Recently I have had the privilege to work with number of expats (US Citizens and Green card holders living in Dubai and Doha) from Dubai and Doha, United Arab Emirates and Qatar. They have certain common questions such as
1. Do I report my foreign asset holdings in the US ?
2. What if I am not a majority shareholder in a company, do I still report income from such company in the United States?
I will attempt to answer some questions here as I feel many others would benefit from the information provided herein.
First of, as a common rule of thumb all world wide income earned by US citizen living anywhere in the world must be reported on the US 1040 tax return and all taxes must be paid on that income. US at the time of this writing does not have a tax treaty with the UAE, my guess is since UAE does not impose any tax on income for its residents, the treaty even if negotiated is unenforceable by the US. If you own shares in a corporation in any of the Gulf nations, you need to determine three basic criteria :
1. Do you own more than 50% of the company shares, do you own the majority voting stocks?
2. Do you run the daily operations of such business and make critical decisions on behalf of such company, another words you exercise control over decision making?
3. Do you maintain a bank account on your personal name in order to transact and have maintained a balance in excess of $ 10,000.00 at any time during any calendar year?
4. Do you own commercial or residential property providing rental income?
If you answer yes to any of the questions posted above, you must file certain forms to be in compliance with the US tax laws, clients have this misconception that these forms entail certain tax consequence. I have advised clients based on their unique scenario where they just had to report the assets and corporate shareholdings to the IRS in the form of financial disclosure and had not been subject to actual taxes.
In certain case where a particular client was a 15% shareholder in a foreign entity, where he did not maintain day to day activity, he simply was not required to report any income earned in the foreign company as such entity did not declare any dividends, and the income was not repatriated to the US. Another words, if you have a 15 % minority share interest in a foreign company with absolutely no control (passive) in such foreign entity. Lets review this with an example, lets say such foreign entity posts net income in the amount of $ 100,000.00 and no dividends are declared, the US minority shareholder in such entity does not have to declare his share of income earned from this entity in the US as it was not brought back to the US in the form of dividend and hence enjoys a deferment of US tax until the board of directors decide to declare a dividend. Please note that dividends declared by such entities are not subject to lower tax rate normally applied to qualifying entities. Although being a 15% shareholder you must declare your investment in such entity on a special US tax form 5471 in order to comply with the US tax code requirement.
US tax code is most complex, we advise all individuals to seek professional help for assistance in their specific compliance requirement. Our office can review your scenario and be happy to guide you accordingly. Please do not hesitate to email me at firstname.lastname@example.org