foreign investment

Client just called. Friend is opening a store in Paris and is looking for investors. Client wants to know about potential tax complications if she invests less than $10,000. I am a little out of my comfort zone. I want to summarize potential complications and questions that I should ask.

Reporting

Report on Form 8938 if the total value of foreign assets was more than $50,000 on the last day of the year or more than $75,000 at any time during the year (double those amounts for MFJ)

Requires a “maximum value” of the investment each year.

What I need to ask the client

Exactly what is this investment? A share of stock? A share of a partnership?

Other problems

If there is an income allocation from this business (a dividend, a share of profit), who will handle France’s taxation and reporting issues? (Not me)

What else? Thanks for any help.

-Find out:
1) Is it registered as an entity under French law, then you determine how to classify the earnings based on clients' response.
2) Client percentage ownership.
2b) If ownership is > 10%, find out if there any other US owners and their percentage. If you cant get this information, find out if friend is targeting US or Foreign investors. (CFC)
2c) If store is registered in France, try to find out if NRAs own other US companies (958(b)(4))
3) When does store expect to make a profit? (PFIC)

omg. Perfect, thanks!

Is your client getting EQUITY ownership? or is your client LENDING money (that might be the easier route from a tax reporting standpoint)?

If it is an equity stake, ask for the type of entity, if any (EURL, SARL, SA, SCPI). If they don't know, ask for an "extrait du K-Bis" (a copy of the registration information provided by the "chambre du commerce". This document will show the entity type (or it will show it is a sole-proprietorship).

8938: the value of the shares in the entity would have to be taken account to determine if your client meets the filing threshold.
5471 (if an entity with limited liability): see Deniz's post
8865 (if a partnership): I don't have enough experience with this form to advise.

3) When does store expect to make a profit? (PFIC)

Just curious: how would an operating business be considered a PFIC? The operating entity wouldn't have passive income or passive assets.

It is possible, for a foreign-operating (i.e., noninvestment) corporation to be classified as a PFIC; this might occur when a foreign corporation, lacking business opportunities that would produce operating income, invests excess cash in passive assets to provide an income stream until its business opportunities improve. The presence of certain amounts of passive assets and income makes the corporation vulnerable to PFIC classification under U.S. federal income tax law.

I already sent the email. She's talking about a small amount for a friend. I told her that I was out of my wheelhouse, that I can handle foreign tax credits from a brokerage account and foreign issues fed to me in a hedge fund K-1, but I cannot take the lead on a stand-alone transaction like this. We would need to add a foreign person to the team.

I dont think you need to add an intl tax person as an employee unless you are part of a bigger practice and routinely encounter cross border client. You should just find someone you know and trust and have them guide you through the international issues.
But you should have them engage either you or the client so they take responsibility for their answers; back of the napkin answers are a bad idea in international tax. In fact, I would not even consider this an international tax client, just a routine client with some potential minor international issues that need to be cleared and have the local practitioners prepare the return.

That's exactly what I meant. I certainly don't have the quantity of foreign issues to hire an employee. There is a firm in SF that helped me with some complicated stuff one time. I called the partner, explained that I was a solo with this horrible foreign issue, and asked if they would they help me. I said that I would pay them upon receipt of invoice. I told the client that these issues were way above my pay grade. So they did help me, and their advice was invaluable. I'd still be doing the research if I tried to learn it all myself.

I pretty much said that to the client - that there were some experts in the city who could help, if she really wanted to do this transaction. I am sure she will make the right decision and not do it.

Thank you very much for helping me.