structuring china startups presentation
TRANSCRIPT
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Structuring China-Focused Startups and Tax Implications for U.S. Founders
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OUR FIRM
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A Typical China-Based Startup Structure
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(R&D, Sales/Marketing) OffshoreOnshore
Control
Agreement
(R&D, Sales/Marketing, Manufacturing)
FoundersVC
Cayman(IP)
US
WOFEChineseDomestic
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IP ownership by Cayman (unless legally required to be owned elsewhere)
Cayman reimburses U.S./Chinese subs for services at cost plus a certain %
Proper documentation (intercompany agreements)
Proper accounting
Possible U.S. entity classification (“check-the-box”) elections for Chinese subs
U.S. sub needs to file federal (including Form 5472 to report transactions with foreign affiliates) and state tax returns. If conducting R&D, may qualify for R&D credits in federal, CA and certain other states.
Key Tax Considerations
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Sometimes IP needs to be owned by a Chinese entity
HK or local country sub to conduct sales/marketing for rest of the world (outside of China and U.S.)
No need for Chinese domestic entity if the Chinese activities are allowed by the WOFE
No need for U.S. sub if no activities in the U.S.
Variations
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Subject to U.S. tax on worldwide income
May need to file Form 5471/8858 to report 10% or more ownership (by vote or value; direct or indirect) or being a director in foreign companies
May need to file FinCEN Form 114 (FBAR, formerly TD F 90-22.1) to report ownership or signature authority in foreign bank/financial accounts ($10,000 or more)
May need to file Form 8938 to report foreign financial assets ($50,000 or more)
May need to deal with Subpart F income or passive foreign investment company (“PFIC”) issues (U.S. VC’s and U.S. employees also care about these)
FATCA
Penalties
Overseas Voluntary Disclosure Program
U.S. Tax Implications for U.S. Founders
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Controlled foreign corporations (“CFC’s”) are foreign corporations > 50% (by vote or value) owned by U.S. shareholders each owning >10% (by vote)
Passive and certain other income of CFC’s is currently taxable to >10% U.S. shareholders (even if not receiving dividends or selling stock)
Tax planning may reduce or eliminate Subpart F income
Subpart F Income
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If a foreign corporation is not a CFC, or if a U.S. person owns <10% (by vote), need to deal with PFIC issues.
A foreign corporation is a PFIC if >75% of its gross income is passive, or >50% of its assets is passive.
Qualified income fund (“QEF”) election is typically recommended. With the election, income of the foreign corporation is currently taxable (even if not receiving dividends or selling stock), but gain on the sale of stock remains capital gain.
Without the election, gain on the sale of stock would be ordinary income, and there would also be interest charge.
In either case, need to file Form 8621 to report ownership of PFIC stock.
PFIC
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Hai Tang, Director
415-764-2789 [email protected]
Adam Steinberger, Managing Director
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Yichen Shepard, Managing Director
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Shaun Dublin, Director
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