GILTI Tax: The Complete Guide for Smart & Easy Planning

If you own a business with international operations or have investments overseas, you’ve probably heard the term “GILTI tax” thrown around—and honestly, it sounds scarier than it actually is. GILTI stands for Global Intangible Low-Taxed Income, and it’s a rule that affects business owners and investors who have income from foreign corporations. The good news? Understanding GILTI tax isn’t rocket science, and with the right strategy, you can minimize its impact on your bottom line.

Here’s the real talk: the IRS created the GILTI tax as part of the 2017 Tax Cuts and Jobs Act to prevent U.S. business owners from stashing profits in low-tax countries and avoiding U.S. taxation. If that’s not you, you might breathe easier. But if you do have foreign earnings, this guide will walk you through exactly what GILTI tax is, how it works, and what you can do about it.

What Is GILTI Tax and Why Does It Exist?

Let’s start with the basics. GILTI tax is a U.S. tax on a specific type of foreign income earned by U.S. shareholders of foreign corporations. Think of it this way: if you own a business and you shift profits to a subsidiary in a country with lower tax rates, the IRS wants to make sure you’re still paying your fair share to Uncle Sam.

Before 2018, this was a real loophole. A U.S. company could create a foreign subsidiary, have that subsidiary earn income, and—thanks to something called “deferral”—not pay U.S. tax on those earnings until the money came back home. The GILTI tax closed that loophole by taxing certain foreign earnings immediately, even if you never bring the money back to the U.S.

The law applies to U.S. citizens and residents who own 10% or more of a foreign corporation (directly or indirectly). If you’re a shareholder in a foreign company, you need to pay attention here. According to the IRS official guidance on GILTI, this rule affects millions of business owners worldwide.

Pro Tip: The GILTI tax doesn’t apply to everyone. If your foreign corporation is a “controlled foreign corporation” (CFC) that earns income from active business operations (not just investments), you might qualify for exemptions. Talk to a CPA before assuming you owe GILTI tax.

How Is GILTI Tax Calculated?

Okay, here’s where it gets a little technical—but I’ll break it down so it makes sense.

GILTI income is basically the net income of your foreign corporation minus a few things:

1. Foreign branch income: Income earned directly by a foreign branch of your U.S. business (not through a separate corporation).
2. Certain passive investment income: Interest, dividends, and capital gains from foreign investments.
3. The “deemed tangible income return”: This is a key part. You get to exclude 10% of the net value of your foreign corporation’s tangible assets. So if your foreign subsidiary owns $1 million in equipment and inventory, you can exclude $100,000 of income.

The formula looks like this:

Once you calculate your GILTI, it’s taxed at your ordinary income tax rate—which could be anywhere from 10% to 37%, depending on your total income. This is where most business owners feel the pinch.

Let me give you a real example. Say you own a foreign manufacturing company that earned $500,000 last year. That company owns $2 million in machinery and equipment. Your calculation would look like:

• Foreign corporation income: $500,000
• Minus 10% of tangible assets ($2M × 10%): -$200,000
• GILTI income: $300,000

If you’re in the 32% tax bracket, you’d owe approximately $96,000 in GILTI tax on that $300,000 (before any deductions we’ll discuss next).

For more on how income is calculated and reported, check out our guide on where to find your AGI on your tax return—similar reporting principles apply to GILTI.

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The GILTI Deduction: Your Best Friend

Here’s the good news that actually saves you money: there’s a deduction specifically designed to reduce GILTI tax, and it’s generous.

Under current law, you can deduct up to 50% of your GILTI income—or 37.5% if you meet certain requirements (more on that in a moment). This deduction was extended through 2025 as part of recent tax legislation, though it’s set to drop to 21.06% after that.

So in our manufacturing example above, with $300,000 in GILTI income:

• GILTI income: $300,000
• GILTI deduction (50%): -$150,000
• Taxable GILTI: $150,000
• Tax at 32% bracket: ~$48,000

That cuts your tax bill in half compared to treating it as ordinary income. That’s not nothing.

The 37.5% deduction (the better deal): If your foreign corporation is engaged in a “qualified business,” you might qualify for a 37.5% deduction instead. Qualified businesses generally include manufacturing, distribution, and service businesses—not passive investments. You’ll need to track this carefully, so work with your CPA.

Warning: The GILTI deduction is temporary and set to expire after 2025. If you’re making long-term business decisions, assume the deduction will be lower or gone entirely. Plan accordingly.

Who Actually Pays GILTI Tax?

GILTI tax applies to U.S. shareholders who own 10% or more of a foreign corporation. But “shareholder” can mean different things:

• Direct ownership: You personally own stock in a foreign company.
• Indirect ownership: You own a U.S. corporation that owns a foreign corporation (this still triggers GILTI).
• Partnership or S-Corp ownership: If your business is structured as a partnership or S-Corp that owns a foreign entity, the GILTI flows through to you on your personal tax return.
• Trust or estate: If a trust you control owns a foreign corporation, you may owe GILTI tax.

