It has been over a year since the final GILTI regulations were published. The GILTI rules for domestic partnerships in the final regulations were dramatically different than in the proposed regulations. In general, a domestic partnership that owns a CFC does not have a GILTI inclusion amount. However, a partner in the domestic partnership may have a GILTI inclusion amount if the partner is a U.S. shareholder of the CFC (typically meaning that the partner directly or indirectly owns 10% or more of the CFC).
Below is an excerpt from the preamble to the final regulations (Treasury Decision 9866, published in the Federal Register on June 21, 2019) that discusses the treatment of GILTI inclusions for domestic partnerships:
C. Adoption of Aggregate Treatment for Purposes of Determining GILTI Inclusion Amounts
* * * [T]he final regulations adopt an approach that treats a domestic partnership as an aggregate for purposes of determining the level (that is, partnership or partner) at which a GILTI inclusion amount is calculated and taken into gross income. Specifically, the final regulations provide that * * * a domestic partnership is not treated as owning stock of a foreign corporation within the meaning of section 958(a). See §1.951A-1(e)(1). Rather, the partners of a domestic partnership are treated as owning proportionately the stock of CFCs owned by the partnership in the same manner as if the partnership were a foreign partnership under section 958(a)(2). See id. Because a domestic partnership is not treated as owning section 958(a) stock for purposes of section 951A, a domestic partnership does not have a GILTI inclusion amount and thus no partner of the partnership has a distributive share of a GILTI inclusion amount. Furthermore, because only a U.S. shareholder can have a pro rata share of a tested item of a CFC under section 951A(e)(1) and §1.951A-1(d), a partner that is not a U.S. shareholder of a CFC owned by the partnership does not have a pro rata share of any tested item of the CFC. * * *
* * * [D]omestic partnerships have generally been treated as entities for purposes of determining the U.S. shareholder that has the subpart F inclusion with respect to such foreign corporation. * * *
The final regulations treat a domestic partnership as an aggregate of its partners in determining section 958(a) stock ownership by providing that, for purposes of section 951A and the section 951A regulations, a domestic partnership is treated in the same manner as a foreign partnership. See §1.951A-1(e)(1). For purposes of subpart F, a foreign partnership is explicitly treated as an aggregate of its partners, and rules regarding aggregation of foreign partnerships are relatively well-developed and understood. See section 958(a)(2). * * *
The final regulations do not adopt the recommendation to extend the treatment of a domestic partnership as an aggregate of its partners to the determination of U.S. shareholder and CFC status. * * * A domestic partnership is a U.S. person under section 957(c) and section 7701(a)(30) and, therefore, can be a U.S. shareholder under section 951(b). * * *
The treatment of domestic partnerships as foreign partnerships in the final regulations is solely for purposes of section 951A and the section 951A regulations and for purposes of any other provision that applies by reference to a GILTI inclusion amount (such as sections 959 and 961). The rule does not affect the determination of ownership under section 958(a) for any other provision of the Code (such as section 1248(a)), nor does it change whether such partner has a distributive share of a domestic partnership's subpart F inclusion under section 951(a). However, the Treasury Department and the IRS are proposing in a notice of proposed rulemaking published in the same issue of the Federal Register as these final regulations to apply a similar aggregate treatment to domestic partnerships for purposes of section 951.
Under section 1373(a), an S corporation is treated as a partnership and its shareholders as partners for purposes of subpart F, including section 951A. Therefore, for purposes of determining a GILTI inclusion amount of a shareholder of an S corporation, under §1.951A-1(e), the S corporation is not treated as owning stock of a foreign corporation within the meaning of section 958(a) but instead is treated in the same manner as a foreign partnership.