GILTI for Americans Owning Israeli Companies — Complete Guide

Why GILTI Matters for Anyone with an Israeli Company

The 2017 Tax Cuts and Jobs Act introduced GILTI — Global Intangible Low-Taxed Income — as a US anti-deferral regime. Its purpose was to prevent US multinationals from shifting profits offshore. The unintended effect: it captures basically every American who owns a foreign operating company, including the founder of an Israeli startup or the owner of an Israeli holding company.

Before GILTI, American owners of Israeli companies could defer US tax on the company's earnings until distributed as dividends. Many did. After GILTI, that deferral is largely gone: US shareholders must pay US tax on most of the company's earnings every year, even if no dividends are distributed.

Without planning, this can effectively double your tax bill. With proper planning — Section 962 election or GILTI High-Tax Exception — most of the US tax can be eliminated. The difference between "no planning" and "proper planning" can be tens of thousands of dollars per year.

Are You a US Shareholder of a CFC?

GILTI applies to "US shareholders" of "Controlled Foreign Corporations" (CFCs). Both terms have specific meanings.

You're a US Shareholder if:

• You're a US person (citizen, green card holder, or US tax resident), AND
• You own 10% or more of the foreign corporation (by vote or value)

The Foreign Corporation Is a CFC if:

• US shareholders (each owning 10%+) collectively own more than 50% of the stock (by vote or value)

What This Means in Practice

If you're a US person and you own 10%+ of an Israeli company that's mostly US-owned, you're a US shareholder of a CFC. GILTI and Subpart F apply.

If you own a small minority of a mostly Israeli-owned company, you're not a US shareholder for these purposes (no 10% interest), and GILTI doesn't apply to you.

The Most Common Scenarios

• Sole American founder of Israeli startup — yes, CFC and US shareholder
• American owns 25% of Israeli company; rest is Israeli — depends on whether US shareholders collectively are >50%. If you're the only US person, no CFC. If multiple US people each own 10%+ totaling >50%, yes CFC.
• American holds Israeli real estate through Israeli LLC — yes, this is a CFC. GILTI may not bite hard (no operating earnings) but Form 5471 still required.
• Israeli company with Israeli founder + US co-founder + US investors — likely a CFC if US shareholders >50%

How GILTI Actually Works

GILTI is calculated using a formula that captures most of the foreign company's "active" earnings.

The Formula (Simplified)

GILTI = Net CFC Tested Income − (10% × QBAI)

• Net CFC Tested Income = Most of the company's earnings (gross income minus deductions, minus Subpart F income, minus US ECI, minus high-tax exception income)
• QBAI = Qualified Business Asset Investment, basically the depreciable basis of tangible assets

The Practical Effect

For a typical Israeli services or software company:

• QBAI is usually small (laptops, office furniture, maybe servers) — say $50,000-$200,000 of tangible assets
• 10% of QBAI = $5,000-$20,000 — a tiny shield
• Almost all of the company's earnings flow through to your US Form 1040 as GILTI

For a hardware or manufacturing company with significant tangible assets, QBAI provides more shield. But for most Israeli companies, GILTI captures the majority of earnings.

How GILTI Flows to Your US Tax Return

1. The Israeli company's net tested income is calculated in USD using historical exchange rates
2. QBAI shield is subtracted
3. The remainder (GILTI) is added to your US taxable income on Form 1040
4. Without elections, you owe individual US tax on this amount — up to 37% federal, plus state if applicable
5. You can claim Foreign Tax Credit for Israeli corporate tax paid, but with significant limitations

A Worked Example

Let's run the math on a typical Israeli founder situation.

Path 1: No Planning (Default Individual Treatment)

• GILTI inclusion: ~$757,000 (after $2,000 QBAI shield)
• US individual tax on GILTI at 37% (top bracket): $280,000
• Foreign Tax Credit: limited under current rules; for individual GILTI without 962, FTC is generally not available
• Total US tax on GILTI: ~$280,000
• Plus tax on her $80,000 salary: ~$24,000
• Plus 3.8% Net Investment Income Tax may apply: ~$29,000
• Total combined tax (Israeli corporate + Sarah's US): ~$559,000 on $985K of profit = ~57% effective rate

Path 2: Section 962 Election

• Sarah elects to be taxed as a US C-corporation on her GILTI
• GILTI inclusion: ~$757,000
• 50% Section 250 deduction: $378,500 deduction
• Net taxable: $378,500
• US corporate tax at 21%: $79,500
• Foreign Tax Credit: Israeli corporate tax of $226,000 × 80% creditable factor = $181,000 of FTC available
• FTC fully offsets $79,500 of US GILTI tax — so US tax on GILTI: $0
• Excess FTC of ~$101,000 wasted (no carryback/carryforward for Section 962 FTCs in this category in most cases)
• Plus tax on $80,000 salary: ~$24,000 (separate from 962)
• Total combined tax: ~$250,000 on $985K = ~25% effective rate

