Indian HUF Entities and How the IRS Classifies Them for Tax and Information Reporting Purposes

Transcription

1 Indian HUF Entities and How the IRS Classifies Them for Tax and Information Reporting Purposes 24 February 2016 Daksha Baxi Executive Director Khaitan & CO, Mumbai, India

2 Introduction: HUF A concept under the Hindu customary law A unit of family of Hindus Joint family is the essence of HUF It is governed by the un-codified Hindu Law and the provisions of the Hindu Succession Act, 1956 ( HSA ) HUF is a separate taxable unit Copyright Khaitan & Co

3 Constituents of HUF Coparceners Members Karta: Oldest coparcener Great Grandfather Grandfather Father Son Wife and mother of the coparcener Daughter (including married daughter): Post amendment of Section 6 of HSA in 2005 Copyright Khaitan & Co

4 Rights of a Coparcener Powers of a Karta Rights: Community of interest and possession Right to seek partition To be maintained out of the HUF Property Powers: Borrow for family purposes and/or business Enter into contracts on behalf of the family for the family business Bind other members with his actions Compromising and discharging claims incidental to business Alienate family property Coparcener Karta Copyright Khaitan & Co

5 HUF: Alienation and Coparcenary Interests Gift Prohibited unless consent is taken from other coparceners Sale or Mortgage Bombay, Madras & MP: Allowed without the consent of other coparceners WB & UP: Prohibited unless consent of all the coparceners is obtained Copyright Khaitan & Co

6 HUF: Partition Coparcenary property can be partitioned Every coparcener has a coparcenary right in the property There should be definite and unequivocal intention by a coparcener of HUF to separate himself from the family and enjoy his share severally then can demand partition of the HUF Partition to be effected by way of deed of partition, notice to partition, institution of suit to partition There could be partial or total partition Wife cannot herself demand a partition but if a partition does take place between her husband and sons, she is entitled to receive share equal to that of a son and to hold and enjoy that share separately from her husband. Same is in the case of widow In case of a partition: Between father and sons: They all take equal shares; Between brothers: They take equal shares Each branch takes per stirpes as regards every other branch but the members of each branch take per capita as regards each other Copyright Khaitan & Co

7 HUF & Tax HUF is a separate taxable entity it is taxed independent of its members Blending of self acquired property? Distribution of property on Partition If property sold, then capital gains tax in the hands of the HUF Members of the HUF receive the partitioned property free of any tax in their hands Copyright Khaitan & Co

8 HUF: NRA Kartha Co-Tenant Shareholder, Director and Officer Limited Partner Owner Trustee Beneficiary US Coparcener(s) NRA Kartha Hindu Undivided Family Co-Tenant Shareholder, Director and Officer General Partner Owner Trustee Beneficiary NRA Coparcener(s) Hereditary Real Estate Acquired Real Estate Bank Account DMAT Operating Business Ranadive Law, P.A., 2016; all rights reserved, no unauthorized reproduction or use Copyright Khaitan & Co

9 HUF: US Kartha US Kartha Co-Tenant Shareholder, Director and Officer General Partner Owner Trustee Beneficiary US Coparcener(s) NRA Coparcener(s) Co-Tenant Shareholder, Director and Officer Limited Partner Owner Trustee Beneficiary Hindu Undivided Family Hereditary Real Estate Acquired Real Estate Bank Account DMAT Operating Business Ranadive Law, P.A., 2016; all rights reserved, no unauthorized reproduction or use Copyright Khaitan & Co

10 Case Study 1 Shalini Singh, a 24 year old Indian citizen and H-1B graduate student seeks your advice regarding his family s HUF. Shalini s parents, both successful doctors in India, have established a Family HUF for the benefit of themselves, Shalini, Shalini s older brother (a Canadian citizen and resident who is married to a U.S. citizen and they have two U.S./Canadian dual citizen children) and Shalini s younger sister, still a college student in India. The Family HUF consists entirely of investments assets: a rental apartment building; physical, non-dmat stock in various Indian public companies inherited from Shalini s mother s parents; and, a DMAT account which is professionally managed by an Indian bank. Shalini s parents recently received a letter from their Indian bank asking them to self-certify the HUF s status under FATCA and whether there are any U.S. members of the HUF. Ranadive Law, P.A., 2016; all rights reserved, no unauthorized reproduction or use Copyright Khaitan & Co

