GILTI for India Founders: Navigating High-Tax Exemption and Filings

(UNITED STATES) India-linked startup founders with U.S. tax ties face a quiet but far-reaching set of rules that can pull overseas profits into their U.S. tax returns each year. Under the Global Intangible Low‑Taxed Income regime — known as GILTI and set out in IRC §951A — a U.S. person who owns at least 10% of a foreign corporation must include their share of the company’s “tested income” in their U.S. taxable income, even if the company never pays a dividend.

For Indian companies with effective tax rates around 25%, the impact can vary depending on elections and timing. The rules exclude certain items, such as income already taxed under Subpart F and income taxed at high rates abroad under a high tax exception. For many India-based founders who are U.S. citizens, Green Card holders, or other U.S. tax residents, this framework now sits at the center of business planning, personal tax filings, and cross‑border investment choices.

How GILTI works in brief

• Who it targets: U.S. shareholders who own >= 10% of a controlled foreign corporation (CFC).
• What is included: A U.S. shareholder’s share of the CFC’s tested income is included in U.S. taxable income annually.
• Key exclusions: Items taxed under Subpart F and income qualifying for the high tax exception.
• Corporate vs. individual treatment: U.S. corporations usually get a favorable deduction (often 50% under historic rules), lowering effective tax on GILTI. Individual shareholders generally do not get the same break unless they make a specific election that treats them similarly to corporations for this purpose.

The practical result is a split system: corporate U.S. shareholders often face a lighter GILTI burden, while individual U.S. shareholders must plan to avoid surprise tax bills on profits they never received in cash.

The high tax exception and why India’s tax rate matters

• The high tax exception allows exclusion from GILTI when the foreign income is taxed above a threshold (roughly > about 90% of the U.S. corporate rate — often expressed as about 18.9% in practice for the test).
• With India’s headline corporate tax around 25%, many Indian companies can meet this threshold and potentially exclude profits from GILTI.
• Timing, grouping, and correct elections are critical. If the election is missed or the year’s numbers don’t align, the exception may fail to apply.

Important: Founders should build a repeatable annual process to compute effective rates, make elections timely, and preserve documentation — this helps prevent double taxation and avoids late-year surprises.

Required filings and penalties

• A U.S. person with 10%+ ownership typically must file:
  • Form 5471 — to report ownership and activity of the foreign corporation.
  • Form 8992 — to compute any GILTI inclusion.
• These forms carry penalties for non‑filing and materially influence how the IRS views the shareholder’s foreign company and GILTI calculations.
• Filing duties exist even when no dividend or distribution is paid — the system prioritizes reporting and computation.

What founders should know about the mechanics

GILTI’s tested‑income calculation involves several steps:
1. Confirm whether the foreign company is a CFC.
2. Measure direct and indirect ownership percentages that determine U.S. shareholder status.
3. Compute tested income by:
– Removing Subpart F income and income effectively connected with a U.S. trade or business.
– Subtracting a deemed return on tangible offshore assets.
4. Compare the effective foreign tax rate to the high tax exception threshold.
5. Decide whether to elect the high tax exception (if available) — if elected correctly, that income may be excluded from GILTI.
6. File Form 5471 and Form 8992, retaining supporting workpapers.

• Corporate U.S. shareholders can use a deduction to lower their effective tax on GILTI.
• Individual U.S. shareholders can consider a separate election to obtain corporate-style treatment — but this election is complex and may not be optimal in all cases.

A practical example

• Founder Raj: U.S. citizen, owns 60% of IndiTech Pvt Ltd in India.
• Year 2025: IndiTech earns USD 1.2 million and pays Indian corporate tax near 25%.
• Outcome:
  • Raj must compute his share of tested income for 2025 and include it in his U.S. taxable income unless a high tax exception applies and is properly elected.
  • If the exception is made and numbers align, Raj can exclude those profits from GILTI and avoid U.S. tax on undistributed income for that year.
  • If the election is missed, Raj could face a U.S. tax bill despite receiving no cash — a liquidity strain for early-stage founders.

Practical planning checklist for India‑connected founders

• Confirm CFC status and whether you are a U.S. shareholder (>=10%).
• Verify ownership percentages, including indirect holdings through other entities or family structures.
• Compare the company’s effective tax rate to the high tax exception threshold (often ~18.9%).
• Keep clean records of:
  • Intercompany pricing and transactions.
  • Loans between related parties.
  • Indian tax returns and assessments to support effective rate calculations.
• Track tangible assets used in the business (tested‑income formula allows a deemed return on these).
• Calendar and apply the high tax exception election when appropriate and be consistent in application.
• File Form 5471 and Form 8992 on time; maintain copies of forms and workpapers.

Common traps and moving pieces

• Adjustments or incentives (e.g., tax holidays) can reduce the effective foreign rate below the high tax threshold, causing GILTI to reappear.
• Subpart F income reduces tested income but may be taxed separately.
• Missing elections or mismatched timing can produce unexpected inclusions and cash strain.
• The choice to make an individual election to be taxed like a corporation can help in some scenarios but has trade‑offs and affects foreign tax credit calculations.

Operational recommendations

• Set a yearly checklist covering CFC status, ownership, effective tax rate, election decisions, and filings.
• Maintain a by‑entity ledger for intercompany deals and loans.
• Store copies of Indian tax returns and assessments in a shared folder with prior Form 5471/8992 filings and election statements.
• Align dividend policy with cash needs versus U.S. tax exposure; remember GILTI can tax undistributed profits.
• Assign a point person (internal or advisor) to manage the annual GILTI process — similar to payroll or vendor payments.

Warning: The rules expect an annual computation tied to the U.S. tax year. Falling behind on basic records (ownership percentages, foreign tax paid) can prevent you from making the high tax exception work and may lead to missed forms and penalties.

Broader impact and policy context

• GILTI aims to prevent deferral of U.S. owners’ income in low-tax jurisdictions, but the rules are blunt and can sweep in ordinary operating profits from Indian software or services companies.
• For India-based founders with U.S. status, GILTI is not niche — it regularly affects salary, dividend timing, funding decisions, and personal liquidity.
• The regime is stable enough that practical steps (regular accounting close, annual elections, stable policies) can keep surprises to a minimum.

Primary sources and further reading

• The IRS’s official guidance on GILTI final regulations is a primary source for background and reporting expectations:
  • IRS: Global Intangible Low‑Taxed Income (GILTI) final regulations
• Filing resources:
  • IRS — About Form 5471
  • IRS — About Form 8992

Final takeaways

• GILTI includes a U.S. shareholder’s share of a CFC’s tested income each year, excluding Subpart F and any income covered by a properly applied high tax exception.
• Corporate U.S. shareholders generally get a deduction that eases the burden; individual shareholders often do not unless they make a careful election.
• India’s corporate tax rate frequently allows the high tax exception to reduce or remove GILTI inclusion, but election timing, records, and annual computations matter.
• For founders with 10%+ ownership in Indian companies, the difference between a smooth filing season and a stressful one often comes down to routine annual processes: know ownership, track effective foreign tax rate, decide on elections, and keep filings current.

By embedding these steps into the company’s finance routine, India‑based teams with U.S.-person owners can scale across borders while minimizing unexpected U.S. tax outcomes.