of holding foreign assets
through a CFC have changed dramatically as a result of Tax Reform.
Typology of Tax Reform by Entity
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U.S.
Citizen
Foreign Corp
(“CFC”)
100%
Foreign Corp
(“Non-CFC”)
20%
Foreign
Disregarded Entity
(DRE)
S Corp or
Partnership
U.S. HoldC
(“C” Corp)
Foreign
Disregarded Entity
(DRE)
Foreign Corp
(“CFC”)

5. Old Rules (pre-2018) New Rules (Post-TCJA)
Taxation of “Subpart F income” of a
CFC
Current tax at ordinary rates Same
Taxation of non-Subpart F income of
a CFC
Non-taxed until repatriated, then taxed as
ordinary income (OI) or qualified dividend
income (QDI)
Current tax at ordinary rates on
“GILTI” portion of income. Remainder
taxed as provided under old law.
Treatment of a non-CFC’s Income Not taxed until repatriated; then taxed as
OI / QDI.
Possible application of PFIC rules.
Same
Treatment of Foreign Check-the-box
/ Flow-through entity
Taxed currently at ordinary rates, subject
to a foreign tax credit
Same, except foreign taxes attributable
to “branch” income are allocated to a
separate Sec. 904 basket
Sale of a Stock in a Foreign
Corporation
Capital gain, except that Section 1248, in
case of CFC, may treat gain as a deemed
dividend that is OI / QDI
Same
Tax Reform Impact’s on Non-Corporate U.S. Shareholders –
Comparison of Old Law vs. New Law
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6.  Direct foreign business activities remain subject to worldwide taxation
subject to a foreign tax credit, as under pre-2018 law.
 A new FTC basket applies to income “attributable to” foreign branches,
as provided under regulations. Sec. 904(d)(2)(J).
 Foreign business income generally is not eligible for the 20% deduction
for pass-through income because of limitation to income effectively
connected with a U.S. trade or business. Section 199A(c)(3)(A)(i).
• However, income from providing sales and services to foreign customers
as part of a U.S. trade or business may qualify for the reduced rate of tax
on pass-through income.
Ownership of a Foreign Branch / Flow-through Entity
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7.  Status quo of current law is generally maintained. Other than limited
exception for dividends paid by certain “inverted companies,” qualified
dividend income (QDI) rules allowing for long-term capital gains
treatment remain unchanged.
 PFIC rules remain unchanged by the TCJA, except for revisions to the
“active insurance” exception.
 Note – participation exemption of Section 245A does not apply to
foreign corporation dividends unless received by a 10% domestic
corporate shareholder.
Ownership of a non-CFC Foreign Corporation
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8.  Individuals and other non-corporate United States shareholders of
CFCs continue to be subject to the existing subpart F rules, including
Section 956, Section 1248 and ordinary income treatment of “subpart
F income.”
 However, U.S. shareholders of CFCs are also subject to the new
minimum tax on “global intangible low-taxed income” or GILTI on a
current basis.
 Unlike subpart F, which is limited to certain categories of income, GILTI
applies to essentially of all of a CFC’s income in excess of certain
formula-based thresholds.
Ownership of a Controlled Foreign Corporation (CFC)
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9.  Each of the above CFCs income is likely not subpart F income, but would constitute GILTI to
the extent it exceeds the “net deemed tangible income return.”
 GILTI is currently taxable to U.S. Shareholder as earned by each CFC, regardless whether cash
is distributed to the US Shareholder.
Types of Income That May Be Considered GILTI
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U.S. Shareholder
CFC-2
100%
CFC-3
100%
CFC-1
100%
Manufactures Inventory for
Sale to Unrelated Parties
Provides Services To Third Parties
in Country of Organization
Sells Property Used in an Active
Business to an Unrelated Person

