Hong Kong Political Instability Leads to US Money Transfers

Hong Kong Political Instability and US Money Transfers

Due to all the political unrest that has plagued Hong Kong, it has become much more common in the past few years for US Taxpayers who are considered US persons with money in Hong Kong to want to transfer that money out to the United States. Sometimes, the US person can directly transfer their own money from Hong Kong to the United States. Other times, Taxpayers have to use conduits such as friends and family members in order to transfer the money. Depending on how that money is held outside of the United States and how to transfer is facilitated – and who makes the transfer – can impact the US tax and reporting requirements. Here are a few facts to keep in mind:

Foreign Accounts

When a person has foreign bank and financial accounts in Hong Kong such as Citibank, HSBC, or Hang Seng, they are required to report the value of the accounts on their US tax returns if they meet the threshold requirements for doing so. They may also be required to have to file the annual FBAR – which includes foreign bank and financial accounts, but is not limited to only bank accounts and may include other assets such as pensions and life insurance policies.

Pension/MPF

It is very common for taxpayers in Hong Kong to have MPF accounts. The term MPF refers to a Mandatory Provident Fund and works sort of like a hybrid between Social Security and Pension Plans. What makes it so complicated from the US tax perspective is that there is no tax treaty between the United States and Hong Kong — and therefore any withdrawals and even growth within the fund may be taxable.

PFIC

PFIC refers to Passive Foreign Investment Companies. Taxpayers who have foreign mutual funds and other equity funds in Hong Kong may be required to report these funds annually on Form 8621 because they qualify as PFIC. Unfortunately, since there is no treaty with Hong Kong, it impacts the ability to claim any of the exceptions for PFIC funds contained in foreign pension plans and other types of trusts.

Form 3520

IRS Form 3520 primarily refers to foreign gifts that a US person receives from overseas individuals, entities, and trusts. Depending on whether the transfer is actually a gift versus a transfer will impact whether there is a Form 3520 reporting requirement. Likewise, the threshold requirements for having to report the gift is impacted by whether the transfer was made from a foreign trust, foreign entity, or foreign person.

Form 3520-A

Taxpayers from Hong Kong who have ownership of a foreign trust are required to report the trust annually each year on Forms 3520 and Form 3520-A. As we saw recently in the case of Wilson, even if the taxpayer is the only owner and beneficiary of the trust — they can potentially be penalized twice on the same trust if they do not properly report it.

Form 5471

Especially due to the civil unrest in Hong Kong, some foreign nationals are transferring ownership of their HK Private Limited businesses to family members in the United States. This may result in a Form 5471 filing requirement, and Form 5471 is a very complicated form. Depending on whether US persons are considered the majority owners of the company or whether or not the foreign companies are owned in part by domestic corporate shareholders may impact the ongoing reporting requirements.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the pension tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

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