What is the GILTI high-tax exclusion, and how do I elect it?

The GILTI high-tax exclusion (HTE) allows a CFC's tested income to be excluded from the GILTI calculation if the income is subject to a sufficiently high effective foreign tax rate. The exclusion is found in Treasury Regulations Section 1.951A-2(c)(7). The theory is that if the income is already taxed at or above a threshold rate abroad, there is no need to impose the additional U.S. minimum tax that GILTI represents. The HTE is elective — it is not automatic. The U.S. shareholder (or the controlling domestic shareholder) must affirmatively elect it.

The threshold for the high-tax exclusion is 90% of the maximum U.S. corporate tax rate. With the current corporate rate at 21%, the threshold is 90% x 21% = 18.9%. If a CFC's tested income item is subject to an effective foreign tax rate of 18.9% or more, it qualifies for the exclusion. The effective tax rate is computed on a tested-unit basis — meaning it is calculated for each qualified business unit (QBU) or group of related activities within a CFC, not on a blended, entity-wide basis. This QBU-level computation can result in some income qualifying and other income not qualifying within the same CFC.

The GILTI HTE election is made by the "controlling domestic shareholder" (generally the U.S. shareholder with the highest ownership percentage) and is binding on all U.S. shareholders of the CFC. The election is made on an annual basis and applies to all CFCs controlled by the electing shareholder group. It is made by attaching a statement to the timely filed (including extensions) income tax return identifying the election under Treas. Reg. 1.951A-2(c)(7). Once made, it can be revoked in a subsequent year, but the IRS may impose consistency requirements.

The HTE is most beneficial for individual U.S. shareholders who do not have access to the Section 250 deduction or deemed-paid foreign tax credits (unless they make a Section 962 election). By excluding high-taxed income from GILTI, the individual avoids being taxed at ordinary rates on income already taxed at 18.9%+ abroad. For corporate shareholders, the benefit is more nuanced — the Section 250 deduction and foreign tax credits may already reduce the effective U.S. tax on GILTI to near zero, and electing the HTE removes the income from the GILTI basket, which means the associated foreign taxes cannot be credited against other GILTI income. Careful modeling is needed.

The GILTI HTE should not be confused with the Subpart F high-tax exception under IRC 954(b)(4), although they share a similar concept. The Subpart F exception excludes income from Subpart F if it is subject to an effective foreign tax rate exceeding 90% of the maximum U.S. corporate rate (the same 18.9% threshold). However, income excluded from Subpart F under this exception could then fall into GILTI tested income — unless the GILTI HTE is also elected. Taxpayers should coordinate both elections carefully to avoid unintended results.