Foreign Investors in a US Startup Round: W-8s, 5472 and USRPHC

Foreign investors in a US startup round: what changes at closing?

Nothing is withheld when a foreign angel or fund buys shares for cash. Withholding applies to US-source income the company pays to a foreign person, and at closing the money flows the other way (Publication 515). What changes is paperwork, now and later:

A round is not simple when a foreign fund or a family group lands at or near 25%, when a fund is a partnership with layers of owners, when the company owns or leases significant US real estate, or when the company will pay interest or dividends abroad. A missed Form 5472 costs $25,000 per form (Form 5472 instructions).

Gather the cap table with each holder's address, country and entity type, the signed W-8 or W-9 forms, each fund's structure chart, and any side agreements for loans, fees or services with an investor.

Which W-8 does each investor give: W-9, W-8BEN, W-8BEN-E or W-8IMY?

Each investor gives the form that matches what it is, not where it lives. A US citizen abroad and a US fund give a W-9; foreign investors give a W-8 (W-8BEN-E instructions; W-8IMY instructions).

A W-8BEN or W-8BEN-E generally stays valid through the last day of the third calendar year after signing; the investor must replace it within 30 days of a change that makes it wrong. A W-8IMY itself can stay valid indefinitely, but the owners' forms attached to it do not. A Canadian corporate investor can follow the W-8BEN-E guide for a Canadian corporation.

Does taking foreign money trigger withholding?

No. Issuing stock for cash is not a payment of income to the investor, so the company has nothing to withhold from. A withholding agent is the person who controls or pays an amount subject to withholding (Publication 515); the company becomes one only when it later pays the investor.

Collect the W-8 anyway. Without valid documentation, the presumption rules decide the investor's status when a payment is made, and the company cannot apply a treaty rate or exemption on a presumed status. SAFE and note holders abroad are covered in SAFEs and convertible notes.

Form 5472 at 25% foreign ownership: when does it apply?

A corporation is a reporting corporation once one foreign person owns at least 25% of the total voting power or total value of its stock at any time in the tax year (Form 5472 instructions). The company then answers "Yes" to Form 1120, Schedule K, question 7, and gives the largest such owner's percentage and country (Form 1120 instructions).

Form 5472 itself is due only for a year with a reportable transaction with a related party. The regulation lists sales and purchases, rents and royalties, payments for intangibles, services, commissions, amounts loaned and borrowed, interest, insurance premiums, and other amounts that enter taxable income (Treas. Reg. 1.6038A-2). Contributions and distributions are listed only for a foreign-owned disregarded entity, not for a corporation, so the share purchase alone is not on the list. A loan from the investor, interest on it, or a fee to the fund's manager is.

• Related parties go wider than the investor. They include anyone related to the company or to the 25% shareholder under sections 267(b) or 707(b)(1), and anyone related to the company under section 482, so a sale to another company the fund controls can be reportable.
• One form per related party. File a separate Form 5472 for each related party with reportable transactions, attached to Form 1120 by its due date, including extensions.
• The penalty is per form. $25,000 for each failure to file or keep records, plus $25,000 for each 30-day period, or part of one, that the failure continues more than 90 days after an IRS notice. A substantially incomplete form counts as not filed.

Whether a particular side arrangement is reportable can turn on its terms; read the regulation's list against each agreement.

Do related investors or a fund's owners count together toward 25%?

Unrelated foreign investors are not added together; the test is whether one foreign person reaches 25%. But that person's holding includes stock it owns through others under section 318, as modified for Form 5472 (Form 5472 instructions; Treas. Reg. 1.318-1).

Stock is counted once, in the way that gives the largest total. Stock a foreign person owns is not attributed to a US person for this test. Siblings are not on the family list, so two siblings abroad are not combined; a parent and child are.

What do we withhold later on dividends, interest or redemptions paid abroad?

The default is 30% of US-source dividends and interest paid to a foreign person, unless a treaty or a code exemption documented on the W-8 lowers it (Publication 515).

The company reports these payments on Form 1042-S even when a treaty or exemption means nothing was withheld (Form 1042-S instructions), and files Form 1042; both are due March 15. Treaty rates and portfolio interest remove only this withholding: under FATCA (chapter 4), dividends and interest paid to a foreign entity can still bear 30% unless its W-8BEN-E or W-8IMY shows a FATCA status that needs none (Publication 515). A US investor who gives no W-9 can face backup withholding at 24%. A company that pays without the withholding it owed is liable for the tax itself; catching up is covered in missed withholding on payments abroad.

