Hotscot

Hypothetical.

Me USC
I give my brother back in Scotland say, $15K to help him set up a restaurant.
All above board, he agrees and documents that he'll pay me back $25K plus 5% of profits after 5 years.

Reportable?
And if not why not?

JAJ

Lending money to a relative is a really bad idea, FATCA reporting aside.

Would this be a loan, or an investment in a foreign corporation? It doesn't sound like a gift if there is a documented repayment agreement.

Hotscot

Just hypothetical

Would it be considered an investment in a foreign corporation and if so reportable under FATCA?

And your question about repayment agreement...what if the cash bought a 5% share in the restaurant, but no promised final value, and that at the end of the five years the value may have gone up or down?

JAJ

Have you read the instructions to form 8938?

It all depends on how the deal is structured. For example, there is a difference between a documented (private) loan to a person and an equity investment in a private corporation. You would need to understand both U.K. and U.S. tax consequences of both, options, along with any others (how would profit be taxed, and if any losses could be used against other income). Also consider any issues arising out of being a director or assumed director of a U.K. corporation, your rights as a minority stockholder should you wish to sell, any liability issues that may arise, etc.

If serious about this, you should be paying for professional advice as it goes way beyond the scope of a public forum.

If it's a straightforward gift, then there are U.S. gift tax reporting issues.

Hotscot

One of the problems I've had in researching this is the professionals I've asked, 5 so far, have given me conflicting answers.

JAJ

Really? Have you asked for advice in writing pursuant to a client agreement, and paid a fee for such advice?

Hotscot

Yes in writing but before the fee stage. I've been sounding out some tax pros based on my specific situation which may be a bit more complex than what they're used to.
Not relating to the hypothetical situation I outlined above.
The stumbling block I keep running into is the section.

"Foreign stock or securities not held in a financial account" and the definition thereof.

jmood

What if you showed this to the IRS as a gift and kept the agreement between you and your brother private? Would you lose out?

If it earned income later, couldn't you simply report that later?

Hotscot

Recently I've been thinking of simply reporting it as miscellaneous income.
It's an investment into a company, however there is not an "account."
I contributed an amount into the company, the company will be sold off next year, then I'll get capital gains.

I believe I just need to report my gain and also note my initial investment as the cost.

JAJ

Are you suggesting tax fraud by reporting something as a gift when it's not?

It's earned income if you work for the company. Otherwise it's not earned.
And usually you would want to extract profit in the form of long term capital gains on the increase in investment. And further to the first point, falsely reporting it as a gift would not be a good start to claiming it as part of cost basis later on.

JAJ

Many tax professionals are just tax preparers, who only want to work in a structured environment. Preparing a cross border tax planning strategy and working with a counterpart in another country is way outside their scope of business. However, when you do find a source of such advice, don't expect it to be cheap.

"Foreign stock or securities not held in a financial account" - not sure what you could find unclear about that, it refers to shares or bonds that you hold directly.

JAJ

You contributed an amount - did you get shares in the company in return, or is it a loan?

If you bought shares, then it's capital gains, not miscelleanous income. You report on Schedule D and the relevant line of your 1040. Also, if you own more than the threshold for a controlled foreign corporation, (10%, from memory) you need to file a form 5471. If not reported on form 5471, it may need to be reported on form 8938. You may also need to pay capital gains tax on a U.K. tax return.

Is this still hypothetical?

Hotscot

Thanks. My original example was hypothetical. I was just trying to keep it simple thinking things through but sorry for any confusion.

So yes.
I made an investment into a company I used to work for after all the managers were invited to do so. They have offices worldwide but the HQ is in France.
I have a letter stating that I have x amount of shares. Below the 10% ownership threshold.
There is no financial account related to my investment.
The board of the company are intending selling the company next year and then the Capital Gains will be realised

I wasn't sure if this was reportable under FATCA. Also considering that the investment has no discernible value.

You also mention a UK tax return? I've not been resident in the UK since 2000.

(After reading I see there's a FATCA reporting threshold of $50,000. The value of my original investment was much less than that. It's a private non traded company so no idea what value my investment will have until the company is sold privately.)

JAJ

The board can't sell the company. Only the stockholders (including you) can sell their shares to a new owner. Although the board may arrange and facilitate the sale. If you sell your shares, that will create for you a capital gain (or loss). Any dividends are taxable income.

I would assume it is FATCA reportable. Have you looked in the form 8938 instructions to see what approach should be taken for this kind of investment, which normally has a value although there is no traded market.

Where is this company located? (the one that you own shares in?). The sale of the shares may be a taxable event in that country as well, requiring a tax return in that country. Some countries tax capital gains of non residents on assets situated in that country. Same goes for any dividends.

Hotscot

I remember we all signed Power of Attorney over to the CFO to take action when it's deemed financially advantageous to do so.

From my research it seems no cash value can currently be assigned to my investment.
I'm therefore taking that tack that it's not reportable but I will of course report it when I realize any gains and dividends.