Important US/Hong Kong Tax and Reporting Issues

Important US/Hong Kong Tax and Reporting Issues

Tax Guide for US Persons with Hong Kong Gifts or Income

Important US/Hong Kong Tax and Reporting Issues (New 2021 & Beyond): The United States Tax System is very complicated and complex — and the IRS does little to make it any easier — especially when the US Taxpayer is originally from a foreign country and maintains accounts, assets, investments and income overseas. One the most difficult countries for tax purposes for US Persons is Hong Kong. That is because the tax rules in Hong Kong are different than in United States — and there is no tax treaty in place as there is with other Asian countries, such as China, Korea and Thailand. Over the many years that we have represented Taxpayers from Hong Kong, we have seen many of the same common issues amongst Hong Kong/US Taxpayers who still maintain money abroad — or have received large gifts from abroad. Let’s go over five (5) common US tax and reporting issues involved in Hong Kong and United States:

Foreign Parents with Signature Authority

In some Asian countries — including Hong Kong — a Parent is able to engage financial transactions on behalf of their child who is not present (some countries require a seal or chop, but Hong Kong discontinued the requirement in 2014). This becomes a problem for US Person Residents such as US Citizens, Lawful Permanent Residents and other foreign nationals who meet the Substantial Presence Test — when their foreign parents abroad begin opening accounts and other investments using the stamp — and without telling the US Person. Usually, several years later, the US person realizes that these accounts are under their name — and now they have to go back and submit one of the offshore amnesty programs in order to safely get into compliance.

Gifts From Conduits

When a Person receives a gift from a foreign individual or business, they may have a Form 3520 reporting requirement — depending on the gift (or trust distribution) value. If for example, a foreign parent wants to gift their US person child $1 million, but uses 15 people to transfer the money due to currency restrictions, the gift still came from Parent and so the form 3520 requirement its still necessary.

*In recent years, the internal revenue is has significantly increased enforcement of Form 3520 penalties.

Foreign Accounts in Hong Kong Financial Institutions

When a US Person has foreign accounts in Hong Kong that are under the Taxpayer’s name — even if they do not control the account — the US person is still required to disclose discounts and all of the necessary international information reporting forms, such as the FBAR and Form 8938. It does not matter that the taxpayer is not in control of opening or transferring the money because the parent was using the Seal — but it will help support a penalty abatement and/or waiver.

Income Not Taxable in Hong Kong

In Hong Kong, as in many foreign countries there are different tax rules. Oftentimes, categories of income that are taxable in United States may not be taxable abroad, such as passive income. Nevertheless, the general proposition is that the US taxes US persons on their worldwide income — unless there is another treaty, rule or regulation that limits taxation.

Mutual Funds in Hong Kong

Mutual funds and other type of equity funds are very common in Hong Kong. When a US taxpayer owns mutual funds in Hong Kong, they are required to report that information in United States on many different forms such as the FBAR and PFIC Form 8621. The failure to file these forms may result in fines and penalties — but the IRS has developed various programs to facilitate save compliance with offshore reporting of money and assets in Hong Kong and other countries.

Offshore Amnesty Program Summary

The FBAR Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.

Some of the more common programs, include:

Can I Just Start Filing FBAR This Year Instead?

No, unless the current year is the first-year you had an FBAR Reporting requirement.

If you had a prior year reporting requirement, but only begin to start filing in the current year (Filing Forward) it is illegal. In the world of offshore disclosure, this is referred to as an FBAR Quiet Disclosure.

The IRS has warned taxpayers that if they get caught in a FBAR Quiet Disclosure situation, it may lead to willful penalties and even a criminal investigation by the IRS Special Agents.

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