Owning a business or a stake in India: Forms 5471, 8865 and the rest

People who own part of a family business in India, hold ESOPs of an Indian company, or are directors of an Indian private limited, often do not realise how much additional reporting they have in the US.

Indian private limited company: Form 5471

A US person who owns 10% or more of the shares of a foreign corporation, or who is an officer or director of one in which a US person has acquired 10% or more, may need to file Form 5471 with their tax return. Attribution rules count shares held by family members, so an apparently small personal holding can reach the limit.

The form is long. It asks for the company's balance sheet, income statement, shareholders and transactions with you. The penalty for failing to file is $10,000 per form per year, with more after notice and a reduction in foreign tax credit.

If US persons together hold more than 50%, the company is a controlled foreign corporation (CFC). Then a US shareholder can be taxed currently on the company's income, including global intangible low-taxed income (GILTI), even when no dividend is paid. Elections such as the high-tax exclusion can sometimes reduce or remove this, and the Indian tax paid by the company may help. It is worth planning before the first return.

Partnerships and LLPs: Form 8865

Interests in a foreign partnership are reported on Form 8865 in the case of 10% or more holdings where US persons control it, a contribution of property, or a 50% holding. An Indian LLP, in which every partner has limited liability, is by default treated for US tax purposes as a corporation unless a classification election (Form 8832) is made, so Form 5471 may apply instead. The classification should be decided with the entity.

Sole proprietorships

An Indian proprietorship is not a separate entity. Report the profit on Schedule C in dollars, claim the Indian tax as a foreign tax credit in the general basket, and report the business bank accounts on the FBAR. Self-employment tax may apply, though the India-US Social Security agreement can exempt it with a certificate of coverage.

Trusts and funds

Gifts to or from foreign trusts, and certain Indian trusts or provident and superannuation funds, can require Form 3520 or 3520-A. A private family trust in India is a particular case where the US treatment must be worked out before you are a beneficiary or settlor.

ESOPs and employee shares

Stock options in an Indian company are taxed at exercise as compensation, with Indian perquisite tax creditable. Rules on the date of income, valuation and the exchange rate need care (equity compensation covers the US-company version).

A start-up checklist

1. List every entity you own, direct or through family: shares, percentage, date acquired.
2. Get financial statements in rupees each year to prepare the forms. Indian statutory accounts usually need adjusting to US tax rules.
3. Decide before the stake is bought or the company is formed whether it should be a company, an LLP or a different structure. Moving later is more costly.
4. Include these entities in your master list for FBAR and Form 8938.
5. Budget for the forms: a missing form costs more than most of the tax.

These rules are technical, and a wrong classification affects every year. A US CPA with international experience should review the structure before it is set up.