Indianapolis, IN asked in Business Formation, Business Law and Securities Law for Indiana

Q: I pitched a technology start-up idea to a family relative, he liked it and agreed to invest.

He is neither a US citizen nor a resident, and he does not want to be listed in the US Startups (even if the law allows him to). He wants to invest via a loan instrument, which I am expected to pay back whenever the model succeeds, beyond which we will share all profits as partners. This therefore means I am expected to remit funds to him overseas.

The question I have is this, will he be taxed in the United States? He has to pay income tax for his own country, will that not be double taxation? How does the IRS handle this?

The second part of this concerns my start-ups, in addition to a start-up studio - (where several ideas can be nurtured and developed), - I also conceived that with some of the funds I 'borrow' that I can invest money into seed stage technology companies in exchange for an equity position. I would like to effect this as an Angel Investor or a Micro Venture Capitalist. What are my options here? I don't meet the accreditation minimum?

1 Lawyer Answer
Jonathan R. Roth
Jonathan R. Roth

A: The answer to your question depends on the Tax Treaty between your relatives home country and the USA. Generally, interest paid to foreign nationals on loans made in the USA are subject to US taxes and withholding. The amount of the tax and the withholding is dictated by a tax treaty between the USA and the foreign national. If there is no tax treaty then the US tax would be 30% subject to certain elections which could be made by the foreign national. The withholding would be at least 10%.

Please feel free to call me if you want a more detailed response.

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