On March 5, 2019, the IRS released the latest installment of proposed regulations to address the Section 250 deduction. The Section 250 deduction allows taxpayers a 50% deduction for Global Intangible Low-Taxed Income (“GILTI”). This may reduce the negative impact of the GILTI provisions by half.

The proposed regulations offer some very welcomed guidance for individuals who are U.S. shareholders in controlled foreign corporations (“CFCs”).  Prior to the guidance, there was uncertainty about whether an individual electing Section 962 treatment would receive this deduction similar to corporations that owned foreign corporations. This allows individuals to have Subpart F income (including GILTI) to be taxed at the U.S. corporate rate and to avail themselves of the Section 250 deduction. The proposed regulations confirm the Section 250 deduction will, in fact, be available for individuals.

The Section 962 election allows for the Subpart F income of an individual to be taxed as if the income was received by a corporation at the corporate tax rate of 21%. Since the income is taxed as if it was received by a U.S. corporation, a Section 960 Foreign Tax Credit (“FTC”) is available to offset the tax imposed on Section 962 income. Subsequent distributions of the non-excludable Section 962 earnings and profits are not tax-free like normal Subpart F income but are included in the gross income of the recipient. This election may eliminate current tax due to the ability to claim an FTC on Section 962 income resulting in deferral of U.S. tax until an actual distribution of the income.

Where the tax rate in the jurisdiction of the CFC exceeds 13.125%, the net result of such an election will not only defer the taxation of the income but may also result in converting ordinary income taxed at a rate of 37% into qualified dividend income at a rate of 23.8%.

The decrease in corporate rates makes the Section 962 election much more attractive to high-net-worth individuals and closely held businesses operating overseas than ever before. Companies and their owners should consider reviewing their current structure and calculating the impact a Section 962 election may have for them. 

Let Doeren Mayhew’s international tax advisors help you take advantage of this huge potential savings.