Taken from article originally published 2nd November 2023

As many of us know, the US tax system can sometimes seem like a minefield of different tax laws, and keeping on top of them can be difficult for the average US citizen in New Zealand.

One frequent issue which arises, is for those who own a Controlled Foreign Corporation (CFC) in New Zealand, and GILTI tax.

What is a CFC?

To explain a little further, a CFC is a foreign company, which is owned greater than 50% by 5 or less US citizens.

In essence, this means that a US citizen who sets up a New Zealand company and owns 100% of it, then owns a CFC. This approach is not unique to the US, and most countries have specific CFC rules for companies owned by its tax residents.

CFCs are generally treated as disregarded entities, whereby the income earned by the company is treated as income in the hands of the owner.

Then what is GILTI?

Despite its name sounding far more sinister, GILTI is an acronym for Global Intangible Low Taxed Income. This was a new tax introduced as part of the Tax Cuts and Jobs Act of 2017, and was designed to ensure that foreign companies (ie CFCs) which are owned by US citizens/companies, cannot shelter income from the US tax system.

As an example, prior to 2017, a CFC could earn income, but not distribute it to the owners (just hold the cash), and thus the income is not taxed by the IRS.

GILTI was introduced to ensure that income earned by a company, but not distributed, is still treated as taxable income.

Technically speaking, GILTI is (supposed to be) foreign income your CFC earns on intangible assets, such as patents, copyrights, and trademarks. You’re obligated to pay GILTI if you own at least 10% of a CFC. But, in reality, GILTI is not calculated by looking at income from intangibles, and rather is a general calculation on the income of a CFC (on the assumption that some of it comes from intangibles).

So, GILTI is a tax on profits of a CFC, even if its not distributed out. How is this calculated?

Income which is subject to GILTI tax is calculated using Form 8992. This is filed in addition to the other forms which are required when you own a CFC (ie Form 1040, Form 5471 etc).

To calculate GILTI tax liability, the initial step involves ascertaining the surplus income generated by CFC, beyond your company's defined tangible income. By deducting the tangible income from the total earnings, you can determine your intangible income or GILTI.

Generally speaking, companies with a high income from intangible income, should expect a higher GILTI tax.

Summary

In essence, what all of this means is that if you are a US taxpayer (ie US citizen) and own a New Zealand company, then the income of the company will be taxed each year by the IRS unless you distribute it out.

Income earned by the company, will be taxed by the IRS as if it had been earned in your own name.

GILTI tax can range from 0% up to 37%, and could be considered a “double tax”, whereby tax will be paid in the US without any credit available in New Zealand.

There are methods to prevent a GILTI tax liability, which involve tax planning to ensure that the CFC is run in a way to not generate GILTI income.

At the US Tax Team, we deal with complex US tax issues such as GILTI daily. We’re able to provide advice, and return preparation, to ensure tax efficiency as much as possible.

If you have any questions regarding GILTI, or your New Zealand company, contact us today – info@usatax.nz.