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Do you think bureaucracy and regulations make it (deliberately) hard for US residents to invest in seed stage companies abroad? For example, if a California re

Do you think bureaucracy and regulations make it (deliberately) hard for US residents to invest in seed stage companies abroad? For example, if a California resident Bob injects capital into a foreign company, say $20,000 for 1% of the brand new company as it is formed in the UK, and receives preferred stock and passes voting power by proxy onto other investors, what are the personal tax and filing implications? My understanding is that any tax impact is only when the preferred stock is converted to ordinary stock and sold for a capital gain or loss. No different from buying and selling regular stocks from ETrade. Regarding filing, form 5471 does not apply, as Bob would have <10% of the company, and the voting power is only %1 and has been granted by proxy to somebody else. On the other hand, if either equity ownership or voting power was >10% then Bob would need to file 5471 and translate the accounts of the foreign company which is a major pain (and accounting expense thus reducing the return on investment) In a nutshell, US residents should only invest small amounts in any foreign companies and make sure equity ownership and voting power is minimal? p.s. Thanks in advance.

gamblor956 13y ago
No. While Congress tries to limit the outbound movement of capital from the U.S., generally contributing to a foreign company is not much of a tax issue unless you're using deferred earnings (i.e., you're making the investment through a corporation you own) that haven't yet been subject to tax. If you contribute post-tax earnings its usually a very simple event. Depending on your ownership stake, you have some information reporting, i.e., Form 5471, Form 926, but that's about it. If you don't have to deal with Form 5471 because you own a very small stake in the company, you'll want to have an accountant look into PFIC reporting, especially if the foreign company is engaged in "passive" activities like renting, licensing, investing, etc. People are scared of Form 5471, but it's really not a big deal. It's also not very expensive, in the scheme of things. If paying roughly $100-$250 for a Form 5471 is too great an expense, you probably don't have the financial leeway to be making the foreign investment in the first place. Also, Translating accounts is not very difficult. You simply apply the appropriate exchange rate (the average rate, or the year-end spot rate, depending on whether you are translating the income statement or the balance sheet). It takes at most a few minutes if you use any sort of organized accounting system or software.
- hkphooey 13y ago
  When I ask accountants, here in the Bay Area, about Form 5471 the quote for personal taxes goes up $1000-$1500. Who does them for $100-$250? Please let me know, thanks!

gamblor956 13y ago

No. While Congress tries to limit the outbound movement of capital from the U.S., generally contributing to a foreign company is not much of a tax issue unless you're using deferred earnings (i.e., you're making the investment through a corporation you own) that haven't yet been subject to tax. If you contribute post-tax earnings its usually a very simple event. Depending on your ownership stake, you have some information reporting, i.e., Form 5471, Form 926, but that's about it. If you don't have to deal with Form 5471 because you own a very small stake in the company, you'll want to have an accountant look into PFIC reporting, especially if the foreign company is engaged in "passive" activities like renting, licensing, investing, etc. People are scared of Form 5471, but it's really not a big deal. It's also not very expensive, in the scheme of things. If paying roughly $100-$250 for a Form 5471 is too great an expense, you probably don't have the financial leeway to be making the foreign investment in the first place. Also, Translating accounts is not very difficult. You simply apply the appropriate exchange rate (the average rate, or the year-end spot rate, depending on whether you are translating the income statement or the balance sheet). It takes at most a few minutes if you use any sort of organized accounting system or software.

hkphooey 13y ago
When I ask accountants, here in the Bay Area, about Form 5471 the quote for personal taxes goes up $1000-$1500. Who does them for $100-$250? Please let me know, thanks!