Path 3: GILTI High-Tax Exception

• Sarah elects HTE — exempting GILTI for foreign income taxed above 18.9%
• Israeli corporate tax 23% > 18.9% threshold → income qualifies for HTE
• GILTI inclusion: $0 (entirely excluded from US taxable income)
• No Foreign Tax Credit for Israeli corporate tax (since income is excluded)
• Plus tax on $80,000 salary: ~$24,000
• Total combined tax: ~$250,000 on $985K = ~25% effective rate

Path 1 vs Path 2/3: ~$300,000 difference per year. Over 5-10 years of operations, that's a multi-million dollar swing.

Section 962 Election — The Game Changer

Section 962 is a critical election for individual US shareholders of CFCs. It allows you to be taxed on GILTI and Subpart F as if you were a US C-corporation, rather than at individual rates.

Why Section 962 Helps

• 21% corporate rate instead of up to 37% individual
• Section 250 deduction — 50% of GILTI is deducted, bringing effective rate to 10.5%
• Foreign Tax Credit available — corporate-treated GILTI can claim FTC for foreign corporate tax (with 80% creditable factor)

How to Elect

Section 962 is elected annually with your Form 1040 by attaching a statement. You can elect for some CFCs and not others. The election covers all GILTI and Subpart F income from elected CFCs.

The Catch — Eventual Distribution

When you eventually distribute the earnings as a dividend, Section 962 creates a "second tax." But:

• The second tax is only on amounts that received Section 962 benefit and weren't already taxed at distribution time
• Most of the GILTI inclusion was sheltered by FTC, so very little is "previously taxed at low rate"
• The dividend can also qualify for qualified dividend rates (15-20%) if the foreign corporation is in a treaty country (Israel qualifies)

Net effect for most Israeli companies: massive deferral with little to no second-tax concern.

GILTI High-Tax Exception (HTE)

The HTE was finalized in 2020 and provides another path to eliminating GILTI for high-tax foreign companies. If the income is taxed in the foreign country at more than 18.9%, you can elect to exclude it from GILTI entirely.

Israel Easily Qualifies

Israeli corporate tax is currently 23% — well above the 18.9% threshold. So virtually every regular Israeli operating company qualifies for HTE.

Exceptions

Some Israeli tax incentives can lower effective rates below 18.9% — disqualifying HTE:

• Preferred Enterprise status — Israeli companies meeting certain conditions get reduced tax rates of 7.5%-12%, depending on location
• Special Preferred Enterprise — even lower (5%-8%) for very large operations
• Innovation Box (R&D companies) — 6%-12% tax rate possible

If your Israeli company benefits from these incentives, HTE may not work — and you may need to use Section 962 instead.

How to Elect HTE

HTE is elected annually with Form 5471 by attaching a specific statement. The election applies to all GILTI from a particular CFC. Switching between HTE and non-HTE in subsequent years is allowed but creates timing complexity.

Trade-offs

• HTE: No GILTI tax, but no Foreign Tax Credit for Israeli tax (since income is excluded). No risk of "second tax" on distribution.
• Section 962: Pay GILTI tax (often offset by FTC). Foreign tax credit value preserved. Some risk of second tax.

962 vs HTE — How to Choose

For most Israeli company owners, both elections eliminate or near-eliminate US tax on GILTI. The choice between them depends on specifics.

Choose HTE if:

• Your Israeli company pays full Israeli corporate tax (23%)
• You want simplicity — no Section 962 statement, no FTC calculations
• You don't need the FTC value for other purposes
• You may distribute earnings as dividends in low-tax-bracket future years

Choose Section 962 if:

• Your Israeli company has tax incentives that bring effective rate below 18.9%
• You have other foreign income that benefits from FTC pooling
• You need to model future distributions and want flexibility
• You have multi-year situations where excess FTC could be useful

Choose Both?

You can elect HTE for some CFCs and Section 962 for others. Useful if you have multiple Israeli companies with different tax profiles.

Form 5471 Reporting Requirements

If you have an Israeli CFC, you must file Form 5471 every year. This is a separate form filed with your Form 1040.