10.  Like income earned from a Partnership or Check-the-box entity, GILTI is
subject to current taxation to U.S. Shareholder at ordinary rates as
earned by the entity.
 However, U.S. shareholder may be worse off than in case of flow-
through taxation because:
• Generally, no foreign tax credit is available to the individual shareholder
for taxes imposed on the CFC (but see Section 962 discussed below)
• No flow-through of losses or carryforward of losses is available
• No flow-through of capital gain character of income recognized by the
CFC is available (i.e., all GILTI is ordinary income)
GILTI is a Modified (and Disadvantaged) Version of Flow-through
Taxation
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11. Section 951A adds GILTI as a new form of income included under Subpart F
mechanics
 Each United States shareholder includes its pro rata share of GILTI,
defined as the pro rata share of the aggregate “net tested income” of
CFCs in excess of the “net deemed tangible asset return.”
 Net tested income equals all gross income of the CFC, minus allocable
expenses, excluding the following: (1) subpart F income; (2) effectively
connected income; (3) income excluded from subpart F by the high-
taxed exception; (4) dividends received from a related person; and
(5) foreign oil & gas extraction income.
What is GILTI?
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12.  The net deemed tangible income return equals 10% of the CFC’s
qualified business asset investment (“QBAI”), minus the amount of the
CFC’s interest expense allocated to reduce tested income.
 QBAI equals the tangible property of the CFC that is used in a trade or
business and subject to an allowance for depreciation under Section 167
of the Code.
• In case of assets that produce both tested income and non-tested income,
e.g., subpart F income, the QBAI is determined by making an allocation of
basis between the two uses of the property.
What is GILTI Cont.’?
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13.  CFC’s Net Tested Income, after allocation of expenses, including taxes, equals
$65.
 CFC’s QBAI equals $200. CFC’s net deemed tangible income return (assuming
no CFC-level debt) is $20.
 U.S. Shareholder’s GILTI inclusion is $45. Absent Section 962, U.S. shareholder
owes $16.65 of Fed tax ($45 @ 37% rate).
Example of a GILTI Calculation – Case 1
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CFC
(Manufacturer)
Assets (Tax Basis) – PP&E $200
Inventory $30
Patent $50
Net Income $80
Foreign Tax <$15>
E&P $65
U.S.
Shareholder
Assume CFC Earns Solely Non-Subpart F Income
100%
U.S. Shareholder Owns Only One CFC

14.  CFC’s Net Tested Income, after allocation of expenses, including taxes, equals
$65.
 CFC’s QBAI equals $20. CFC’s net deemed tangible income return (assuming
no CFC-level debt) is $2.
 US Shareholder’s GILTI inclusion is $63. Absent Section 962, US shareholder
owes $23.31 of Fed tax ($63 @ 37% rate).
Example of a GILTI Calculation – Case 2
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CFC
(Service
Business)
Assets (Tax Basis) – Office equipment $20
A/R $30
Net Income $80
Foreign Tax <$15>
E&P $65
U.S.
Shareholder
Assume CFC Earns Solely Non-Subpart F Income
100%
U.S. Shareholder Owns Only One CFC

15. Application of GILTI to a C Corp Shareholder
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 The GILTI rules produce results that are much less harsh in the context
of a U.S. C corporation shareholder due to three considerations:
• Lowering of U.S. corporate rate from 35% to 21%
• 50% deduction (for years through 2025) for GILTI recognized by a U.S. C
Corporation. See IRC Section 250(a).
• Indirect foreign tax credit for taxes imposed on GILTI under
Section 960(d).

16.  An indirect credit is allowed for the foreign taxes imposed on the GILTI
of a U.S. C Corporation’s CFCs. This follows the old indirect credit rules
with important modifications:
• FTC is haircut by 20% of the total foreign taxes imposed on the GILTI (i.e.,
only 80% of taxes are allowed as an FTC).
• Old pooling rules of Section 902 are replaced by single year credit
• GILTI is a separate basket for Section 904(d) purposes
• No FTC carryover / carryback is permitted.
GILTI Foreign Tax Credit Rules (new Section 960(d))
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17.  U.S. Shareholder’s GILTI inclusion is $78 (including Section 78 gross-up).
U.S. Shareholder receives a 50% deduction for the $78 of GILTI or <$39>.
 U.S. Shareholder pays $8.19 of pre-credit U.S. tax on $39 of net GILTI. ($39 x 21%).
U.S. Shareholder is allowed an FTC of $11.63(i.e., 80% * $15 of taxes * 96% inclusion
percentage).
 U.S. Shareholder pays no after credit U.S. tax on GILTI.
Example of GILTI for a C Corporation
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CFC
(Service Business)
Assets (Tax Basis) – Office equipment $20
A/R $30
Net Income $80
Foreign Tax <$15>
E&P $65
Assume CFC Earns Solely Non-Subpart F Income
100%
U.S. Shareholder Owns Only One CFC
For simplicity Assume U.S. Shareholder Has no
Other Activities and no Allocable Expenses under
Section 861 to GILTI
U.S.
C Corporation

