For US citizens living in Spain who own a Spanish company — a Sociedad Limitada (SL), a holding company, or any other non-US corporate entity — two provisions of the US Tax Cuts and Jobs Act 2017 can create unexpected US tax obligations: GILTI (Global Intangible Low-Taxed Income) under IRC §951A, and Subpart F income under IRC §951. Understanding when these apply, when they do not, and what planning is available is essential for any American business owner in Spain.
What Is GILTI?
GILTI — Global Intangible Low-Taxed Income — was introduced by the Tax Cuts and Jobs Act of 2017 (TCJA) and applies to US shareholders of Controlled Foreign Corporations (CFCs). A CFC is a non-US corporation in which US shareholders (each owning 10% or more of the vote or value) together own more than 50% of the corporation's vote or value.
GILTI is designed to tax US shareholders on a portion of the CFC's earnings that exceed a 10% return on the CFC's Qualified Business Asset Investment (QBAI — essentially tangible depreciable assets). The excess — the "intangible" return — is the GILTI inclusion. It is taxed annually as deemed income of the US shareholder, whether or not any distribution is actually made.
How GILTI Works for an American Owning a Spanish SL
Suppose a US citizen living in Spain owns 100% of a Spanish SL. The SL earns €200,000 of net profit in the tax year:
- The SL is a CFC (the US citizen is a 10%+ US shareholder owning more than 50% combined)
- QBAI is assessed on the SL's tangible assets. For a service company with minimal tangible assets, QBAI may be near zero
- GILTI = SL net income minus 10% of QBAI. For a service SL with zero QBAI: GILTI = €200,000
- The US shareholder includes €200,000 in US gross income as a GILTI inclusion — annually, without any distribution
- The US tax on GILTI (before deductions or credits) is at the individual's ordinary income rates
The GILTI High-Tax Exclusion (HTE)
The GILTI High-Tax Exclusion (HTE) is one of the most important planning tools for Americans with foreign companies. Under Treasury regulations, a US shareholder can elect to exclude GILTI from US income if the CFC's income was subject to a foreign effective tax rate (ETR) exceeding 18.9% (which is 90% of the US corporate tax rate of 21%). If the HTE applies, GILTI is excluded entirely from the US shareholder's income — no US tax is due.
Spanish SL at 25% IS rate: Spain's general corporate income tax rate is 25%. A Spanish SL paying Spanish Impuesto sobre Sociedades at 25% easily exceeds the 18.9% HTE threshold. In most cases, a Spanish SL that pays standard Spanish IS at 25% on all its income qualifies for the GILTI HTE election — meaning GILTI is excluded from the US shareholder's income. The HTE election must be made annually on Form 8992 and the applicable international tax schedules.
Caveats apply:
- The HTE is calculated category by category (tested unit by tested unit). If the SL has some income taxed at reduced rates (e.g., R&D deductions, patent box), the blended rate for that category may fall below 18.9%
- The HTE election is all-or-nothing for a given CFC — if elected, it applies to all GILTI-category income of that CFC
- If the SL has a Spanish startup tax rate (15% for new companies in their first two profitable years), the rate may be below 18.9%, potentially disqualifying the HTE
- The election must be made timely
Subpart F Income
Subpart F (IRC §951) predates GILTI and applies to certain categories of passive and mobile income earned by a CFC. Unlike GILTI, Subpart F applies regardless of the foreign tax rate — there is no high-tax exclusion available for most Subpart F income (though a high-tax exception does exist under §954(b)(4)). Subpart F categories include:
- Foreign Personal Holding Company Income (FPHCI): Dividends, interest, royalties, rents, and capital gains — the classic passive income categories
- Foreign Base Company Sales Income: Income from buying property from or selling to a related party in a different country
- Foreign Base Company Services Income: Income from services performed for or on behalf of a related party outside the CFC's country of organisation
- Insurance income and related categories
For a US citizen owning a Spanish SL that provides active services to unrelated clients in Spain, the operating income is generally not Subpart F income — it does not fall into any of the Subpart F categories. However, if the Spanish SL receives interest on loans to related parties, dividends from subsidiaries, or royalties from IP licences, those receipts may be Subpart F FPHCI inclusions, taxable in the US in the year earned — regardless of any distribution.
