The Tax Cuts and Jobs Act of 2017, P.L. 115-87 (TCJA), [1] enacted into law on December 22, 2017, introduced numerous reforms to international taxation which changes have already had a profound impact on tax planning for multinational business enterprises (MNEs) as well as domestic businesses engaged in foreign business ventures or investments.[2] The most significant reform enacted in the TCJA includes extends beyond the international tax provisions contained in the Code. Most noteworthy is that the TCJA reduced the maximum corporate income tax rate from 35% to 21% for taxable years beginning in 2018. [3] This substantial rate reduction in the US corporate income tax rate is on worldwide taxable income, including the pass through of  subpart F income of a controlled foreign corporation (CFC) in which the domestic corporation is a US shareholder under section 951(b).[4] The TCJA repealed the corporate alternative minimum tax under section 55.[5]

Among the most prominent of the international tax changes is the new category of foreign source income of a US shareholder, as defined, which must be included in gross income; global intangible low-taxed income (GILTI) under section 951A. While the purpose for Congress’ enactment of section 951A was to tax US shareholders with respect to their foreign business income on a current basis, Congress did not want to make U.S. domestic corporations subject to GILTI to be disadvantaged in the global marketplace against its foreign competitors. But this protection strangely extends only to domestic C corporations.[6]

At first blush, the GILTI provision seems to be inconsistent with the enactment of the flat 21% rate on corporations, the 100% DRD participation exemption under section 245A, and the repatriation of post-1986 foreign-source E&P, all of which were specifically intended to make domestic corporations more competitive in the global marketplace. In contrast, without some form of restraint, the broad scope of GILTI’s new anti-deferral provision could substantially reduce the tax advantageous provisions contained in the TCJA’s package of other international tax reforms. These provisions were specifically intended to make domestic corporations more competitive in the global marketplace. In contrast, without some form of restraint, the broad scope of the new anti-deferral provision (GILTI) has the potential to substantially reduce the tax advantageous provision contained in the TCJA’s package of international tax reforms.

Therefore, Congress, tweaked the GILTI rules to reduce the adverse impact of current taxation on global intangible income by permitting a U.S. domestic corporation’s GILTI income under section 951A to a reduced rate of income tax to 10.5% (or possibly less when foreign tax credits are factored in under section 960) by allowing a 50% deduction from income subject to a GILTI inclusion under section 951A. This deduction is set out in new section 250, but only applies to domestic C corporations. Other U.S. taxpayers face a 37% tax rate on their GILTI income inclusion as well as its subpart F income not otherwise described in section 951A. Again, horizontal equity norms were not taken into account by the Congress as similarly situated US taxpayers are treated most differently which only a certain class of taxpayers bearing a much larger current tax. Moreover, the 20% deduction under section 199A does not apply to foreign source income.

The Treasury and IRS have recently issued two sets of proposed regulations under the GILTI provisions and related rules. The Preambles to each set and accompanying regulatory language are long and extensive, complex and in certain instances, perhaps in need of re-evaluation or re-thinking. This author recently published in the Journal of Corporate Taxation an article “The Proposed Gilti Regulations Under Section 951A”, Corporate Taxation (WG&L) (Mar/April 2019).

One problem area has been how to integrate the new GILTI regime with the long-standing, anti-deferral rules under subpart F with respect to a controlled foreign corporation (CFC). While the statutory framework set forth in section 951A considered the overlap and requires subpart F income to be reduced from residual GILTI income, the allocation and apportionment rules reflected in the proposed regulations still suffer from apparent glitches or defects. When the new parallel world provisions are applied to general corporate tax rules, additional analysis is required and there may be instances that the outcomes are not predictable. One such tax planning context involving US shareholders is the reporting and characterization of gains from the sale of CFC stock under section 1248 as well as taking such gain into account under section 951(a)(subpart F inclusion) and section 951A(GILTI inclusion). There is also the 50% GILTI deduction available for US shareholders of CFCs that are domestic corporations. Again, it must be noted that non-corporate U.S. shareholders are not eligible for the section 250 deduction with respect to GiLTI but are subject to full income inclusion under section 951A.

Where a US shareholder sells shares of stock in a CFC at a gain, no subpart F income results. However, the Code requires the US shareholder include in gross income a deemed dividend to the extent that the gain may be comprised of accumulated earnings and profits per section 1248(b). The US shareholder’s previously tax income under section 959 is excluded from being taxed. In the year of the sale, the current period’s subpart F income and GILTI to the extent of newly minted earnings and profits are included within the taxable section amount. Gain in excess of the section1248 amount would in general constitute long term capital gain to the US shareholder. Where the US shareholder is a US corporation, then the section 1248 dividend qualifies for the 100% dividends received deduction under section 245A.

What other impact might follow? Perhaps GILTI could still be present in the year of sale since there is no required nexus to earnings and profits. For example, a CFC in general would not owe capital gains taxes on the sale of its assets but such gain would be GILTI to the US shareholder. But where the CFC sells certain passive assets, subpart F income could occur to the extent of earnings and profits.

Within the context of a U.S. corporation’s purchase of 80% or more of the shares of another corporation, the purchasing corporation can elect to treat the transaction as a taxable sale of the target corporation’s assets. Under section 338(g), the target corporation, which could be a CFC, is treated as though it sold all of its assets at FMV with the purchasing corporation, i.e., through the deemed asset sale from “Oldco” to “Newco”, receiving a step-up in basis on the hypothetical asset sale. The target corporation is required to remit federal income tax on the gain which would then become previously taxed income (PTI) under section 959. Such asset gain may be includible in gross income of the US shareholder under GILTI to the extent that the CFC target corporation does not have a significant amount of passive assets. In such instance the capital gains rate to “Oldco” would go from 21% (the corporate rate established under the Tax Cuts and Jobs Act) to a 10.5% rate under GILTI.

