Territorial Economic Recovery Act
The Territorial Economic Recovery Act (H.R. 363) would modify the U.S. international tax rules to exclude certain income earned by a “qualified possession corporation” (QPC) from the tested income used to compute Global Intangible Low-Taxed Income (GILTI) for controlled foreign corporations (CFCs). Specifically, if a CFC meets defined criteria showing substantial activity and income tied to a U.S. possession (e.g., Puerto Rico, the U.S. Virgin Islands, and other possessions described in law), then income from those possessions that is effectively connected to an active trade or business would be excluded from its tested income. The bill defines possession-related criteria, expands the list of possessions eligible for this treatment, and sets the effective date to apply to years beginning after December 31, 2023. The aim appears to be encouraging investment and economic activity in U.S. possessions by reducing the U.S. GILTI tax burden for qualifying corporations operating there.
Key Points
- 1Exclusion from tested income: The bill adds a new provision to 951A to exclude from a CFC’s tested income the income of a qualified possession corporation that is effectively connected with the active conduct of a trade or business within a possession of the United States.
- 2What counts as a possession: For purposes of this section, a “possession of the United States” includes Puerto Rico, the U.S. Virgin Islands, and any specified possession described in section 931(c).
- 3Qualified Possession Corporation (QPC) standards: A CFC is a QPC if, over the 3-year period ending in the prior year (or the existence period if shorter), (1) 80% or more of gross income is from sources within a U.S. possession, and (2) 75% or more of gross income is effectively connected with the active conduct of a trade or business within a possession.
- 4Effective date and scope: The amendments apply to taxable years of foreign corporations beginning after December 31, 2023, and to the taxable years of U.S. shareholders in which or with which those foreign years end.
- 5Policy purpose: By targeting income tied to U.S. possessions, the bill seeks to promote territorial economic recovery and incentivize corporate activity in these territories.