What's on Form 5471

• Schedule A: Stock owned
• Schedule B: US shareholders
• Schedule C: Income statement of the CFC (in functional currency and USD)
• Schedule F: Balance sheet
• Schedule G: Other information
• Schedule G-1: Cost-sharing arrangements
• Schedule H: Earnings & profits
• Schedule I: Summary of shareholder's income from foreign corporation
• Schedule I-1: GILTI calculation
• Schedule J: PTI (Previously Taxed Income)
• Schedule M: Transactions between CFC and related parties
• Schedule O: Reorganizations
• Schedule P: PTEP (Previously Taxed Earnings & Profits)
• Schedule Q: CFC income groups
• Schedule R: Distributions
• Statement: Section 962 election (if applicable)
• Statement: GILTI HTE election (if applicable)

Categories of Filers

Different US shareholders fall into different "categories" with different filing requirements:

• Category 1 — Officers/directors of certain CFCs
• Category 2 — Acquired stock in foreign corporation
• Category 3 — Officers/directors with 10%+ acquisitions
• Category 4 — Control of foreign corporation (50%+)
• Category 5 — US shareholder of CFC (most common for owners)

Penalties

Penalty for non-filing or incomplete filing: $10,000 per form per year, plus 10% reduction in foreign tax credits. Stacked across years.

Time Investment

The IRS estimates 60-90 hours per Form 5471. Most owners outsource this entirely to a CPA. We typically charge $3,500-$8,000 per Form 5471 depending on complexity.

Subpart F Income — The Other Trap

Even before GILTI, the US had Subpart F — an older anti-deferral regime. Subpart F captures specific categories of "tainted" income immediately:

Common Subpart F Categories

• Foreign Personal Holding Company Income — interest, dividends, rents, royalties, capital gains
• Foreign Base Company Sales Income — buying/selling related-party goods through tax-friendly jurisdictions
• Foreign Base Company Services Income — services to related parties outside the country of incorporation

Why Subpart F Matters Even If GILTI Is Eliminated

Section 962 covers Subpart F. HTE does not (HTE is GILTI-specific). So if you elect HTE only, Subpart F income still hits you at individual rates.

Common scenarios where Subpart F matters:

• Israeli company holds significant cash investments earning interest
• Israeli company licenses IP to a related US company (royalties)
• Israeli company provides consulting services to your other US business
• Israeli company sells goods through a related-party arrangement

Common Mistakes

1. Not Realizing You're a CFC Until Year 3

Many founders think their Israeli startup is "just a company in Israel" — until tax season hits and the Form 5471 issue emerges. By then, multiple years may need to be amended. Get advice immediately upon formation.

2. Defaulting to Individual Treatment Without 962

Without Section 962, GILTI is taxed at individual rates with limited FTC. This is usually the worst possible outcome. Always evaluate Section 962 (or HTE) for any Israeli company you own.

3. Wrong HTE Election Mechanics

HTE must be elected on a CFC-by-CFC basis with all controlled CFCs treated consistently. Some founders try to "cherry-pick" — HTE for one Israeli company but not another in the same control group — which doesn't work.

4. Treating Distributions as Tax-Free

Once you've paid GILTI tax, the GILTI-included earnings become "PTEP" (Previously Taxed Earnings & Profits) — distributable without further GILTI tax. But many owners miss this and accidentally pay tax twice.

5. Ignoring Transfer Pricing

Transactions between you (or your US entities) and the Israeli company need transfer pricing documentation. Without it, the IRS or ITA can adjust prices, creating phantom income and double tax.

6. Forgetting Subpart F While Solving GILTI

Choosing HTE solves GILTI but leaves Subpart F exposed. If you have meaningful Subpart F income (royalties, related-party services), Section 962 is usually better.

7. Late Form 5471 Filing

$10,000 penalty per missed year stacks fast. If you've been non-compliant, the path forward is the "Streamlined Compliance Procedure" or DIIRSP (Delinquent International Information Return Submission Procedures) — both significantly reduce penalty exposure.

The Bottom Line

If you're an American with an Israeli company, GILTI is one of the most impactful US tax issues you'll face. Without proper planning, it can effectively double your tax bill. With proper planning — Section 962 election, GILTI HTE, or some combination — most or all of the US tax can be eliminated.

The right approach:

1. Evaluate your structure immediately upon Israeli company formation
2. Don't default to individual GILTI treatment — almost always suboptimal
3. Choose between Section 962 and HTE based on your specific situation
4. Maintain proper Form 5471 reporting every year
5. Address Subpart F income separately from GILTI strategy
6. Document transfer pricing for related-party transactions

If you have an Israeli company and aren't sure your GILTI strategy is optimal, contact us for a free 30-minute review. We'll model your situation and identify whether changes could reduce your annual tax by 20-30% or more.