The scenario
You're a US person (citizen, GC, or US tax resident) who owns shares in an Indian Pvt Ltd company — as founder, co-founder, employee with ESOPs, or investor.
Multiple layers of US compliance:
- Form 5471 (annual ownership reporting)
- GILTI / Subpart F (current taxation of CFC earnings)
- Form 8938 (FATCA disclosure)
- FBAR (if you have signing authority on company accounts)
- Indian dividend / capital gain reporting when realized
Form 5471 obligation
If you're a Category 4 or 5 filer (see separate blog), Form 5471 required annually.
Category 4: > 50% ownership Category 5: 10-50% ownership of CFC (where US persons together own > 50%)
Penalty for missing: $10K/year + reductions in FTC.
CFC determination
Indian Pvt Ltd is CFC if US persons (each owning 10%+) together own > 50%.
Worked examples:
- Solo US founder with 60% → CFC
- US founder 25% + Indian co-founder 75% → NOT CFC (only one US shareholder, < 50%)
- Two US founders 30% each + Indian co-founder 40% → CFC (US persons own 60%)
GILTI — annual tax on CFC earnings
If Indian Pvt Ltd is CFC, you owe GILTI tax (Global Intangible Low-Taxed Income, Section 951A) on a portion of company's earnings annually.
GILTI calculation:
- Company's net income
- Less 10% of tangible asset basis (QBAI)
- Less certain interest expenses
- = GILTI inclusion
US tax on GILTI: 10.5% to 21%, depending on §250 deduction and §962 election.
This means: even if Indian Pvt Ltd doesn't distribute dividends, you owe US tax on its earnings every year.
§962 election — corporate-rate tax + FTC
By election, US individual can be taxed on GILTI at corporate rate (21%) instead of individual rate, AND claim 80% of Indian corporate tax as FTC.
Effective tax on GILTI with §962:
- US rate: 21% × 50% deduction (§250) = 10.5%
- Less FTC for Indian corporate tax (80%): often zero net US tax
For most NRI founders with profitable Indian Pvt Ltd: §962 election eliminates GILTI tax.
Subpart F income
Certain types of CFC income are immediately taxed in US hands regardless of GILTI:
- Foreign personal holding company income (interest, dividend, rent on passive assets)
- Foreign base company income (related-party transactions)
- Insurance income
For operating Indian Pvt Ltd, Subpart F often doesn't apply (active business income excluded). For passive Indian investment vehicles, Subpart F can be brutal.
Transfer pricing — related-party transactions
If your Indian Pvt Ltd transacts with US entities you own:
- India requires arm's-length pricing (Section 92)
- US requires arm's-length pricing (§482)
- Both countries can adjust if pricing is off
Penalties on both sides for non-arm's-length pricing.
Dividend repatriation
When Indian Pvt Ltd distributes dividend to US-person shareholder:
- India: TDS at 20% (10% with DTAA TRC + Form 10F)
- US: Treated as PTEP (Previously Taxed Earnings and Profits) if already taxed via GILTI — no double tax
- Net effect: typically dividend is tax-neutral due to prior GILTI inclusion
Capital gain on share sale
When you sell Indian Pvt Ltd shares:
- India: LTCG @ 12.5% if held > 24 months (unlisted threshold)
- US: LTCG @ 15-20% if held > 1 year
- FTC on Form 1116
- Indian basis adjustments under prior GILTI inclusions complicate calc
ODI compliance (for Indian-resident co-founders)
If you have Indian-resident co-founders making investments in or holding shares of US entities or affiliates, ODI compliance applies.
Practical advice
- Engage cross-border CPA before incorporation — structure matters
- File Form 5471 from year 1
- Make §962 election for GILTI relief
- Document transfer pricing rigorously
- Get Indian audited financials by November for timely US filing
- Track PTEP across years for accurate dividend treatment
Common mistakes
- Missing Form 5471 (#1 mistake)
- Not making §962 election (overpaying GILTI tax)
- Missing transfer pricing documentation
- Confusing PTEP with current-year earnings
- Not coordinating Indian + US filings
Explore our complete US Tax Return Guide to understand refunds, filing rules, and IRS procedures for NRIs.