What is a "not a USRPHC" statement, and must we give it?

It is a signed statement of whether the investor's shares are a US real property interest (investors want it to say they are not), and a US corporation must give one within a reasonable period after a foreign holder asks (Treas. Reg. 1.897-2(h)). No form is required. It must be dated and signed by a responsible corporate officer under penalties of perjury.

A corporation is a US real property holding corporation (USRPHC) if, on any determination date, the fair market value of its US real property interests is at least 50% of the total of its US real property, its real property abroad and its other business assets. Cash and securities count only to the extent the business needs them for present operations, not reserves for future growth (Treas. Reg. 1.897-1). The shares stay US real property interests if the company was a USRPHC on any determination date in the past five years, or a shorter holding period. Real property includes land, buildings and leasehold interests, valued at what the lease could be assigned for (Treas. Reg. 1.897-1).

Investors ask because of a future sale. A buyer of their shares need not withhold under FIRPTA if given a copy of the company's statement dated no more than 30 days before the transfer (Treas. Reg. 1.1445-2). A company that owns no buildings and leases an office often passes, but the officer signs under penalties of perjury, so run the test on actual values.

What must we send the IRS after giving the USRPHC statement?

The company mails the IRS a notice on or before the 30th day after it mails the statement to the investor. If it misses that date, the statement is invalid (Treas. Reg. 1.897-2(h)(2)). The notice has no form and must contain:

1. A statement that it is provided under section 1.897-2(h)(2).
2. The company's name, address and EIN.
3. The investor's name, address and identifying number, if any, unless the attached statement shows them.
4. Whether the interest is a US real property interest.
5. An officer's signed verification under penalties of perjury, with a copy of the statement attached.

Mail it to the address under "Where To File" in the Form 8288 instructions. Add a supplemental statement if the company values intangibles, other than goodwill, by a method other than purchase price or book value and they are at least 25% of its assets. A company that attached a voluntary "not a USRPHC" statement to its prior-year return, with no triggering event since, is exempt from the separate notice.

What records should we keep from closing?

Keep everything that proves who owns what and why each form was right:

• The closing cap table with each holder's country, entity type and voting and value percentages, updated at each issuance.
• Each investor's W-8 or W-9, with the date received and its expiry.
• Fund structure charts and W-8IMY withholding statements.
• A worksheet showing the 25% test, including family, partnership and option attribution.
• Every agreement for loans, fees, services or licences with an investor or its affiliates.
• Each USRPHC statement, the asset values behind it, the IRS notice and proof of mailing.

A reporting corporation with less than $10,000,000 of US gross receipts is spared the special related-party record rules, but still files Form 5472 and keeps ordinary tax records (Treas. Reg. 1.6038A-1).

Example

These examples are illustrative; amounts are in US dollars.

Singapore angel buys 5%

An angel living in Singapore invests $250,000 for 5% of a Delaware corporation and signs a W-8BEN. Nothing is withheld at closing. She is below 25%, and no relative holds shares, so Schedule K question 7 stays "No" and no Form 5472 is needed for her.

Foreign fund leads with 30%

A foreign fund organized as a partnership invests $6,000,000 for 30% and gives a W-8IMY with its partners' forms. Each year the fund holds 25% or more, the company answers "Yes" to question 7. In the closing year, the company also pays the fund a $40,000 monitoring fee, a payment for services, so the company attaches a Form 5472 for the fund as a related party. In a later year with no transactions with the fund or its related parties, question 7 stays "Yes" but no Form 5472 is due.

Investor asks for the USRPHC statement

Two years after closing, the fund plans to sell its shares and asks for a statement. The company's assets are $5,000,000 of cash, equipment and software carried at book value, and an office lease worth little on assignment, so US real property is far below half. An officer signs a dated statement on March 2, mails it to the fund, and mails the IRS notice with a copy by April 1. The sale closes on March 20, within 30 days of the statement's date, so the buyer can rely on a copy and withhold nothing under FIRPTA.

Different for you?

• A foreign parent owns the whole company: see the US subsidiary of a foreign company.
• You already paid dividends or interest abroad without withholding: see missed withholding on payments abroad.
• A foreign investor crossed the line in an earlier year and no Form 5472 was filed: see missed foreign-owner filings and penalties.
• Foreign SAFE or note holders have not converted yet: see SAFEs and convertible notes.
• The company's subsidiary, not an investor, is abroad and investors ask about QSBS: see QSBS with a foreign subsidiary.
• A fund near the line, layered fund structures, real estate on the balance sheet, or a USRPHC statement to sign: get startup tax help before closing.