global Tax Transferring Foreign Stock Ownership to Your Child: Key Considerations January 28, 2025 Parents, planning to transfer partial foreign stock ownership (stock in companies that are domiciled outside of the U.S.) to your U.S. child? Here is what you should consider and the impact that it may have on your children. Parents (both U.S. and Non-U.S. parents of a U.S. child), it is crucial to note that all U.S. persons, including children, who exceed certain thresholds-- often easily met--must report world-wide income and assets regardless of where they live or whether dividends/income were paid out to the U.S. person. Thus, your child may have complex U.S. reporting requirements. The reporting requirements can be triggered by the initial transaction – your child’s transfer of ownership in the foreign company(ies) - and the child’s actual ownership in the company. Let’s dive into the details. Understanding the Initial Transactions That Trigger U.S. Reporting Requirements The initial transaction (includes, but not limited to): The child buys shares of the foreign company(ies) from you,The child contributes property in the foreign company(ies) in exchange for shares in the foreign company(ies),You gift your child shares of the foreign company(ies), orBequest the child shares of the foreign company(ies). In each case, the transaction must be analyzed as the thresholds are relatively low and easily met. Evaluating Ownership: Key Steps for U.S. Tax Compliance The actual ownership of the company. Once your child has acquired ownership in the foreign company (1 – 4 above), the U.S. tax advisor must determine the following: The type of entity that the foreign company is for U.S. income tax reporting purposes (a foreign partnership or a foreign corporation) by reviewing the articles of incorporation and applying U.S. tax law. It is important to note that often times U.S. tax law will differ from the foreign tax rules and will result in a different entity type when compared to the foreign tax rules. Must review the complete flow chart that includes all owners, including family members even if they are non-U.S. persons) and subsidiaries. Must review detailed financial statements and discuss company activity to determine if there are additional filing requirements in reporting the foreign partnership or foreign corporation. Proper planning is essential! In most cases, the threshold in this section is also easily met, but the reporting requirements are much more extensive. In many cases, the foreign company’s (ies’) complete financials are reported on your child’s U.S. tax return and in some cases, the activity from the company’s operations also creates income on your child’s U.S. tax return, even if income was never paid out to your child. Failure to plan can result in higher U.S. taxes and failure to comply will carry costly penalties. Transferring ownership to your child can be very worthwhile, but proper planning is essential! Before transferring ownership interest to your child, it is prudent to reach out to a U.S. international tax advisor to help ease the process and keep your child in compliance with U.S. income tax reporting.
