Funding Your US Corporation From Abroad: Shares or Loan

Is a wire to my US corporation taxable income?

A US C corporation generally does not count a genuine shareholder capital contribution or money for newly issued shares as income. Borrowed money creates a repayment obligation, not sales income. Section 118 excludes capital contributions from income; section 1032 prevents corporate gain or loss when it issues shares for money.

The wire's origin does not decide its US tax treatment. Document its purpose and keep the transfer record. Payment for goods or services is different.

Is the funding shares or a loan?

Shares give ownership; a loan gives a real right to repayment. A wire memo saying “loan” is weak evidence if the corporation never agrees to repay or treats the money as permanent capital. Section 385 identifies a written promise, fixed payment date and interest, priority, and debt-to-equity position as relevant factors.

Follow the terms in the books and payments; classify undocumented advances promptly.

Does a cash share purchase go on Form 5472?

Form 5472 applies if a US corporation has a reportable related-party transaction and a foreign person owns 25% of its voting power or value, directly or indirectly, at any time in the year. Living abroad does not decide foreign-person status: a US citizen is not foreign, and a green card or substantial US presence may make a noncitizen a US tax resident. See the Form 5472 instructions and IRS residency guidance.

A cash purchase of newly issued shares generally is not a listed Form 5472 transaction for a US C corporation. The regulation lists loans and interest; its contribution rule applies only to a foreign-owned disregarded entity. The Form 5472 instructions distinguish Parts IV, V, and VI.

“Stock in trade” on Form 5472 means inventory, not the corporation's own shares. A transaction mixing shares with services, property, or debt needs separate review. See Foreign-owned C corporation filing for the annual forms.

If I pay company bills with my personal card, is that a loan?

A personal-card payment is usually an owner advance if the corporation owes you reimbursement. It can instead be capital if documented as a contribution or consideration for shares. For a fee paid before incorporation, keep the receipt; after formation, document whether the corporation assumes the cost and owes reimbursement or accepts it as capital. Do not book a loan before that decision. First corporate return with no revenue covers formation-cost deductions. Keep the invoice, card statement, approval, and repayment decision.

If the payment creates a loan from a foreign related owner, keep it in the owner-loan schedule. Form 5472 line 17 uses beginning and ending loan balances or a monthly average, not the sum of advances.

Should a founder loan charge interest, and is withholding due?

Put an interest rate and payment terms in the note before the loan starts. An interest-free or below-market corporation-shareholder loan can create deemed interest under section 7872. Its small-loan exception applies while aggregate loans between the owner and corporation do not exceed $10,000, unless tax avoidance is a principal purpose. A rate on paper also needs to match the corporation's actual records and payments.

Interest paid by a US corporation to a foreign owner is generally US-source income subject to withholding. The usual rate is 30% unless a documented exemption or treaty rate applies. A lender owning at least 10% of the corporation's voting power cannot use the portfolio-interest exemption. IRS Publication 515 explains both rules.

For an eligible individual resident in India, Article 11 of the US-India treaty generally caps US tax on ordinary interest at 15%. Get a valid Form W-8BEN before applying that rate; other treaties differ. The corporation, as withholding agent, owes tax it fails to withhold under section 1461. Report paid or deemed-paid interest on Forms 1042 and 1042-S, generally due March 15, 2027 for payments during this page's tax year; deposits can be due sooner under the Form 1042 instructions. Form 5472 line 32 reports paid or accrued interest, subject to its section 163(j) instruction.

If a foreign individual owns more than 50% of the stock's value, section 267 generally delays the corporation's deduction for interest owed to that person until it is paid, even if the books accrue it. This deduction rule does not change Form 5472's paid-or-accrued instruction. See 26 CFR 1.267(a)-3.

What records and book entries should the corporation keep?

Form 5472 instructions require related-party records. A missing or substantially incomplete form, or missing required records, can cost the corporation $25,000 initially. Reconcile owner accounts before filing.

For foreign currency, keep the original amount, conversion date and rate, and US-dollar amount. Form 5472 requires US-dollar amounts and an exchange-rate schedule.

For regular bookkeeping decisions, see Doing your own books or hiring a bookkeeper.

Can I convert an owner loan into shares later?

Yes, the corporation can issue shares to extinguish a genuine owner loan. Document the balance, unpaid interest, share value, approval, and settlement date. Remove the loan payable and record the shares; account separately for any value difference and unpaid interest.

The conversion can have tax consequences: section 108(e)(8) measures debt satisfied with corporate stock by that stock's fair market value. If the shares are worth less than the debt, cancellation-of-debt income may arise. Review the conversion before signing it and reassess whether it creates a Form 5472 transaction.

Example

Illustrative amounts in US dollars. Each scenario assumes an individual who is a foreign person for US tax purposes and owns at least 25% of the US C corporation's voting power.

A founder wires money for shares

The founder wires $50,000 for newly issued shares. The corporation records cash and equity, not income, and keeps the transfer, approval, subscription, and stock ledger. This cash purchase generally is outside the C corporation's Form 5472 transaction list.

A founder makes an interest-bearing loan

The founder lends $20,000 at 5% on the year's first day, creating $1,000 of interest. With no repayment or section 163(j) limit, Form 5472 line 17 shows $0 opening and $20,000 ending; line 32 shows $1,000 interest. Portfolio interest is unavailable. When the interest is paid, the corporation withholds $300 at 30%, or $150 at the 15% treaty rate for a qualifying Indian resident with a valid W-8BEN. It files Forms 1042 and 1042-S and checks when to deposit the tax.

A founder pays bills personally

The founder pays $3,000 of company bills on a personal card. If reimbursement is intended, the corporation records the cost and a $3,000 payable to the founder, then includes it in the owner-loan records for Form 5472. If the payment was intended as capital, document a contribution or the shares actually issued and record equity. An existing reimbursement payable remains debt until separately settled.

Different for you?

• A foreign company funds the US company: See US subsidiary of a foreign company.
• You want dividends, salary, or loan repayments: See Paying yourself as a foreign owner.
• The corporation already missed loan reporting: See Missed foreign-owner filings and penalties.
• You need the owner advances reconciled with the books: See bookkeeping services.
• You send funds from India: US classification does not settle India's foreign exchange or overseas investment rules; ask an Indian adviser before transferring money.