The key threshold is 10% ownership. If you own 9.99% of a foreign company, GILTI doesn’t apply. But if you own 10%, it does. This is why some business owners deliberately structure their foreign investments to stay below the 10% threshold—though this strategy has limits and risks.

Who doesn’t pay GILTI tax? Mostly people who:

• Don’t own any foreign corporations.
• Own foreign corporations that are taxed as U.S. corporations (rare, but possible).
• Own less than 10% of a foreign corporation.
• Have foreign corporations with net losses (no income to tax).

If you’re unsure whether GILTI applies to you, consult a CPA who specializes in international tax. This isn’t the place to guess.

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Smart GILTI Tax Planning Strategies

Now we get to the fun part: actually reducing your GILTI tax. Here are the most effective strategies used by savvy business owners.

1. Maximize Your Tangible Asset Base

Remember that 10% exclusion on tangible assets? That’s your first line of defense. The more equipment, inventory, and physical property your foreign corporation owns, the larger your exclusion.

If your foreign business is currently leasing equipment from a U.S. parent company, consider having the foreign subsidiary buy it instead. This increases the tangible asset value and reduces GILTI. Just make sure the purchase price is reasonable and well-documented—the IRS will scrutinize this.

2. Shift Income to Active Business Operations

GILTI only applies to certain types of income. If you can shift income from passive investments (interest, dividends, capital gains) to active business operations, you might reduce or eliminate GILTI.

For example, if your foreign subsidiary earns $100,000 in dividend income from another company, that’s GILTI. But if it earns $100,000 from actually manufacturing and selling products, that’s active business income—and you get the GILTI deduction on it.

3. Use the Foreign Tax Credit Strategically

If your foreign country taxes GILTI income, you can claim a foreign tax credit on your U.S. return. This can significantly reduce your overall tax burden. We’ll dive deeper into this in the next section, but the takeaway is: don’t overlook foreign taxes you’re already paying.

4. Structure as a Disregarded Entity (For Certain Situations)

In some cases, you can elect to have a foreign corporation treated as a “disregarded entity” for U.S. tax purposes. This means it’s taxed as a branch of your U.S. business, not as a separate corporation. Branch income isn’t subject to GILTI.

This strategy only works in certain situations and has serious implications for liability and foreign tax purposes. Don’t try this without professional guidance.

5. Consider the Check-the-Box Election

Similar to the disregarded entity strategy, you can sometimes elect to have a foreign corporation treated as a U.S. corporation for tax purposes (called a “check-the-box” election). This can eliminate GILTI, though it creates other tax complications. This is advanced stuff—definitely work with a CPA on this one.

6. Time Your Income and Deductions

GILTI is calculated annually. If you have control over when your foreign corporation realizes income or incurs expenses, timing these strategically can reduce your GILTI in high-income years.

For instance, if you know you’ll have a lower-income year coming up, you might defer foreign income to that year. Or if your foreign subsidiary is losing money, that loss can offset GILTI from other foreign corporations you own.

Pro Tip: If you have multiple foreign corporations, their GILTI income and losses can be combined on your tax return. So if one subsidiary is profitable and another is losing money, they can offset each other. This is called “look-through” treatment, and it’s a powerful planning tool.

Common GILTI Tax Mistakes (And How to Avoid Them)

After working with hundreds of international business owners, I’ve seen the same mistakes over and over. Here’s what to watch out for:

Mistake #1: Ignoring GILTI Entirely

The biggest mistake is not calculating GILTI at all. Some business owners don’t realize they owe it, or they assume their accountant is handling it. Then April 15th rolls around and—surprise—they owe tens of thousands they didn’t budget for.

Solution: If you own a foreign corporation, ask your CPA directly: “Do I owe GILTI tax?” Get a clear yes or no, and if it’s yes, understand the amount before year-end.

Mistake #2: Miscalculating Tangible Assets

The 10% tangible asset exclusion is tricky. Business owners often include assets that don’t qualify (like intangibles) or fail to properly value what they own. This can inflate GILTI significantly.

Solution: Get a professional valuation of your foreign corporation’s tangible assets. Keep detailed records of what you own, when you acquired it, and how much it cost. The IRS loves documentation.

Mistake #3: Not Claiming the GILTI Deduction

Believe it or not, some taxpayers calculate GILTI and pay tax on 100% of it—when they’re entitled to deduct 50% (or more). This is leaving money on the table.

Solution: Make sure your return explicitly claims the GILTI deduction. If you’re filing Form 8992 (GILTI Calculation and Reporting), the deduction should be automatic. But double-check.

Mistake #4: Forgetting Foreign Tax Credits

If you paid taxes to a foreign country on your GILTI income, you can credit those taxes against your U.S. liability. Many business owners don’t claim this credit because they don’t know about it.

Solution: Track all foreign taxes paid. File Form 1118 (Foreign Tax Credit Limitation) to claim the credit. This can save thousands.

Mistake #5: Treating All Foreign Income the Same

Not all foreign income is GILTI. Branch income, passive investment income, and certain other categories are excluded. If you lump everything together, you might overpay tax.

