From Hong Kong With Love…

We had many US clients this year with family in Hong Kong requesting legal assistance with recent transfers received from Hong Kong due to the local political instability.

Typically, the transfers received from Hong Kong due to the local political instability and held in the US person’s account temporarily with an intent to return or repay the funds later.

The issue is whether this transfer received is to be reported on a Form 3520?

Form 3520 Background:

Form 3520 is to be used by “U.S. Recipients of Gifts or Bequests Received During the Current Tax Year from Foreign Persons”. Part IV of Form 3520 asks you to list certain gifts or bequests received during the tax year from foreign persons. Question 54. This question asks you to disclose any foreign gifts received from a nonresident alien or a foreign trust that exceeds $100,000. To calculate the $100,000 threshold, you must aggregate gifts from foreign nonresidents and foreign estates. In addition, Question 54 requires you to disclose foreign gifts that exceed $5,000. Question 55 asks you to disclose gifts from foreign corporations or foreign partnerships. Question 56 asks you to state if you had reason to believe if the foreign donor was acting as a nominee or intermediary. If you answered “Yes” to this question, you must attach an explanation to the Form 3520.

Form 3520 is required only if:

  1. You are the responsible party for reporting a reportable event that occurred during the current tax year, or you held an outstanding obligation of a related foreign trust (or an obligation of a person related to the trust) that you treated as a qualified obligation during the current tax year or;
  2. You are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust or;
  3. You are a U.S. person who received (directly or indirectly) a distribution from a foreign trust or;
  4. You are a U.S. person who, during the current tax year, received either: a. More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or b. More than $15,601 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.

None of theses situations apply to transfers received with an intent to return or repay the funds later. Such transfers are loans. Such loans should be fully documented in writing with all required legal formalities. Moreoever, such loans should ideally mimic “qualified obligations” in the foreign trust context to avoid gift recharacterization if scrutinzed by the IRS. See Regs. §1.679-4(d), IRS Notice 97-34, §V(A).

In summary, transfers received from Hong Kong due to the local political instability and held in the US person’s account temporarily with an intent to return or repay the funds later should not require a Form 3520 filing.

W strongly recommend US tax legal counsel to guide US persons with such issues to avoid Form 3520 ccomplications (and penalties).

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