The Section 962 Election
For individual US shareholders who do not qualify for the GILTI HTE (or who have Subpart F income), the Section 962 election provides a mechanism to reduce the effective US tax rate. Under Section 962, an individual US shareholder can elect to be taxed on CFC inclusions as if they were a domestic C corporation. The practical effects:
- GILTI inclusions are subject to the corporate GILTI deduction (IRC §250), which reduces the effective rate to approximately 10.5% at the corporate level (or lower with FTCs)
- Foreign Tax Credits are available against the deemed corporate-level tax
- On actual distribution, the previously-taxed income is partially taxable again (at the shareholder's ordinary rate minus the Section 962 corporate-level tax already paid) — so Section 962 defers some tax but does not eliminate it
The Section 962 election is complex and must be made annually. Whether it is beneficial compared to simply including the GILTI/Subpart F at individual rates with an individual-level FTC depends on the specific facts — a US CPA analysis is required.
Interaction with Spanish IRPF
The GILTI and Subpart F inclusions create a potential Spanish IRPF interaction problem. Spain taxes its residents on worldwide income. If a Spanish tax resident (US citizen) receives a GILTI or Subpart F deemed inclusion in their US income, Spain may or may not tax the same amount. The Spanish IRPF treatment of a deemed (not actually distributed) US income inclusion from a CFC is complex:
- Spain's own transparencia fiscal internacional (TFI) rules under Art. 91 LIRPF independently attribute certain CFC income to Spanish resident shareholders — but the Spanish TFI regime has different categories and thresholds from the US GILTI/Subpart F regime
- For a Spanish SL owned by a US citizen resident in Spain, the Spanish TFI rules may not apply (they typically target low-tax jurisdictions — Spain at 25% IS is not a low-tax jurisdiction)
- GILTI inclusions are US-law deemed income — Spain does not automatically recognise US deemed inclusions as taxable events in Spain
- On actual dividend distribution from the SL to the shareholder, Spain taxes the dividend as savings income (19–28%); the US also taxes the distribution (though reduced by previous GILTI inclusions through previously taxed earnings and profits accounts)
The PFIC Regime for Non-US Funds
Separately from GILTI and Subpart F, US citizens in Spain who invest in non-US investment funds (Spanish fondos de inversión, Irish-domiciled ETFs, Luxembourg SICAVs) face the PFIC regime under IRC §1297. PFICs are taxed punitively on excess distributions and gains under the interest-charge regime. Unlike the GILTI HTE, there is no high-tax exclusion for PFICs. The practical result for Americans in Spain: non-US investment funds should generally be avoided in favour of US-domiciled vehicles.
| US Regime | Applicable To | Spanish SL at 25% IS | Planning Available |
|---|---|---|---|
| GILTI (IRC §951A) | US shareholder of CFC; annual deemed inclusion of excess returns | HTE typically available (25% ETR > 18.9%) → GILTI excluded | HTE election; Section 962; FTC |
| Subpart F (IRC §951) | US shareholder of CFC; passive income, related-party transactions | Applies only if SL has passive income or related-party transactions | High-tax exception (§954(b)(4)); active business structuring; Section 962 |
| PFIC (IRC §1297) | US shareholder of non-US investment funds | Spanish fondos and Irish ETFs are PFICs — punitive regime applies | Avoid non-US funds; use US-domiciled ETFs/funds where possible |
| Spanish TFI (Art. 91 LIRPF) | Spanish resident shareholders of low-tax foreign companies | Spanish SL at 25% IS generally NOT within Spanish TFI (not low-tax) | Maintain adequate Spanish IS rate |
Why You Need Both a US CPA and a Spanish Tax Lawyer
The interaction between US CFC rules (GILTI, Subpart F, PFIC) and Spanish IRPF creates a dual-filing, dual-planning requirement that no single professional can adequately handle alone:
- A US CPA (Certified Public Accountant) with international expertise prepares the Form 1040, Form 5471 (CFC reporting), Form 8992 (GILTI), Form 8621 (PFIC), and any other US filings. They assess whether the HTE election is beneficial, whether a Section 962 election is advisable, and how the Foreign Tax Credit is optimised.
- A Spanish tax lawyer (abogado tributarista) advises on Spanish IRPF compliance, manages the Spanish corporate tax returns for the SL, analyses whether Spanish TFI rules apply, and ensures that dividend distributions from the SL are structured and timed efficiently from a Spanish savings-income perspective.
The two advisers must coordinate — timing of dividends, structuring of remuneration vs. dividend, and the treatment of deemed inclusions all require both US and Spanish analysis simultaneously.
US Citizen with a Spanish Company? Get Integrated Advice
Jacob Salama provides Spanish tax law advice for US citizens in Spain and coordinates with trusted US CPAs to provide integrated GILTI, Subpart F, and IRPF planning.
Book a Consultation →Disclaimer: This article is for general informational purposes only and does not constitute legal or tax advice. Spanish tax law changes frequently. Always consult a qualified tax lawyer before making any decisions. SALAMA LEGAL SLP — Colegiado nº 11.294 ICAMálaga.