Preface: Foreign tax reporting requirements are complex. Here a few pointers on a hypothetical loan to a foreign person.

 

Tax Reporting for Loans to Foreign Persons

 

Now and then, interesting tax questions arise. One of those questions is say you have a friend living in Canberra, who wants to purchase and restore historic buildings. After reviewing the initial financial projections, you agree to help finance with some startup capital. Question for your tax accountant: Will this loan subject you to FinCEN tax filings and applicable foreign tax regulations? Will the interest income be subject to foreign withholding tax, and or applicable foreign tax credits?

Let’s look at the questions at hand, one at a time, to determine the tax reporting requirements.

First, Foreign Bank Account Reporting (FBAR) filings, common on FinCEN Form 114 are applicable to financial interests in foreign bank accounts, and signatory authority over foreign financial accounts, even if the account accumulates zero taxable income, if the account exceeds $10,000 at any time during the tax year.

In the question posed, i.e. tax reporting on personal foreign loans, since the loan it is not a financial account e.g. held in a registered bank account, it therefore does not require the filing of Form 114. Secondly, Form 8938 Statement of Specified Foreign Assets, is not required, because the asset is not a registered financial account maintained in a foreign financial institution, nor a stock, security, or financial instrument held by a foreign person for investment purposes. It is simply a personal loan, between two friends. So far, easy foreign tax compliance.

Yet, this is not say the foreign financing is free from all foreign tax reporting requirements. FinCEN Form 105 Report of International Transportation of Currency of Monetary Instruments, is on the other hand, a required report filing. This reporting form is necessary for shipments of currency $10,000, and higher, or monetary instruments, from the United States to any place outside the United States. A transfer of cash, in either personal check, or certified check, is a monetary instrument, subject a FinCEN 105 Filing.

Next, the interest income may be subject to withholding taxes. The withholding may be reduced or mitigated under US tax treaty, depending on the foreign tax jurisdiction. The double tax is mitigated with a deduction or credit for tax paid to a foreign country. Fortunately, Australia has an income treaty with the United States that helps avoid the double taxation, in this hypothetical instance, on the interest income.

Should your investment include an ownership interest in the business entity, the foreign tax reporting requirements become increasingly complex.

When you have a tax question, always contact your CPA for the appropriate tax advice pertinent to your tax scenario.