INTRODUCTION
In this issue of Parallel Universes (similar situation, different residency), we address exits from a company with relation to QSBS eligibility. Consider an Indian citizen living in the US vs a US Citizen living in India. How is the outcome dramatically different for the Indian citizen in the US on an H1B visa (resident of the US) vs a citizen of the US (resident of India)?
From Rahul’s Perspective
Rahul went on an H1B to the US a few years ago after his MBA. He’s an Indian citizen and got an offer right out of business school to work at a technology product firm in the US in 2012. He was issued stock options in the company, but he didn’t know too much about stock options at the time, and he didn’t think anything would come of it. Still, the job offer seemed full of growth opportunities and he wanted to move to the US, so he took the offer. At the young age of 24, his future looked bright.
Problem
The company is now making a partial exit, and Rahul is eligible to receive proceeds for the sale of a percentage of stocks (qualified small business benefit, or QSBS, an entrepreneur friendly benefit in the US that allows for the greater of $10 million or 10 times basis in gains as tax exempt when you exit).
Rahul is not a US citizen, but he’s a US resident, so what are his tax implications for this exit?
Solution
Rahul is liable for both US taxes and also any benefits under the tax code that would otherwise apply to citizens. When he makes his exit, he gets $1MM dollars and it’s all tax exempt.
From Govind’s Perspective
Govind had been working in the US for over 10 years at the same technology product firm, and in fact he founded the company and ran it successfully. He is from India, and since his mother is elderly, he has been wanting to spend more time with her. Govind is in his late 40s, with a wife and son in the US. His mother didn’t want to move to the US, so when Govind was given the responsibility of heading the subsidiary out of India, it aligned with his personal goals to be closer to his mother. He and his wife moved to India in 2012 and became tax residents, while his son started school in India.
Problem
As the founder, Govind is eligible to sell a proportionate percentage of his stock amounting to $5MM, but because he’s an Indian resident, he loses approximately 28.5% in taxes payable to India.
Solution
When Govind files his returns, he can invoke the QSBS provisions for the US, but won’t get the benefit on a worldwide basis. He can also try to reinvest some of the proceeds in India under section 54F and avail an exemption from capital gains.
He could also pass some of this amount by gifting it to his son (Us resident) and still take partial advantage of QSBS.
Contact Ventura Pranas, for such customised solutions to complicated tax-related issues.
