Do you have US investors in your fund? A question you have probably heard all too often in the context of FATCA. However, beyond the scope of FATCA, providing your US investors with the right US tax reporting allows them to properly file their US tax return. According to US tax rules, any US person is taxed on its worldwide income.
When offshore funds have US investors, the offshore funds have to deal with complex US tax reporting rules. US tax law applies to US persons no matter where they live or what they invest in.
US investors are seeking new diverse investment opportunities across asset classes and jurisdictions. Making non-US investments can create substantial risk and complexity for US Investors:
- Complex US tax information reporting requirements for non-US investments; and
- Stringent penalties for a failure to properly report on foreign investments.
US investors rely on foreign asset managers to provide all necessary details to report for foreign investments and the income derived from them as well as to administer any related US taxes. US investors will seek out asset managers that have clear US tax reporting competencies and a track record meeting similarly situated investors needs.
The legal entity form of the non-US investment vehicle decides which kind of reporting the US investor will need. In this regard, It is important to keep in mind that the classification of non-US investment vehicles under the tax law of your country may not match the classification for U.S. tax purposes. For instance, entities that are not considered corporations under foreign law may be considered corporations for U.S. tax purposes and vice versa.
US tax law allows elligible non-US investment vehicles to make a "Check-The-Box" election in order to classify a "local" Corporation as a Partnership for US tax purposes, or vice versa. The required forms by the IRS depends on the legal form of the entities:
- "Transparent" Structure (partnership): Schedule K-1 reporting
- Legal Structure (corporation): PFIC Statement
Investing in a PFIC and K1 requires US holders to report and pay tax annually.
Partnership and Schedule K-1
Partners of foreign partnerships will require Schedule K-1s to fulfill their tax reporting obligations.
The Schedule K-1 reports the partner’s share of the taxable income, gain, losspartership expenses. The Schedule K-1 report will include disclosures regarding additional reporting that may be required by the partners on their respective U.S. federal tax returns (i.e. Form 8865, 926, ect.)
Passive Foreign Investment Company ("PFIC")
A passive foreign investment company (PFIC) is a corporation for US tax purposes located abroad, which exhibits either one of two conditions based on either income or assets:
At least 75% of the corporation's gross income is "passive"—that is, derived from investments or other sources not related to regular business operations.
At least 50% of the company's assets are investments, which produce income in the form of earned interest, dividends, or capital gains (apart from a limited number of exceptions).
PFICs first became recognised through tax reforms passed in 1986. The changes were designed to close a tax loophole, which some U.S. taxpayers were using to shelter offshore investments from taxation.
Typical examples of PFICs include foreign-based mutual funds and startups that exist within the scope of the PFIC definition.
By filing Form 8621 and electing to treat PFIC as a qualified electing fund (QEF)investors will be able to enjoy the favorable tax rate on capital gains. The investor of a PFIC should receive Annual Information Statements which are signed by a representative of the PFIC for the US shareholder.
CFC (Controlled Foreign Corporation)
CFCs are foreign corporations in which more than 50% of the total combined voting power of its stock or the total value of its stock is owned by United States shareholders. A US shareholder is any US person who owns 10% or more of the total value of shares of all classes of stock of a foreign corporation, or who owns 10% or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote.
Such US shareholder requires to receive form 5471 which contains extensive information on the level of the non-US investment vehicle and US shareholder.
Scope of services
Upfront assistance in reaction with the regime election and tax requirements;
Preparation of the annual reporting;
High level and solid assistance for investors’ questions.
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