US individual shareholders of controlled foreign corporations (CFCs) are currently grappling with the one-time US transition tax on post-1986 deferred foreign income accumulated by their CFCs and the impact of new anti-deferral income inclusion rules referred to as the global intangible low-taxed income (GILTI) provisions, along with other generational changes to the US international tax rules, as the United States transitions from a worldwide tax system to a quasi-territorial tax system. Interestingly, an infrequently used election under IRC Section 962, which has been part of the US tax rules since 1962, may prove to be an effective solution for these US individual shareholders to mitigate or eliminate any negative tax consequences associated with the one-time US transition tax for fiscal year CFCs and the GILTI provisions.
Although a US individual shareholder making an IRC Section 962 election is subject to tax on the income inclusion attributable to their CFCs at a corporate tax rate (e.g., 21 percent in 2018), he/she is entitled to claim a foreign tax credit for the underlying foreign income taxes paid by the CFC as if the individual were a domestic C corporation. Essentially, these deemed-paid foreign tax credits may significantly reduce or eliminate his/her hypothetical corporate tax liability, thereby deferring US taxation until the CFC makes an actual distribution of earnings. In other words, an IRC Section 962 election has the potential to restore these US individual shareholders to their pre-international tax reform position and render these two new international tax provisions of little to no consequence.
International tax is a complex area of taxation, even more so after the Tax Cuts and Jobs Act was enacted. To discuss strategies to take advantage of the new tax rules and reduce your tax burden, contact your professional at UHY Advisors in one of our many locations.