Federal Treatment of An Actual Distribution of Earnings and Profits for Electing

An individual, trust or estate that made an IRC 962(a)(1) election to pay a tax equal to a corporate tax on GILTI may receive an actual distribution (as opposed to GILTI, which is deemed income) from the foreign corporation in the future. If an actual dividend is paid, IRC 962(d) requires the taxpayer to include in gross income the actual dividend less any federal tax paid on specific income, which includes GILTI.

Example 2: An individual makes the election under IRC 962(a)(1). Assume for purposes of IRC 78 that the individual is deemed to have paid foreign tax of $10 on $90 of GILTI included in gross income. The individual paid no other tax on income to which the election under IRC 962(a)(1) applies.

Year 1: Deemed income (GILTI)
GILTI in gross income: $90.00
Plus: IRC 78 foreign tax gross-up: 10.00
Less: IRC 250(a)(1)(B) deduction, 50%: (50.00)
GILTI included in AGI: $50.00

U.S. tax at 21% corporate rate: $10.50
Less: 80% foreign tax credit: (8.00)
Net U.S. tax: $2.50

Year 2: Actual income
Foreign dividend: $90.00
Less: Tax paid in Year 1 on GILTI: (2.50)
Net foreign dividend in gross income: $87.50