Following up with my clients on various end-of-year consulting engagements that have been on the back burner since September and October.
For this one, I believe the most advantageous answer for the client is "do nothing", which coincidentally is my favorite answer.
Fact pattern:
Taxpayer “A” and taxpayer “B” are US citizens living as expats in a foreign country (“FC”). FC does not have a tax treaty with the US. FC taxes corporations' net taxable income at a flat rate of 22%.
Taxpayers A and B are business partners, and currently have ownership in foreign corps incorporated in FC:
Foreign Corp 1 (51% taxpayer A, 49% taxpayer B)
Foreign Corp 2 (30% taxpayer A, 30% taxpayer B, 40% non-US investors)
Foreign Corp 3 (19% taxpayer A, 18% taxpayer B, 63% non-US investors)
FC 1 and 2 are CFCs. FC 3 is not a CFC. All corps are in the food service / food preparation industry.
5471s and repatriation inclusion (Sec 965) were prepared for the 2017 tax returns.
I’m interested in hearing thoughts on if it make sense to move taxpayer’s interest to a US holding C-Corp based on the new participation exemption and GILTI tax?
It would seem under the current structure (individuals directly holding the interest), GILTI is avoided under the exclusion for high-taxed income under IRC Sec 951A(c)(2)(A)(i)(III). That is, FC income tax rate of 22% is higher than 18.9% (21% x .9). So taxpayers have no exposure to GILTI?
It also appears there’s no advantage to trying to obtain the participation exemption (100% DRD) under a US C Corp if that means exposure to PHC and AET. The alternative, electing C Corp rates under Sec 962 and using foreign tax credits would yield zero US tax on the taxpayers' 1040s.
Agree?