18.  Treatment as Subpart F Income. Except as otherwise provided in
regulations, GILTI is generally treated as subpart F income for other
purposes of the Code, including Sections 959, 961 and 962.
 Effective Date. GILTI applies to taxable years of CFCs beginning after
Dec. 31, 2017.
GILTI – Other Provisions
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19.  Section 962 includes an election by a United States shareholder that is
an individual to be taxed at corporate rates on subpart F income.
 Where the Section 962 election is made, the United States shareholder’s
tax on subpart F income is limited to the following:
• The maximum rate of tax that would apply to the amount of subpart F
income under Section 11 of the Code if it were received by a domestic
corporation, less
• Any indirect credit that would be allowed to such a domestic corporation
with respect to the subpart F income under Section 960.
GILTI – Impact of a Section 962 Election
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20.  Section 962(d). Actual dividends by a CFC out of its earnings that were
taxed under Section 962 are tax-free PTI distributions only to the extent
of the amount of tax paid under Section 962(a). Any amounts in excess
of such amounts are not excluded from gross income under
Section 959(a).
 Issues to Consider in applying Section 962(a):
• Whether the 50% deduction under Section 250 applies to the GILTI
inclusion by the hypothetical domestic C corporation?
• Whether actual dividends paid by the CFC in excess of Section 962 PTI are
ordinary income or qualified dividend income
• Election mechanics and seeming limitation of Section 962(a) to
“United States shareholders who are individuals”
GILTI – Impact of a Section 962 Election
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21. Assume CFC has $100 of GILTI and pays $20 of foreign tax:
Example of Section 962(a) Election –
Assuming No 50% Deduction, Ordinary Dividends
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Section 962(a) Calculation:
$100Grossed Up GILTI
$0Deduction under Section 250
$100Net Income
$21.00Tax at 21%
($16)GILTI FTC
$5.00Section 962(a) Tax
Actual Distribution:
$75.00Section 962(d) Dividend Amount
($27.75)Fed tax on distribution Without Sec 962
$47.25After Tax Proceeds Foreign Tax $20
Fed Tax $29.26
53%All-in Tax Rate (IRS and Foreign)

22. Assume CFC has $100 of GILTI and pays $20 of foreign tax:
Example of Section 962(a) Election –
Assuming No 50% Deduction, Qualified Dividends
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Section 962(a) Calculation:
$100Grossed Up GILTI
$0Deduction under Section 250
$100Net Income
$21.00Tax at 21%
($16)GILTI FTC
$5.00Section 962(a) Tax
Actual Distribution:
$75.00Section 962(d) Dividend Amount
<$17.85>Fed tax on distribution Without Sec 962
$57.15After Tax Proceeds Foreign Tax $20
Fed Tax $29.26
42.85%All-in Tax Rate (IRS and Foreign)

23. Assume CFC has $100 of GILTI and pays $20 of foreign tax:
Example of Section 962(a) Election –
Assuming 50% Deduction, Qualified Dividends
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Section 962(a) Calculation:
$100Grossed Up GILTI
<$50>Deduction under Section 250
$50Net Income
$10.60Tax at 21%
($16)GILTI FTC
$0Section 962(a) Tax
Actual Distribution:
$80.00Section 962(d) Dividend Amount
<$19.04>Fed tax on distribution Without Sec 962
$60.96After Tax Proceeds Foreign Tax $20
Fed Tax $29.26
39.04%All-in Tax Rate (IRS and Foreign)

24.  Repeal of goodwill & going concern exception to Section 367(d) and
active foreign trade or business exception to Section 367(a).
 Modifications to the constructive ownership rules under
Section 958(b)(4).
 Modification to the definition of “United States shareholder” under
Section 951(b) to refer to 10% ownership by vote or value.
 Repeal of the 30-day rule as a pre-condition to inclusion of subpart F
income.
Selected Other International Tax Changes Potentially Affecting
Individuals
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25. William R. Skinner
Partner, Tax Group
Fenwick & West LLP
(650) 335-7669
wrskinner@fenwick.com
Any Questions
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