On June 21, the Treasury published proposed and final regulations under Code §951A. They address, inter alia, an expansion of the high-tax kickout exception applicable to Subpart F Income.
In a nutshell, Code §951A excludes several items from gross tested income, and thus from G.I.L.T.I., including foreign base company income ("F.B.C.I.") and insurance income subject to the high-tax kickout. The final regulations do not allow for the high-tax kickout exception to apply to gross tested income not otherwise constituting F.B.C.I. or insurance income. Instead, they defer to the proposed regulations to suggest a framework under which taxpayers could elect for non-F.B.C.I. or non-insurance income to benefit from the high-tax kickout.
The proposed regulations provide that controlling domestic shareholders of a C.F.C. can elect for the high-tax kickout exception to apply to all the C.F.C.'s items of income for the taxable year that meet the effective 18.9% foreign tax rate. This effective rate must be computed on a unit-by-unit basis for each Qualified Business Unit. For this purpose, controlling domestic shareholders generally are U.S. Shareholders owning more than 50% of the voting rights in the C.F.C. in the aggregate. The election is made by attaching a statement to the return (including to amended returns) and is binding on all the U.S. Shareholders of the C.F.C. In the case of a controlling domestic shareholder group, the election applies to each C.F.C. in that group. Unless revoked, the election applies to the year of the election and subsequent years. Finally, it should be noted that, if the high-tax kickout exception is elected for, the foreign income taxes associated to the excluded income and the property generating the excluded income are, respectively, excluded from the Code §960 indirect foreign tax credit and from qualified business asset investments.
The final regulations caution that taxpayers cannot rely on the proposed regulations to elect for non-F.B.C.I. or non-insurance income to benefit from the high-tax kickout before the proposed regulations become final.
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