EB-5 Investors – What You Need to Know for Tax Issues
The EB-5 immigration program has been extended until at least mid-December. The program, which was established in 1990, allows foreign investors and their families get conditional permanent residence in the United States based on investments they make.
EB-5 investors receiving distributions from a project in a Regional Center or by virtue of their investment in a new commercial enterprise are generally subject to withholding tax until they become conditional permanent residents in the United States, either through consular processing of their immigrant visa abroad or through adjustment of status to a conditional permanent resident (if in the United States in another lawful immigration status). If you are in the United States, you may be subject to US income tax based on a substantial presence test (If the individual has resided in the U.S. for more than 31 days in the current year and has resided in the U.S. for more than 183 days over a three-year period, including the current year). Once EB-5 investors become conditional permanent residents in the United States, they are subject to federal income tax on their worldwide income. This includes sources of income both inside and out of the United States. However, foreign tax credit may be available on income that is taxed outside the United States if U.S. has an income tax treaty with the investor’s home country. EB-5 investors are also subject to other types of taxes, such as estate, gift, and generation-skipping transfer taxes. State taxes may also apply. We will discuss in below for several taxes and planning opportunities that related to EB-5 investors:
In the United States, an individual’s immigration status differs from his or her tax status. An EB-5 investor is a “non-resident alien” (“NRA”) for federal income tax purposes. An NRA is defined as a non – U.S. citizen who doesn’t pass the green card test or the substantial presence test. EB-5 investors are generally NRAs until they obtain their permanent residence status. For the purpose of calculating the U.S. income tax liability, the NRA classification may continue to apply even following the receipt of a green card (pursuant to the residence tie break rule of an applicable tax treaty).
Income tax rules applicable to NRAs are complex. An NRA pays a flat 30 percent tax on U.S.-source “fixed or determinable, annual or periodical” (FDAP) income that is not effectively connected to a U.S.trade or business, and which is subject to tax withholding by the payer. FDAP includes interest, dividends, royalties and rents, etc. The rate of tax may be reduced by an applicable treaty. The income is taxed on a gross basis, with almost no offsetting deductions. Practically, this means that almost any payment made to an NRA from the United States is subject to a 30 percent tax withheld at the time of payment. The FDAP tax and withholding may be reduced or eliminated by a tax treaty. However, an important exception applies to capital gains—foreigners are generally not taxed on their capital gains from U.S. sources.
When an NRA has income from a U.S. trade or business (“effectively connected” income), he or she is taxed on that income just like any other U.S. taxpayer. U.S. trade or business has been held to include the provision of personal services in the United States, sale of products in the United States, solicitation of orders from the United States and subsequent exportation of merchandise outside the United States, manufacture, maintenance of a retail store, and maintenance of corporate offices in the United States. An NRA will be engaged in a U.S. trade or business if the NRA is an investor in an entity that is taxed as a partnership for U.S. income tax purposes, and that entity is engaging in a U.S. trade or business.
Consequently, NRAs should invest either through corporations, or through LLCs that elect to be taxed as corporations.
Estate and Gift Taxes
The definition of an NRA changes in the estate tax context. Here, the inquiry looks primarily at whether the foreigner intends to make the United States his domicile. EB-5 investors will often find themselves to be U.S. residents for income tax purposes, but an NRA for estate tax purposes.
The estate tax is imposed only on the part of the NRA’s gross estate that is situated in the United States at the time of death. The rate of NRA’s estate tax is the same as that imposed on U.S. citizens and resident aliens, but the unified credit is only $13,000 (equivalent to about $60,000 of property value). With proper planning, these harsh results may be avoided—with most other international tax subjects, an applicable tax treaty may reduce or eliminate U.S. estate tax.
Estate tax planning for NRAs is commonly accomplished through the use of (1) foreign corporations to own U.S. assets, or (2) the gift tax exemption for intangibles to remove assets from the United States. Planning for EB-5 investors would include moving assets to family members and irrevocable trusts prior to meeting the estate tax NRA test.
The implications of US taxes under EB-5 are complicated. KCH is qualified to discuss the US tax implications of EB-5 and help clients makes the best decisions. Do not hesitate to contact our office at 973-586-2360 or email us (firstname.lastname@example.org) should you have further questions or to set up a consultation.
Prior to becoming U.S. income tax resident aliens, immigrants have a unique planning opportunity to reduce their future U.S. tax liabilities before stepping foot on American soil. Overriding plans should focus on implementing specific strategies that accelerate income, defer losses and maximize tax efficiencies of estates and business entities prior to U.S. immigration.