Skip to content

U.S. EXPAT TAX GUIDE โ€“ INDIA

Benefits of Splitting Company Shares with a Spouse in India

If you are a US citizen married to an Indian citizen and have set up a private company in India, you might be wondering if splitting company shares with your spouse could help you save on taxes.ย 

It might seem logical that sharing ownership might reduce your individual tax burden by dividing the income. However, the IRS applies rules that make this strategy less straightforward than it appears.

Table of contents


How can US expats reduce their tax burden while living in India?

The IRS uses a concept called constructive ownership rules. These rules mean that even if you transfer 99% of the company’s shares to your spouse, the IRS will still treat you as if you own those shares.ย 

Essentially, the IRS assumes that married couples act as a single financial unit. Therefore, regardless of the actual share division, if you retain even a small percentage of the ownership, the IRS considers that you “constructively” own the entire company.

The reason for these rules is that married couples typically make financial decisions together, and as such, control over the company is viewed collectively.ย 

So, if you hold just 1% and your spouse holds 99%, the IRS considers you to own 100% of the company for tax purposes.

What is the impact of being classified as a Controlled Foreign Corporation (CFC)?

Because of these constructive ownership rules, a company owned by you and your spouse may be classified as a Controlled Foreign Corporation (CFC). A CFC is a foreign company in which US shareholders collectively own more than 50% of the shares, either directly or indirectly.ย 

Even if you technically own only a small portion of the company, the fact that your spouse owns the rest means the entire company is considered under your control as a US citizen.

Once your company is classified as a CFC, there are additional filing obligations, such as completing Form 5471. This form provides the IRS with detailed information about the financial activities of your company, including income, expenses, and ownership.ย 

Even if the company does not generate US tax liability in a given year, the reporting requirement still applies, and failure to comply can lead to significant penalties.

Does splitting company shares reduce filing requirements for US expats?

Splitting company shares with your spouse does not reduce your filing requirements. Since the IRS treats you as the constructive owner of your spouse’s shares, you will still need to file Form 5471 and possibly Form 8858, if applicable.ย 

That said, there can be some benefits to splitting shares when it comes to distributing income. For instance, if the company earns US$100,000 in profit, you can choose to distribute US$50,000 each to you and your spouse. This distribution means that you are taxed only on the US$50,000 you receive, and your spouse is taxed on their portion based on their own tax situation.

Should US expats consider becoming employees of their company instead of staying self-employed?

Another strategy for reducing tax liability is to set up a private company and become an employee of that company instead of continuing as a self-employed individual. By doing this, you may reduce your exposure to US self-employment taxes, which include Social Security and Medicare contributions.

If you become an employee of your own company, you can pay yourself a salary that qualifies for the Foreign Earned Income Exclusion (FEIE). In 2025, the FEIE allows you to exclude up to US$130,000 of foreign-earned income from your taxable income.ย 

This can significantly reduce your US tax liability. In addition to the FEIE, you may also be able to use the Foreign Tax Credit (FTC) to offset taxes paid to the Indian government.

Is forming an Indian corporation a good tax-saving strategy for US expats?

For many US expats, setting up an Indian private limited company can be a practical and effective way to manage tax liability. This approach helps minimize exposure to US self-employment taxes.

However, it’s important to carefully weigh these benefits against the administrative burden and compliance costs.ย 

Working with a tax professional who understands both Indian and US tax systems can be highly beneficial. They can assist with setting up the company, managing compliance requirements, and maximizing your tax savingsโ€”all while ensuring that you are adhering to both US and Indian tax laws effectively.

Why partner with a specialist Expat accountant?

Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in Germany. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.

TESTIMONIALS & REVIEWS

41000 Testimonials
Verified Testimonials
5,300-Happy-Clients
Happy Clients
5-star-Feefo-Reviews
Trustpilot and Feefo Reviews