Subpart F Income vs. GILTI vs. PFIC – Anti-Deferral Framework

Subpart F Income vs. GILTI vs. PFIC – Anti-Deferral Framework

Subpart F Income vs. GILTI vs. PFIC – Framework of Anti-Deferrals

Subpart F Income vs. GILTI vs. PFIC: When it comes to U.S. tax liability, the IRS wants to tax you on all of your income, all of the time. You, on the other hand probably want to pay the least amount of tax possible.

Subpart F Income vs. GILTI vs. PFIC

That is why the U.S. government developed various anti-deferral regimes. Anti-deferral is used to avoid the “deferral” of income and corresponding tax liability. Three common (and sometimes overlapping) regimes include Subpart F Income, GILTI (Global Intangible Low-Taxed Income) and PFIC (Passive Foreign Investment Companies). While all of the these regimes have the same goal (aka to limit tax deferred income), they do not all work the same.

Let’s review the basics of each type of income:

Subpart F Basics

Subpart F income has been around for a long time. The regime came into effect as offshore investments became more regular.

Here is a common example of what used to happen more frequently: David is a U.S. person. He owns 55% of a foreign company. Tony is a foreign person who owns 45% of the company.

Since David is the majority owner, he can dictate how the operations work. Oftentimes, David would take a loan from the company. The company had consistent excess in earnings aka Earnings & Profit, which the company did not distribute.

As a result, David would take an annual loan of $300,000. And, every few years, the company would forgive and cancel the loan. Result:

  • David has no income to report (subject to constructive dividend rules)
  • The company can deduct the loss (vs. dividend distribution).
  • David paid not tax on the money

Result: The U.S. developed the Subpart F Income regime. A detailed summary can be found here.

GILTI Basics

Unlike Subpart F, which is primarily dividends and related passive income, GILTI is more encompassing. As part of TCJA, the government introduced GILTI. Unfortunately, in practice, the income is not limited to intangible or low-taxed income.

Common example: Michelle is a doctor. She has a foreign service corporation which generates significant amounts of income. The income is then retained, and considered as “retained earnings.” Michelle does not have many assets associated with the business, so her deductions are limited.

Michelle may be subject to an annual tax on the retained portion of the income, which was not previously taxed. While Michelle may consider removing the corporate structure, the problem is that then she does not receive the tax benefit of the entity structure in her home country. Moreover, if she is a sole proprietor, all of her income is subject to tax, and she may lose some of the protection of being classified as an entity.

Learn more about GILTI.

PFIC Basics

PFIC is a Passive Foreign Income Company. These rules involve investment income that is being generated in a foreign country. Since most foreign institutions do not issue 1099 or comparable income summary forms, the IRS is in the dark as to the gains and profitability of many of these foreign investments.

In addition, the IRS is concerned that the investors are accruing income within the fund, and not reporting it. Subject to pension and treaty laws, the general proposition is that foreign investment income is reportable and taxable during the growth phase – even if the shareholder plans on keeping the investment overseas until retirement.

PFIC issues are very common. We have authored numerous articles on the topic.  Here are links to a basic PFIC summary and/or how the excess distribution calculation works.

Foreign Income Reporting Amnesty – Golding & Golding (Board-Certified)

We specialize exclusively in international tax, and specifically IRS offshore disclosure.

We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants and Financial Professionals worldwide.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Streamlined Counsel?

How to Hire Experienced Streamlined Counsel?

How to Hire Experienced FBAR Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA
  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.