LET’S TALK TAXES – Own Shares in a Foreign Corporation?

“Most U.S. tax returns require that the filer provide information about foreign financial accounts, ownership in foreign entities, and financial statement data.”

“Written Testimony of Douglas Shulman Commissioner of Internal Revenue before Senate Committee”, July 17, 2008, IRS Ex-Commissioner Doug Shulman

Previously, I had written about owning shares in a foreign mutual fund or overseas investment company.  But, what if you own shares directly or indirectly in a foreign company?

Owning shares in a foreign corporation comes with its own set of rules and regulations. With globalization, more and more individual investors are crossing national boundaries to invest in foreign corporations.  For US persons, such entrepreneurship comes at a cost.  They, along with their tax advisors, need to navigate a mine field of requirements.  Entrepreneurs unwilling to handle these complexities should be wary of venturing overseas.

Two US citizens, A and R decide to form XYZ Co., an overseas corporation for doing business.  Since both had foreign corporation ownership during 2012, along with their personal income tax returns, they have certain filing and reporting requirements relating to their ownership in XYZ Co.

The number of shares owned seldom matters. It’s the ownership percentage of a foreign corporation that is important.  The reporting requirements vary depending based on percentage of stock ownership (a) 10% or less, (b) 50% or less, and (c) over 50%.  In addition to other reporting, total ownership by US persons over 50% requires inclusion of financial information of the foreign corporation.

A and R each have 50% stake in a foreign company, XYZ Co. Since both are US persons and together own over 50%, they must include XYZ’s financial information, in addition to satisfying other reporting requirements

Often investors feel that if their investment is minimal then they can ignore the IRS reporting and filing requirements.  This is absolutely incorrect.

A and R’s total investment in XYZ Co. is only $5,000. They think that the IRS requirements do not apply to them due to the low dollar value of their investment.  They are wrong.  They must report their ownership of XYZ Co.

Acquisition, disposition, and changes in ownership are also reportable transactions. Due to the complexities involved with foreign ownership, individual investors should consult with their advisors and understand their obligations.

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