This example, as well as other scenarios involving the application of the deemed sale rules of CFC stock under sections 338 and 336(e), present challenges to tax advisors based on the lack of guidance in this area. Moreover, the Treasury and the IRS must provide such guidance in the form of interim notices and then in a proposed and final rule-making. Most recently, a package of technical corrections to the TCJA addressed the overlap between GILTI (and CFC tested income) and subpart F income, including in the context of a US shareholder’s sale of stock.

Until definitive guidance is provided in this area, planning for the sale of stock in a CFC by a US shareholder, particularly a US corporation, must account for the several potential outcomes which may require consideration of strategies that were not necessary to consider prior to the TCJA.

This blog post is intended solely for informational and educational purposes. It neither constitutes nor was intended to constitute the rendering of legal advice and therefore does not constitute legal advice rendered by this author or by Fox Rothschild LLP for which reliance may be made by the reader. Persons interested in finding out the specific consequences to section 951A and section 1248 after the Tax Cuts and Jobs Act or other information set forth herein must consult with their independent tax advisor, lawyer with Fox Rothschild LLP or Jerry August c/o


[1] P.L. 155-97, the Tax Cuts and Jobs Act (TCJA) of 2017 (12/22/2017) and the regulations promulgated thereunder by the Treasury and its delegate, the Internal Revenue Service.

[2] The set of changes to the international provisions made in the TCJA were identified in Lowell, Thomas and Novak, “The International Provisions of the TJCA”, J. Corp. Tax’n (Mar/April 2018). This article first lists the most significant international tax reforms: (i) the maximum effective tax rate on US corporations and foreign corporations with respect to their US source business income is reduced from 35% under pre-TCJA law to 21%; (ii) a 100% deduction for foreign-source dividends received by domestic corporations from 10% owned foreign corporations and the elimination of foreign tax credits (FTCs) for such distributions: (iii) deemed repatriation of accumulated deferred foreign income for undistributed post-1986 accumulated foreign earnings and profits of a controlled foreign corporation under §965 and taxed at separate lower rates for both cash or cash equivalents at a 15% rate and an 8% rate with respect to “other property” under §965(c) with the repatriation tax payable in installments over an 8 year period if elected under §965(c) with a special rule for S corporations; (iv) a change to a territorial based system allowing a 100% deduction for foreign-source dividends received by a US corporation which owns 10% or more of the stock, based on voting or value, of a foreign corporation; (vi) the enactment of an additional anti-deferral controlled foreign corporation contained in where certain foreign earnings in excess of a deemed return (10% of specified business assets) are another category of controlled foreign corporation (CFC) income and taxable on a current basis; taxed currently; (vii) revisions to the CFC provisions , i.e., §§951-965 in general; (viii) an anti-earnings stripping rule which limits deductions for payments of business interest to 30% of business interest income, 30% of adjusted taxable income and floor plan financing interest in accordance with; (ix) a controversial base erosion tax (BEAT) of 10% of a large corporation’s worldwide income after exceeding a threshold of deemed base erosion payments for intracompany transactions involving a U.S. corporation payor and foreign affiliate; and (x) the US version of the “patent box” structure used by various foreign jurisdictions to provide low rate tax on foreign source intangible income as well as foreign source income from a domestic corporation’s provision of goods and/or services to a foreign affiliate in accordance with §250.

[3] See §7704(a), unless otherwise provided, and subject to the passive-type income partnership rule in §7704(c), a publicly traded partnership is taxable as a corporation for federal income tax purposes.

[4] The definition of a US shareholder under §951(b) prior to TCJA was 10% or more of the total combined voting power of all classes of stock entitled to vote with respect to such foreign corporation. TCJA expanded the definition to include the ownership of 10% or more of the total value of shares of all classes of stock of such foreign corporation. Stock attribution rules are provided in §958(b). Prior to the Act, §958(b)(4) limited §958(b) from attributing stock owned by a foreign person to its U.S. corporate subsidiary (“downward attribution”). However, the Act repealed §958(b)(4). Now stock owned by a foreign person can be treated as owned by a US person that is owned by a related foreign person which reform was intended to preclude the de-control of a foreign subsidiary by gaming the downward attribution rule. See TCJA, §14213(a). The provision is effective for the last taxable year of foreign corporations beginning before January 1, 2018 and each subsequent year of such foreign corporations and for the taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.

[5] TCJA §12001(d)(1). The corporate alternative minimum tax for taxable years beginning prior to 2018, was 20% of the corporation’s AMTI to the extent it exceeded the exemption amount of $40,000 which phases out at $130,000 of AMTI and as reduced by the alternative minimum foreign tax credit. Where the corporation’s AMTI exceeded the corporation’s regular tax, excluding the accumulated earnings or personal holding company tax provisions, the excess amount (less certain business tax credits) is the corporation’s AMT tax obligation. Where the AMT had the effect of constituting an advance payment of the corporation’s regular tax, the law provided a credit against the regular tax in a future year under §53 which allowed the AMT allocable to such items to be credited against the regular tax in a subsequent year by means of a AMT credit (carryforward).

[6] This limitation on the tax rates provided under §250 for GILTI and FDII income to benefit only domestic C corporations obviously violates tax policy norms and objectives in that it lacks horizontal equity, i.e., the tax burdens on similarly situated taxpayers should be borne equally. See Berg and Feingold, “The Deemed Repatriation Tax—A Bridge Too Far?” Tax Notes, 3/5/2018.