GILTI Rules: Why Offshore Corporations Don’t Work Like They Used To #
US citizens who set up offshore corporations thinking they’ll defer taxes often get hit with a surprise. The surprise is called GILTI, and it’s designed specifically to stop what you’re trying to do.
GILTI stands for Global Intangible Low Tax Income. The name is confusing on purpose. What it actually means is the IRS taxes US owners of foreign companies on profits those companies earn, even if the owner hasn’t taken the money out yet. You don’t get to leave profits sitting in a Cayman Islands corporation and defer US tax until you decide to pay yourself a dividend. The IRS treats those offshore earnings as your income right now.
This came out of the 2017 tax reform. Before GILTI, US citizens could own foreign corporations in low-tax jurisdictions and let the profits accumulate offshore without paying US tax until they brought the money home. Companies did this at scale. The IRS decided individuals shouldn’t get to do it either.
Here’s how it works in practice. You set up a British Virgin Islands company to hold your investment portfolio or run your online business. The company makes $200,000 in profit. You leave the money in the company, figuring you’ll deal with US tax later when you take distributions. Wrong. Under GILTI, the IRS calculates your share of that foreign company’s income and includes it on your US tax return as if you received it personally. You owe US tax on $200,000 even though you didn’t take a dollar out of the offshore entity.
The calculation gets complicated fast. GILTI doesn’t tax all foreign income. There’s an exclusion for a deemed return on tangible assets the foreign corporation owns. There are credits for foreign taxes already paid. But for most people using offshore corporations to hold passive investments or run service businesses, GILTI catches nearly everything. The promised tax deferral disappears.
This is why offshore corporations that used to make sense for US persons often create more problems than they solve now. You still have to file all the international reporting forms (5471, FBAR, 8938). You still deal with the complexity of maintaining a foreign entity. But you don’t get the tax deferral you thought you were getting. You just get a big compliance burden and a surprise tax bill.
For US citizens and green card holders, offshore structures need a specific purpose beyond “pay less tax.” Asset protection in a jurisdiction with strong creditor laws can still make sense. Holding operational businesses in countries where you actually do business can work. But parking investment accounts in a low-tax jurisdiction to defer US tax doesn’t function the way it did before GILTI.
The exceptions are narrow. If the foreign corporation pays meaningful foreign tax (generally above 13.125% after 2025), you might reduce or eliminate GILTI. If the business has substantial tangible assets (equipment, real estate, inventory), the deemed return on those assets can reduce GILTI exposure. But passive investment income sitting in a shell company gets hit full force.
What catches people is they set up the offshore structure based on advice that’s a decade old. Or they hear about wealthy people using offshore entities and assume the same strategy applies to them. It doesn’t. The rules changed. GILTI changed them. And the IRS is serious about enforcement because they built the entire framework to close what they saw as a loophole.
For high-net-worth individuals considering offshore structures, you need tax planning that accounts for current law, not what worked in 2015. The offshore entity might still make sense for non-tax reasons. But if someone is selling you on tax deferral through a foreign corporation and they’re not talking about GILTI, they’re either uninformed or lying.
Digital Wealth Partners provides wealth management and investment advisory that works within actual tax rules, not outdated strategies. For families dealing with cross-border complexity where the wrong structure creates expensive problems, Digital Ascension Group coordinates family office services with tax professionals who understand how GILTI and other international rules actually apply to your situation.
Offshore without planning creates surprise tax bills, not savings. The planning has to come first, and it has to account for the rules as they exist now.
Contact Digital Ascension Group to learn how our family office services can coordinate your complete financial picture.
