Understanding the GILTI Tax: What US Expats Need to Know in 2025

What is the Global Intangible Low-Taxed Income (GILTI)?

Global Intangible Low-Taxed Income (GILTI) refers to income earned overseas by US-controlled foreign corporations (CFCs) that is subject to unique tax treatment under the US tax code. The GILTI tax aims to prevent the erosion of the US tax base by discouraging multinational companies from shifting profits derived from easily movable assets, like intellectual property (IP) rights, to foreign countries with lower tax rates than the US.

Before the Tax Cuts and Jobs Act (TCJA) of 2017, US businesses and individuals were taxed on their worldwide income. However, income generated by foreign subsidiaries of US corporations was only taxed when repatriated to the US as dividends. The TCJA changed this framework, largely exempting the earnings of foreign subsidiaries’ active businesses from US corporate taxes, even when repatriated.

Who is Affected by by the GILTI Tax?

The GILTI rules apply to US citizens, including Accidental Americans, or corporations that, directly or indirectly, own 10% or more of the voting power of any class of stock in a controlled foreign corporation (CFC). Simply put, a CFC is a foreign corporation with limited liability, over 50% of which US persons own.

These shareholders must pay annual taxes on any net income the CFC generates from intangible assets, even if they have not yet distributed that income.

GILTI tax is applied to income that has yet to be paid, but it won’t be taxed again once it is given to the shareholder. Still, US shareholders of a US-controlled foreign corporation (CFC) must report their share of GILTI income on their tax return for the year.

Examples of When a US Expat Might Encounter the GILTI Tax

1.) Owning a Foreign Business

An expat starts a small business in another country, like a cafe or consulting firm, and owns 10% or more of the company. The profits from the business, especially if generated from things like intellectual property or brand recognition, may be subject to GILTI tax, even if the income isn’t distributed to the expat.

2.) Investing in a Foreign Corporation

An expat invests in a foreign company, such as a Southeast Asian startup, and holds 10% or more of the shares. If the company earns income from intangible assets like patents or trademarks, that income could fall under GILTI rules, requiring the expat to pay the GILTI tax.

3.) Real Estate Investment in a Foreign Country

An American expat invests in real estate through a foreign corporation (like a property management company in a foreign country). If the company owns valuable intellectual property or earns income from foreign operations, that income could be taxed under GILTI, depending on the expat’s ownership stake.

Subpart F Income

A CFC’s Subpart F income is the main income taxed to any US shareholder who owns at least 10% of the CFC, directly or indirectly.

Subpart F income includes:

• Foreign personal holding company income generally includes passive income such as interest, dividends, rent, royalties, capital gains, and exchange gains, with some exceptions if businesses earn these in active operations.
• Sales and services income from transactions with or on behalf of related parties where the purchase, sale, or service occurs outside the CFC’s country of incorporation, with exceptions for each situation.
• Insurance income from policies issued outside the CFC’s country of incorporation.
• Penalty-related income includes bribes, kickbacks, and a portion of income if an international boycott affects a CFC’s business. It also includes income from countries with no diplomatic relations, those supporting terrorism, or those considered “unrecognized.”

GILTI Foreign Tax Credit Limits

The US tax on foreign-source income limits foreign tax credits. If a US taxpayer pays more corporate foreign tax than the US tax owed on the same income, the Foreign Tax Credit will only apply to the US tax liability.

The taxpayer calculates the credit limit by multiplying their pre-credit US tax by a ratio: foreign-source income divided by worldwide income.

Taxpayers can usually carry over foreign taxes that cannot be credited to other years, but they cannot carry over GILTI-related taxes. A 20% reduction will also apply to foreign taxes related to GILTI, as claiming foreign corporate tax credits is only possible through the Section 962 Election.

GILTI Tax Calculations

The formula for calculating GILTI is as follows:

**Net CFC tested income – (10% x qualified business asset investment (QBAI) – interest expense) = GILTI

• CFC-tested income** is determined by subtracting income related to US trade or business, or income that qualifies as subpart F income, from the company’s total gross income.
• In this formula, QBAI represents the total value of a company’s tangible or fixed assets. These assets are used to calculate a CFC’s tangible return on assets, which helps determine the return on intangible assets subject to GILTI.
• Interest expense refers to the business costs of the assets used to calculate QBAI.

Example of GILTI Tax Calculation

Imagine you’re a US expat who owns 15% of a foreign company that qualifies as a controlled foreign corporation (CFC). This company earns $1,000,000 in gross income. It also has $300,000 in tangible assets (like buildings, machinery, etc.) and $700,000 in intangible assets (like patents, trademarks, etc.).

Step 1: Calculate the Company’s GILTI Income

GILTI income is the foreign corporation’s income that exceeds a certain return on tangible assets (QBAI). To find the GILTI income, we follow these steps:

a. Calculate the Return on Tangible Assets (QBAI):

Let’s say the return on tangible assets is 10%. We’ll use that to determine the “allowance” for tangible asset returns.

QBAI = 10% × Tangible assets

QBAI = 10% × $300,000 = $30,000

This means the company can have up to $30,000 of its $1,000,000 income treated as a return on tangible assets, which is not subject to GILTI.

b. Subtract QBAI from Gross Income:

Now, subtract the $30,000 QBAI from the company’s total income.

GILTI Income = Gross income – QBAI

GILTI Income = $1,000,000 – $30,000 = $970,000

So, the company’s GILTI income is $970,000.

Step 2: Allocate your GILTI income Based on Your Ownership Percentage

The GILTI tax rate is based on your ordinary income tax rate. Your GILTI income is added to your individual return as other income on Form 1040, Schedule 1, as “Section 951A(a) inclusion”.

Since you own 15% of the company, your share of the GILTI income is 15% of $970,000.

Your share of GILTI Income = 15% × $970,000 = $145,500

So, your share of the taxable GILTI income is $145,500.

Step 3: Calculate US Tax on the GILTI Income

Step 4: Determine if you can use an election to lower your taxes

You cannot use personal foreign tax credits on your GILTI income. However, you do have some options to lower your US tax liability.

To lower the GILTI tax, you can use the GILTI High-Tax Exclusion (HTE) to exclude GILTI income from US taxation. This election is only eligible for corporations that are already subject to foreign tax at an effective rate of at least 18.9% (for 2024, based on the 21% US corporate rate).

If your company’s corporate tax rate is lower than 18.9%, electing Section 962 allows individuals to pay taxes as a US domestic C corporation. This grants access to the 50% GILTI deduction (IRC § 250) and the 80% Foreign Tax Credit (FTC) benefit, significantly reducing US tax liability on GILTI.

Both strategies can reduce US GILTI tax exposure, especially when foreign corporate taxes are high.

When to Seek Professional Help

If you’re an expat with foreign income or business interests, working with a Tax Professional who understands expat tax laws is crucial! At MyExpatTaxes, we specialize in helping expats navigate complex tax issues like GILTI, ensuring they stay compliant while minimizing their tax liability.