How to Disclose Foreign Shares in Your IT Returns

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all resident Indian investors have invested in foreign equities, especially US equities, in recent years. The taxation of income from these shares is different from that of Indian shares. Resident Indian taxpayers holding foreign shares are required to make various disclosures in the Foreign Assets (FA) table of tax returns, with serious consequences for non-disclosure. Some of the issues related to foreign equity disclosure are discussed below.

Very often, employees are granted stock options (ESOPs) from the parent company overseas which vest over a period of time, can then be exercised and are then held in the form of shares. Do ESOPs have to be reported as foreign assets if they are not acquired or if they have been acquired but not exercised? Until they are exercised, no amount is paid out for ESOPs. Even the indirect value is only calculated after the exercise. ESOPs are considered contingent assets until the time of acquisition. They are not actions until they are exercised. Therefore, it is advisable to show ESOPs acquired under Part B of Schedule FA as a financial interest in any entity held at nil value.

If you are a resident of India and hold US stocks through a broker or portfolio manager, where should the stocks be disclosed in Schedule FA – in Part A3 as foreign equity ownership or in part A2 as foreign depository accounts owned? In most cases, physical share certificates are not issued in your name and the shares are held by the broker or portfolio manager in the street name, i.e. they are held on behalf of the broker or portfolio manager, who issues an account statement of the shares they hold on your behalf. These shares are not registered in your name with the company and should therefore be disclosed as a deposit account held in Part A2, not as an equity interest held.

In such cases, an investor will typically hold multiple stocks in the same brokerage account or portfolio. So what needs to be disclosed is the brokerage or portfolio account as a whole, with the maximum balance, etc. of the entire portfolio. Sometimes providing a max balance (the maximum account balance in a given period) can be a challenge unless the broker or portfolio manager provides it. Alternatively, the maximum balance can be considered as the highest monthly closing balance according to the monthly statements provided. In the event that brokerage or portfolio accounts are in a common name, should both joint account holders disclose the same balances, although a name has been added for convenience only and not all assets belong only to the first owner? It may be sufficient for the co-holder, who does not actually own the foreign assets for tax purposes, to disclose this custodial account in Part E of Schedule FA, Accounts in which you have custodial authority. signature. To be on the safe side, it may be advisable to disclose the deposit account in appendix FA of the two co-holders. The reporting financial institution would also normally disclose the two joint holders in its FATCA/CRS report, and such disclosure by the two joint holders would facilitate the verification of the data received by the tax authorities.

Sometimes you may have invested in a fund, which may be structured as a trust or an LLC (limited liability company). What is the appropriate disclosure for investments in such a fund – as a participation – Part A3 (in the case of an LLC), as a beneficiary of a trust – Part F (in the case of an trust) or Financial interest in an investee – Part B? In an investment fund, you really don’t know who the other investors are, because they have to be disclosed if you’re the beneficiary of a trust. In the LLC, you are actually investing in a fund rather than as an equity holder. Therefore, the appropriate disclosure would be as Financial interest in any investee – Part B.

These and other issues arise when you complete Schedule FA. In the absence of detailed practical advice from tax authorities in this regard, one should try to understand the logic and complete Schedule FA to the best of one’s understanding to ensure that foreign investments are all disclosed. As long as you eventually disclosed the asset in part of Schedule FA, which is a possible manner of disclosure, you cannot be penalized for failing to disclose or misdisclosing foreign assets.

Gautam Nayak is Partner, CNK & Associates LLP.

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