Estonia, the small Baltic country of just 1.3 million people situated halfway between Sweden and Russia, was named “the most advanced digital society in the world” by Wired magazine. According to recent figures, Estonian residents complete their taxes online in under five minutes, 99 percent of Estonia’s public services are available on the internet 24 hours a day, and nearly one-third of its citizens vote via the internet. With these advanced technological features, it is not surprising that its government boasts that Estonia is home to more tech unicorns (i.e., private companies valued at more than $1 billion) per capita than any other small country in the world.
As a result of the high number of technology companies that call Estonia home, one might think that the U.S.’s new global intangible low taxed income (or GILTI) tax was enacted specifically to go after U.S. taxpayers doing business in countries such as Estonia, where intangible assets presumably make up a significant portion of the value of these tech companies. The new GILTI regime, enacted as part of 2017 tax reform, generally triggers immediate U.S. tax on active income earned by a Controlled Foreign Corporation (CFC), other than an annual carve-out for 10 percent of the CFC’s adjusted basis in its tangible depreciable assets used in its trade or business. In essence, all active income above this assumed return is deemed to be from intangibles (regardless of any actual relationship to intangible assets), and is thus subject to the GILTI provisions, which now reach most offshore income that was previously possible to defer from U.S. taxation. There is no high-tax exception to GILTI, although income that would otherwise be Subpart F income but for the Section 954(b)(4) high-tax exception is excluded from GILTI. Continue Reading