11 Case Study 2 Ram Patel, a 65 year old U.S. citizen, cardiologist, married with three children and five grandchildren (so far), all of whom are U.S. persons, seeks your advice regarding his family s HUFs. Ram s older brother Shyam, an Indian citizen and resident, who is married with no children, has recently passed away suddenly. Shyam was the Kartha of two Patel family HUFs, one established by their father, and one established by Shyam himself following a partial partition of Father s HUF after Ram emigrated to the United States: Father s HUF owns ten acres of sugarcane fields. The HUF operates eight acres as sugar cane fields and rents the other two acres out to a variety of small vegetable farmers. HUF One has various checking and savings accounts to run the business (farming and landlord). Shyam s HUF owns a two acre parcel next door, which has an aging processing facility on one acre and the other acre is vacant. Shyam s HUF also owns a DMAT account which is managed by Shyam s widow. Ram Patel is nearing retirement and has always dreamed of returning to India and being a sugar farmer. His wife (not Indian) is open to spending time in India, but none of their children have any desire to leave the United States. Ram has not previously declared any of the HUFs assets or income on his U.S. tax returns and information reports. Ranadive Law, P.A., 2016; all rights reserved, no unauthorized reproduction or use Copyright Khaitan & Co

12 Case Study 3 Ashok Verma, a 69 year old Indian citizen and resident, who is married with two children, both of whom are U.S. persons (but neither knows anything about the HUF s existence), seeks your advice regarding his family s HUFs. Ashok and his wife intend to apply for Green Cards and moved to the U.S. to be closer to their children after his retirement. Ashok is the Kartha of a HUF established by his Father. Father s HUF owns the family home which consists of one floor for Ashok and family (now vacant); one floor each for Ashok s younger sisters and their respective families (all Indian citizens and residents), and the ground floor which is rented to a small shop. Ashok wishes to sell the building to the shop owner, and then terminate the HUF. One of his sisters is willing to move out, but the other sister and her family refuse to move out. Ranadive Law, P.A., 2016; all rights reserved, no unauthorized reproduction or use Copyright Khaitan & Co

13 Case Study 4 Ashok Verma, a 69 year old Indian citizen, who is married with two children, both of whom are U.S. persons (but neither knows anything about the HUF s existence), seeks your advice regarding his family s HUFs. Ashok and his wife received Green Cards and moved to the U.S. five years ago to be closer to their children after his retirement. Ashok is the Kartha of a HUF established by his Father. Father s HUF owns the family home which consists of one floor for Ashok and family (now vacant); one floor each for Ashok s younger sisters and their respective families (all Indian citizens and residents), and the ground floor which is rented to a small shop. Ashok wishes to sell the building to the shop owner, and then terminate the HUF. One of his sisters is willing to move out, but the other sister and her family refuse to move out. Ranadive Law, P.A., 2016; all rights reserved, no unauthorized reproduction or use Copyright Khaitan & Co

14 Case Study 5 The Devi Family consists of the following individuals: Abhishek 82, widowed, Indian Citz/Resd; 5 children listed below Bharati 57, married, Canadian Citz/Resd; 1 son, 35, US GC (who has 3 US born children, 6, 3 and 1); 1 daughter 33, Canadian Citz/Resd (who has 2 Canadian born children, 8 and 6); Chetan 55, married US Citz/Resd; 3 children, 25, 22 and 17 all US born, no grandchildren Divam 53, divorced Indian Citz/Resd; 2 sons, 27 (who has 1 Indian born child) and 25, both Indian Citz/Resd Eesha 50, married UK Citz/Resd; 2 children 25, 21 both UK born Farhad 47, married Indian Citz/Resd; 4 children, 2 Indian Citz/Resd (4, 7), 1 US GC (25), 1 US H-1B (22) Abhishek has established the Abhishek Devi HUF to own the family home. It has been subdivided into separate apartments, which he currently shares with sons Divam and Farhad, and their respective families (i.e., Divam s sons and Farhad s second wife and younger children). Two separate apartments within the joint home are kept vacant for use by Bharati, Chetan and Eesha and their respective families when visiting. His HUF also owns three rental properties and financial investments such as DMAT account, mutual funds, and associated bank accounts. Abhishek manages the DMAT account, but has an Indian financial institution manage the mutual fund accounts. Abhishek is the Kartha of Narendra Devi HUF, a HUF established by his father to own the family printing business, and associated bank accounts, he has operated for over 50 years, and which Divam and his two sons now actively manage. Abhishek s brother and four sisters, and their respective families (all spread between India, U.K., U.S., Australia, Singapore and France) are co-parcenors or members, as the case may be, of this HUF. Ranadive Law, P.A., 2016; all rights reserved, no unauthorized reproduction or use Copyright Khaitan & Co