U.S. TAX GUIDE IN INDIA
Does splitting shares with a spouse really help US expats in India save on taxes?
Splitting company shares with a spouse might sound like a quick way to reduce taxes if you are a US citizen running a business in India while married to an Indian citizen. At face value, it appears that placing most of the shares in your spouse’s hands could diminish your own ownership percentage, thereby lowering your personal tax liability to the Internal Revenue Service (IRS).
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Yet, the US tax system often does not view it that simply. Constructive ownership rules give the IRS the ability to treat shares held by your spouse as if they still belong to you.
In other words, even if your spouse holds 90% of the shares on paper, the IRS may look at the situation and decide that you effectively own all or most of the company. As a result, the supposed reduction in your personal ownership might not bring much relief when you file your US tax return.
Why do constructive ownership rules matter for share transfers between spouses?
Constructive ownership rules are there to stop taxpayers from sidestepping their US tax obligations by shifting financial assets to a spouse or another family member.
The underlying assumption is that spouses often share financial decisions and resources, making it easy for one spouse to transfer shares to the other without significantly altering who controls the business.
If you and your spouse live together, make decisions jointly, and collectively benefit from the success of the company, the IRS views you as a single economic unit.
From the IRS’ viewpoint, the aim is to ensure that profits and gains are taxed correctly. If your spouse holds the bulk of the shares, but you still play a central role in running the operations or receive the economic benefits of ownership, you will not escape the expected US tax liabilities.
How does a foreign company become a Controlled Foreign Corporation (CFC)?
The term “Controlled Foreign Corporation,” often referred to as a CFC, comes into play when US persons collectively control over 50% of the value or voting power of a non-US corporation.
If you and your spouse are both considered US persons for tax purposes, your combined holdings may exceed that 50% threshold, even if one spouse appears to be the majority owner. Once the company meets that test, it gains the CFC label, and you must abide by extra US reporting requirements.
Among these requirements is Form 5471, which details the corporation’s income, expenses, profits, balance sheet, and shareholder structure. Even in years when the business owes no US tax, Form 5471 must be filed on time.
Penalties start at US$10,000 for each instance of non-filing or late filing and can grow if you do not fix the oversight. These rules aim to ensure that US taxpayers cannot hide profits or assets by operating them through offshore businesses in which they hold a large stake.
Does dividing company shares reduce filing obligations?
In short, no.
Transferring shares to your spouse does not typically free you from filing requirements. If the constructive ownership rules determine that you effectively still control or benefit from the totality of the shares, the paperwork will remain largely the same.
You will likely still be required to file Form 5471 as a CFC owner, depending on how the ownership percentages shake out when combined.
The IRS generally expects you to disclose all relevant foreign business interests, no matter how you assign shares within your household. This means that if you were looking to lessen your US compliance workload simply by placing more shares in your spouse’s name, you will likely be disappointed.
What are the advantages of being an employee instead of self-employed?
If you have been operating in India as a sole proprietor or freelancer, you may be paying self-employment taxes, which cover contributions to Social Security and Medicare.
By forming a private company in India and becoming an employee of your own corporation, you avoid the direct self-employment tax imposed by the US. This move can also open the door to the Foreign Earned Income Exclusion (FEIE), which may allow you to exclude a set amount of foreign wages from US taxation if you meet certain residency or physical presence tests.
The amount changes based on the tax year; for the tax year 2024-2025, the amount is US$126,500. However, for 2025-2026, it is US$130,000.
If you still owe some tax after applying the exclusion, you can often claim the Foreign Tax Credit (FTC) to offset taxes paid in India against your US liabilities.
How does setting up a private limited company in India impact taxes?
Creating a private limited company in India can produce a range of benefits, from limiting personal liability to taking advantage of corporate tax rates that might be more favorable than paying both self-employment and income taxes in the United States.
If your company is classified as a CFC, you may still owe annual Form 5471 filings, but you might benefit from provisions that reduce or eliminate double taxation if India’s corporate taxes are near or above 90% of the current US corporate tax rate.
In that scenario, the so-called “high-tax exception” can defer or alleviate some of the immediate US tax burden on retained corporate earnings. Meanwhile, you still have to pay Indian corporate tax on your profits, and if you later distribute them to yourself as dividends, you need to examine how the IRS treats those dividends back in the US.
Another advantage of forming a company is the potential to set your own salary at a level that helps you optimize the FEIE, while leaving extra profits inside the corporation to fund future expansion.
This strategy can make sense if you plan to grow your business, but it requires diligent record-keeping, along with careful coordination between Indian and US tax filings.
Which other tax responsibilities should US citizens in India remember?
Any US expat in India needs to keep track of multiple reporting duties to maintain compliance.
First, you must generally file an annual US tax return, regardless of where you live, because the United States taxes its citizens and resident aliens on worldwide income.
Second, if your aggregate foreign account balances exceed US$10,000 at any point during the year, you must file a Foreign Bank Account Report (FBAR) through the Financial Crimes Enforcement Network (FinCEN). Additionally, if your foreign assets surpass certain thresholds—varying by filing status—you may have to file Form 8938 under the Foreign Account Tax Compliance Act (FATCA).
Another important issue is that the US and India do not have a Totalization Agreement, which means you might end up paying into both countries’ social security systems unless you can qualify for an exception.
Should you work with a cross-border tax professional?
It is wise to consult a specialist who understands both systems.
Constructive ownership rules, CFC filings, the Foreign Earned Income Exclusion, and foreign tax credits can each be difficult on their own. And when combined in a cross-border environment, they become even more confusing.
A knowledgeable professional can help you choose a business structure—whether that involves maintaining self-employed status or becoming an employee of a private limited company—that aligns with your specific goals.
They can also guide you through the process of filing Forms 5471, 8858, FBAR, and other essential requirements, thereby reducing the risk of penalties.
While working with an expert does involve additional fees, many people find that the savings gained from accurate tax planning and the peace of mind provided by proper compliance outweigh those costs.