Solution: Categorize your foreign income carefully. Work with a CPA who understands the nuances. The difference between active and passive income, for example, can mean tens of thousands in tax savings.

Mistake #6: Failing to File Required Forms

GILTI requires specific IRS forms: Form 8992, Form 1118, and possibly others depending on your structure. If you don’t file these, you might trigger penalties or an audit.

Solution: Ensure your tax return includes all required forms. If you’re not sure what’s required, ask your CPA or check Investopedia’s guide to GILTI reporting requirements.

GILTI and Foreign Tax Credits

Here’s a concept that trips up a lot of business owners: the foreign tax credit.

If your foreign country taxes your business income, you can credit those taxes against your U.S. GILTI liability. This prevents double taxation—paying tax in both countries on the same income.

How it works:

1. Your foreign subsidiary earns $300,000 and pays $60,000 in foreign tax (20% rate).
2. You calculate GILTI of $300,000 (after exclusions and deductions).
3. Your U.S. tax on GILTI would be $96,000 (at 32% rate).
4. You claim a foreign tax credit of $60,000.
5. Your net U.S. GILTI tax: $36,000.

The foreign tax credit is limited—you can’t credit more foreign tax than your U.S. tax liability. But within that limit, it’s a dollar-for-dollar reduction.

Important note: The foreign tax credit calculation is complex and involves Form 1118. You need to separate GILTI income from other foreign income, calculate the credit for each category, and deal with carrybacks and carryforwards. This is definitely a job for a professional.

The takeaway? If you’re paying foreign taxes, don’t just pay U.S. tax on top of that without exploring the foreign tax credit. You could be leaving significant money on the table.

For more on tax credits and how they work, check out our guide on tax-equivalent yield calculations, which uses similar credit principles.

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Frequently Asked Questions

What’s the difference between GILTI and Subpart F income?

– Great question. Both are types of foreign income taxed to U.S. shareholders immediately, but they’re different. Subpart F income includes things like foreign personal holding company income (dividends, interest, rents from related parties). GILTI is the broader category that catches all other foreign business income that isn’t already taxed under Subpart F. Think of Subpart F as the specific bad actors, and GILTI as the catch-all for everything else. You can have both on the same return, and they’re calculated separately.

Do I owe GILTI tax if my foreign corporation has a loss?

– No. If your foreign corporation has a net loss for the year, you don’t have GILTI income. In fact, you might be able to carry that loss back or forward to offset GILTI from other years or other foreign corporations. This is one reason why timing matters—if you know a foreign subsidiary will have a loss, it can be valuable for offsetting gains elsewhere.

Can I avoid GILTI by owning less than 10% of a foreign corporation?

– Technically yes, but be careful. If you own less than 10%, GILTI doesn’t apply to you personally. But the IRS watches for artificial structures designed to avoid GILTI. If you own 9% directly and your spouse owns 11%, the IRS might aggregate your ownership and say you’re both above 10%. Always consult a CPA before structuring ownership specifically to avoid the 10% threshold.

Is GILTI tax the same as the Global Minimum Tax?

– No, they’re different. GILTI has been around since 2018. The Global Minimum Tax (part of recent international tax reforms) is a newer rule that sets a minimum 15% tax rate on large corporations. They can interact with each other, but they’re separate calculations. If you’re a large multinational, you might deal with both. Smaller businesses typically only worry about GILTI.

What happens to GILTI after 2025?

– The GILTI deduction is currently set to drop from 50% to 21.06% after 2025. This means more GILTI income will be taxable, and your tax bill could increase significantly. If you’re making long-term planning decisions, assume the deduction will be smaller or gone. Consider strategies now that don’t rely on the deduction being available forever.

Do I need to report GILTI if I don’t owe tax on it?

– Yes. Even if your GILTI is zero or negative, you typically need to file Form 8992 if you’re a U.S. shareholder of a controlled foreign corporation. The IRS wants to see the calculation, even if no tax is owed. Failure to file can result in penalties. Check with your CPA to confirm what’s required in your specific situation.

Can I deduct GILTI losses against other income?

– Not directly. If your foreign corporation has a loss, that loss reduces your GILTI income (which is good). But you can’t use GILTI losses to offset your W-2 wages, business income, or other types of income. GILTI losses stay in the GILTI bucket and can only offset GILTI gains from other foreign corporations or be carried back/forward to other years.

How does GILTI affect estimated tax payments?

– If you owe GILTI tax, you need to include that in your estimated tax calculations. Just like state estimated tax payments, federal estimated taxes should account for all expected income, including GILTI. If you underpay, you could owe penalties. Work with your CPA to calculate the right estimated tax amount.

What if I’m a U.S. citizen living abroad—do I still owe GILTI tax?

– Yes. U.S. citizens and permanent residents owe GILTI tax on their worldwide income, regardless of where they live. The Foreign Earned Income Exclusion (FEIE) doesn’t apply to GILTI. If you’re an expat with a foreign corporation, you likely owe GILTI tax. This is an area where many expats get surprised, so definitely talk to a CPA who specializes in expat taxation.