Standard disclaimer, you are not my lawyer, this is not advice.
I have been recently offered an opportunity to make some small investments in a non-US venture (basically, a company privately owned by an acquaintance is looking for some trusted capital sources among people said acquaintance knows). I have the following questions, keeping in mind that I’ll accept “talk to a real tax lawyer” as an answer:
Is there any specific procedure/caveats for a US Citizen to deposit currency in a foreign bank (I’m looking at specifically Deutche Bank since it’s got a US presence but is headquartered with the investment target in Germany), or can that be done relatively easily?
Assuming the investment profits, it’s been proposed that dividends will be paid to an account local to the company (they’d prefer Deutche Bank, or some other bank located in Germany but with US presence for everyone’s convenience). They are convinced that taxes on that income is reported and paid when I transfer it to a US-based account since it’s accruing in Germany. Is that true?
2A) If the money paid is described as “consulting services” and a salary rather than a return-on-investment, assuming I deal with the appropriate laws for working in Germany, does that change the answer to 2?
I’m looking to make an investment in a buddy and return a decent profit for myself here without running into IRS trouble. I am not looking to violate US tax law, but trying to get an idea of what I’m looking at so I know if it’s worth it to invest in hiring an actual tax lawyer for the amount of profit I expect to see.
Number 1, you already know what we (i.e. all the straight dope law types) are going to say: you need to talk with a lawyer. But in this case you REALLY need to talk with a lawyer, because there are quite likely to be other issues about your personal financial situation that come into play here. So even if any of us could answer the specific legal questions you pose (and I for sure could NOT) then it would still be irresponsible to answer them because even 100% correct answers to the narrow questions you pose might still steer you in the wrong direction.
Number 2, when you talk with the lawyer, I would take the questions you have written down and show them to the lawyer in writing. I would ALSO take a few minutes to write down what your goals are. The more clearly you can be about your goals, the better advice the lawyer can give you.
On rereading your post, I see you’ve already made a start on listing your goals. I would (a) think if there are any other goals you have here (e.g. goals related to how soon you might need access to the money) and (b) prioritize the goals, i.e. put them in numerical order. This may sound a little over the top, but I’m telling you it is HUGELY helpful to have as much clarity as possible about goals, and it is extremely rare that a lawyer complains about a client who spent too much effort clarifying what his goals are.
Thanks very much for the honest input. I figured I’d get an answer.
I suppose the base question I have here is “How likely, if I’m getting paid a salary, is the fact that salary is being notationally paid in a foreign country going to make it cost more tax-wise than any old income over here?”
I’m also going to ask one more question that it seems to me should have a simple yes/no answer: Since one of the ways this guy has proposed showing me return on investment is paying me for “consulting services” (I am an IT consultant in real life, so I am already set up to cope with taxes resulting from self-employment/consulting income), does the federal tax code care about the identity/location of the entity providing me income? That is, if I spend billable hours on the phone actually doing consulting work with, say, a German company, and they in return pay me in US dollars to an account in a US bank, is that more complicated than any other cash income from a taxation perspective?
Generally, if you are resident in the US (for tax purposes, which is not necessarily connected with either citizenship or with immigration status), you pay tax on your world-wide income. So, I’m resident in the US (but not a citizen), and I have some income in Australia, paid in Australian dollars, which never enters the US, but I have to pay tax on it, even though:
(1) Some of it is franked dividends in Australia, which means that I don’t have to pay income tax on it in Australia; and
(2) Some of it is a superannuation pension which (in the future) will be tax-free for me in Australia.
On the other hand, much foreign income is the subject of double-taxation treaties, which means that you only pay tax on it in one country, but not in the other. So my Australian income which had had Australian income tax paid on it is not subject to income tax in the US.
Of course, it would be hard for the US taxation people to know about my foreign income, since the people who pay me the money would report it to the Australian Tax Office, but not to the US taxation folk. So if I evaded the tax by not declaring the income, I’d probably get away with it. But I’m too honest to try.
However, it’s very complex, and I’m not sure that I understand all the issues even wth my situation. So, the OP should get advice from a lawyer or an accountant with experience in international tax issues – and not just any lawyer or accountant, because this is a specialised field.
Being considered a “resident for tax purposes” doesn’t tell the whole story - US citizens are required to pay income tax to the US Gov’t regardless of their “tax residence” (although the floor before you pay taxes on this are high)
The Tax treaties i’m aware of don’t modify what is or isn’t subject to income tax in the US, and they don’t modify how much income tax is owed. What they do do is provide for a tax credit for foreign tax paid. Depending on your situation, that may or may not balance out to a 1:1 ratio of taxes paid to foreign government:tax credit
CPA checking in. Please be aware that I am not your CPA and any advice given should be verified with your personal accountant or tax attorney.
In regards to depositing money in a foreign bank account, regardless of whether the money is earned from foreign sources, you are required to file a specific form each year with the IRS detailing the foreign account information. Here is the link to the form - http://www.irs.gov/pub/irs-pdf/f90221.pdf
As others have already said, regardless of how the income is reported to you - as a dividend or as ordinary consulting income, you are required to report the income on your 1040. If the foreign country in which you are doing business imposes their own tax on that income, you can claim a foreign tax credit (Form 1116) on your U.S. 1040 for the amount of foreign taxes paid to offset any double taxation issues.
As folks have noted above, many countries (including Germany) have tax treaties with the United States, under which terms the country where a given amount income is earned generally gets the “first crack” at taxing that amount. So if you earn $10,000 in Germany, and the United States also requires you to pay tax on that income, you can deduct the tax you paid to Germany from the tax you pay to the United States. (This is, of course, a generality; consult the tax treaty or, preferably, a lawyer for more specific information.) You can see that under this scheme, your total tax burden will be determined by whichever of the two countries’ rates is higher. This website and other ones I’ve found imply that the first 50 000€ or so of non-resident income are taxed at 25%, so if that’s above your marginal tax rate you’ll most likely end up paying more tax than if you had earned that same money in the States.
I am not a tax lawyer or accountant, just some schlub who’s had to deal with Canada/U.S. tax issues. Like Giles, I only really know just enough to understand my own situation. The above tax advice is for novelty purposes only.
Thank you all very much for the information–I now know pretty much exactly what I came in here to find out, which is “the tax issues are annoying enough that I have to factor a relatively serious amount of lawyer’s time into any potential profit I might make from investing/consulting”.