U.S. tax on a business owned abroad and the income from its sale

Question

I'm a UK resident who, in the future will possibly apply for a green card (I have an American girl friend).

I understand that if I become a green card holder, I'd be liable to declare my worldwide income.

This is of course fine.

I do have a business in Switzerland. But although I'm a partner, I don't earn a single cent from it. Nothing. However, I have 50% ownership of a property that the business owns.

So the question is:

Q) Will I have to submit the accounts for the Swiss Business even though I'm not on the payroll - and the business makes hardly any profit each year. I can of course get our accounts each year, but they will be in Swiss German!

Q) Will I need to have this translated? Is there any format/procedure to this? Will it have to be translated by my Swiss accountants? - and if so - which parts of the documentation need to be translated?

And lastly, I plan on selling my share of the business (and the property) in the future.

I was told that if I sell the business (and property) after I acquire a greencard - that I will be liable to 15% tax of the profit I'd made. I also understand that any tax paid (on selling) in Switzerland will be deducted from the 15%?

Q) Is this correct?

I will effectively have all the paperwork for this - as we'll need to do the same in Switzerland. But again, it will be in Swiss German.

Q) Would this be a problem if it's presented in Swiss German!?

I know this is a very unique set of questions, so if you can shed any light on the matter, it would be greatly appreciated.

Answer 1

Q) Will I have to submit the accounts for the Swiss Business even though Im not on the payroll - and the business makes hardly any profit each year. I can of course get our accounts each year - BUT - they will be in Swiss German!

You will have to submit on your income from the business. The term "partnership" refers to a specific business entity type in the U.S. I'm not sure if you're using it the same way. In a partnership in the U.S. you pay income tax on your share of the partnership's income whether or not you actually receive income in your personal account. There's not enough information here to know if that applies in your case.

(In the U.S., the partnership itself does not pay income tax - It is a "disregarded entity" for tax purposes, with the tax liability passed through to the partners as individuals.)

Q) Will I need to have this translated!? Is there any format/procedure to this!? Will it have to be translated by my Swiss accountants? - and if so - which parts of the documentation need to be translated!?

As regards language, you will file a tax return on a U.S. form presumably in English. You will not have to submit your account information on any other form, so the fact that your documentation is in German does not matter. The only exception that comes to mind is that you could potentially get audited (just like anyone else filing taxes in the U.S.) in which case you might need to produce your documentation. That situation is rare enough that I wouldn't worry about it though. I'm not sure if they'd take it in German or force you to get a translation.

I was told that if I sell the business (and property) after I aquire a greencard - that I will be liable to 15% tax of the profit I'd made. I also understand that any tax paid (on selling) in Switzerland will be deducted from the 15%!?

Q) Is this correct!?

The long-term capital gains rate is 15% for most people. (At very high incomes it is 20%.) It sounds like you would qualify for long-term (held for greater than 1 year) capital gains in this case, although the details might matter.

There is a foreign tax credit, but I'm not completely sure if it would apply in this case. (If forced to guess, I would say that it does.) If you search for "foreign tax credit" and "IRS" you should get to the information that you need pretty quickly.

I will effectively have ALL the paperwork for this - as we'll need to do the same in Switzerland. But again, it will be in Swiss German.

Q) Would this be a problem if its presented in Swiss German!?

Even in this case you will not need to submit any of your paperwork to the IRS, unless you get audited. See earlier comments.

Answer 2

I'll start with the bottom line. Below the line I'll address the specific issues.

Becoming a US tax resident is a very serious decision, that has significant consequences for any non-American with >$0 in assets. When it involves cross-border business interests, it becomes even more significant. Especially if Switzerland is involved. The US has driven at least one iconic Swiss financial institution out of business for sheltering US tax residents from the IRS/FinCEN.

So in a nutshell, you need to learn and be afraid of the following abbreviations:

• IRS
• FinCEN
• FBAR
• FATCA
• PFIC
• CFC

and many more.

The best thing for you would be to find a good US tax adviser (there are several large US tax firms in the UK handling the US expats there, go to one of those) and get a proper assessment of all your risks and get a proper advice.

You can get burnt really hard if you don't prepare and plan properly.

Now here's that bottom line.

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Q) Will I have to submit the accounts for the Swiss Business even though Im not on the payroll - and the business makes hardly any profit each year. I can of course get our accounts each year - BUT - they will be in Swiss German!

That's actually not a trivial question. Depending on the ownership structure and your legal status within the company, all the company's bank accounts may be reportable on FBAR (see link above). You may also be required to file form 5471.

Q) Will I need to have this translated!? Is there any format/procedure to this!? Will it have to be translated by my Swiss accountants? - and if so - which parts of the documentation need to be translated!?

All US forms are in English. If you're required to provide supporting documentation (during audit, or if the form instructions require it with filing) - you'll need to translate it, and have the translation certified. Depending on what you need, your accountant will guide you.

I was told that if I sell the business (and property) after I aquire a greencard - that I will be liable to 15% tax of the profit I'd made.

Q) Is this correct!?

No. You will be liable to pay income tax. The rate of the tax depends on the kind of property and the period you held it for. It may be 15%, it may be 39%. Depends on a lot of factors. It may also be 0%, in some cases.

I also understand that any tax paid (on selling) in Switzerland will be deducted from the 15%!?

May be. May be not. What you're talking about is called Foreign Tax Credit. The rules for calculating the credit are not exactly trivial, and from my personal experience - you can most definitely end up being paying tax in both the US and Switzerland without the ability to utilize the credit in full. Again, talk to your tax adviser ahead of time to plan things in the most optimal way for you.

I will effectively have ALL the paperwork for this - as we'll need to do the same in Switzerland. But again, it will be in Swiss German.

Q) Would this be a problem if its presented in Swiss German!?

Of course. If you need to present it (again, most likely only in case of audit), you'll have to have a translation. Translating stuff is not a problem, usually costs $5-$20 per page, depending on complexity. Unless a lot of money involved, I doubt you'll need to translate more than balance sheet/bank statement.

I know this is a very unique set of questions, so if you can shed any light on the matter, it would be greatly appreciated.

Not unique at all. You're not the first and not the last to emigrate to the US. However, you need to understand that the issue is very complex. Taxes are complex everywhere, but especially so in the US. I suggest you not do anything before talking to a US-licensed CPA/EA whose practice is to work with the EU/UK expats to the US or US expats to the UK/EU.