A consequence of the Tax Cuts and Jobs Act in 2017 was the introduction of IRS Form 8992: Global Intangible Low Taxed Income (GILTI). While its purpose was to discourage multinational corporations, like Apple,1 from evading US taxes, this legislation inadvertently impacted American expat small business owners worldwide.
For US business owners operating as Controlled Foreign Corporations (CFCs), the GILTI tax could apply. When this requirement arises, business owners must calculate their GILTI income using the IRS Form 8992. Rest assured, we’re here to help you navigate this complex process with expertise so that you can stay compliant. Let’s dig in.
What is a Controlled Foreign Corporation (CFC)?
A Controlled Foreign Corporation (CFC) is a foreign corporation majority owned by US shareholders.
To be more precise, these three elements must be present for a foreign company to be deemed a CFC.
- The company must be registered in a foreign country
- The total ownership attributable to US shareholders should be more than 50%
- Each US shareholder must own at least 10% of the company’s total shares.¹
It’s crucial to note that the IRS determines ownership as either more than 50% of:
- The number of all shares, or
- The value of shares.
Additionally, the IRS considers how you own the shares when determining if a corporation is a CFC. These include:
- Direct ownership: You own shares outright in your name.
- Indirect ownership: when you are a majority owner of a company that owns more than 50% of a subsidiary foreign corporation.
- Constructive ownership: where ownership is deemed attributable to one owner based on ownership by another related person (or persons) such as family members.²
Contrary to what you may expect, the definition of a US shareholder does not just include a US citizen. This brings us to the question of who exactly is a US shareholder.
Who qualifies as a US shareholder?
The tax code generally defines a US shareholder as either:
- a citizen or tax resident of the United States
- a domestic partnership
- a domestic corporation
- any estate or trust (other than a foreign estate or trust).³
The purpose of the CFC designation
Before the GILTI laws came into being, the general rule was that most income of US multinational corporations would only be taxed once repatriated to the United States in the form of a dividend.
To take advantage of this preferential treatment, corporations would create foreign companies in low-tax or no-tax countries, accumulate profits in those countries, and repatriate the earnings only in years when the US parent corporation had losses.
But with the GILTI tax, the IRS expanded the types of foreign income subject to immediate US taxation, regardless of repatriation status.
What is IRS Form 8992: US Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)?
US CFC shareholders use IRS Form 8992 to calculate how much of their foreign corporate income is taxable in the US.
But what is GILTI income? Generally, it is:
- Global: income earned from anywhere in the world.
- Intangible: income earned from intangible assets. This includes interest and royalties.
- Low-taxed: often income earned in low-tax countries when compared to US corporate tax rates.
If you determine you’re a US shareholder of a CFC, you’ll need to file Form 8992 at the same time as your income tax return.
While IRS Form 8992 is only one page long, it’s among the most complex. So you may need the help of a professional with experience in expat taxes to file it. The gist of the instructions is as follows.
Form 8992 instructions
Form 8992 is a one-page form with two parts and two additional schedules.
After entering identifying information at the top of the form, you need to determine if you need to complete the accompanying Schedule A or Schedule B. You’ll need one of these two schedules to complete both parts of Form 8992.
Form 8992 Schedule A instructions
Schedule A of Form 8992 is used by expats who own CFCs and must report GILTI income on their tax returns.
🛑 However, before you can get started, you need to have your Form 5471 Schedule I-1 available that you completed to report your foreign corporation income and expenses. Using Schedule I-1, you’ll calculate your pro rata share of the CFC’s GILTI income.
Form 8992 Schedule B instructions
Most US expats won’t need to worry about Schedule B of Form 8992 because this schedule is completed by companies that own a CFC (i.e., consolidated groups). This tends to be relevant to more complex business structures, and multinational companies, rather than your everyday business owner living abroad.