Key U.s. Tax Considerations for Eb-5 (and Other) Visa Applicants

• Jurisdiction: United States,Federal
• Author: By Patrick W. Martin
• Citation: Vol. 23 No. 4
• Publication year: 2015

Key U.S. Tax Considerations for EB-5 (and Other) Visa Applicants

By Patrick W. Martin¹

I. EB-5 VISA GENERALLY

Currently, there are more than 6,000 foreign investors who apply annually for lawful permanent residence² predicated upon the Employment Based Fifth Preference ("EB-5") program. The statutory regime for EB-5 visas was adopted more than two decades ago. This visa category is available to qualified immigrants seeking to enter the United States ("U.S.") for the purpose of engaging in a new commercial enterprise in which the immigrant has invested or is actively in the process of investing at least $1,000,000 (which may be reduced to $500,000 if the new commercial enterprise is located in a targeted employment area).³ The investment must benefit the U.S. economy and create full-time employment for not fewer than ten U.S. citizens or other qualified employees. Upon admission to the U.S. with an EB-5 visa or upon adjustment to EB-5 status, the investor, his or her spouse and their children are conditional lawful permanent residents for a two year period. Acquiring lawful permanent resident ("LPR") immigration status has important U.S. tax consequences. A successful EB-5 investor must apply to have the conditions upon "permanent" residence removed by the United States Citizenship and Immigration Service ("USCIS").⁴ However, there is no guaranty that the investor will have these conditions removed and become an "unconditional" lawful permanent resident.

II. U.S. INCOME TAX DEFINITIONS GENERALLY

In the immigration and tax world, the use of similar terms often leads to great confusion as these terms could have different meanings for tax and immigration law. As an example, a "U.S. person" is a specifically defined tax term in the Internal Revenue Code of 1986 as amended ("IRC") that includes certain individuals, corporations, partnerships and trusts that satisfy various criteria set forth in the IRC.⁵A "resident alien"⁶ is included within the definition of a "U.S. person." A "lawful permanent resident" as defined in the IRC⁷ may (but is not always) a "resident alien" and hence a "U.S. person". Yet another example of how these terms can cause confusion, the term "U.S. person" as defined by the 2011 foreign bank account reporting ("FBAR") regulations under Title 31 of the United States Code is defined slightly differently than under the IRC (Title 26 of the United States Code).

For instance, a U.S. citizen⁸ will necessarily be a "U.S. person" under the IRC. Yet another important example of how the tax law imposes specific technical definitions is the term "non-resident alien," is an individual who is not a "resident alien." An individual who is a "non-resident alien" for tax purposes can never be a U.S. citizen. A "non-resident alien" may later become a "resident alien" for tax purposes, and again revert back and forth to "non-resident alien" status depending upon the facts of a particular case.

Sound confusing? These technical tax definitions are indeed complex in their details and oftentimes can overlap when discussing "resident alien," "United States citizen," "non-resident alien," "domicile"⁹ "U.S. person," etc.

Finally, before discussing these tax rules further, it is worth noting that many of these tax concepts discussed throughout this article, in the context of an EB-5 investor, also can apply to other non-U.S. citizens¹⁰ who come into the U.S. on other visas;¹¹ e.g., E-1, E-2, L-1 visas, etc.

III. U.S. INCOME TAXES GENERALLY REGARDING EB-5 VISAS

Non-U.S. citizens are often quite confused about the U.S. tax laws. There are many questions that should be asked by all non-U.S. citizens who are considering applying for EB-5 visa status:

• How do U.S. taxes apply?
• When is U.S. income subject to taxation?
• When is non-U.S. income subject to taxation?
• What income is subject to taxation?
• What are the income tax rates generally?
• How is income to be reported for U.S. income tax purposes and what federal tax returns must be used and filed?
• What procedural requirements exist for U.S. income tax returns to be filed; e.g., is a social security number ("SSN") needed and may it be obtained from the U.S. federal government?
• What difference will it make if there are ownership or management interests in companies located outside the U.S.?
• What difference will it make if there are ownership or management interests in companies located inside the U.S.?
• What assets and information must be reported?
• How do foreign assets and bank accounts need to be reported (if at all) to the Internal Revenue Service ("IRS")?
• What difference can it make if the non-U.S. citizen has a home, residence or generally moves to a state such as New York, California, Texas, Florida, Illinois, Washington, Nevada, etc.?
• How can the U.S. estate and gift tax (different from the income tax) apply?
• When are gift or estate transfers of assets subject to the U.S. estate and gift tax and how are these assets reported?
• What are the estate and gift tax rates, generally?
• Finally, two of the most important questions for non-U.S. citizens are:
• What are the consequences if assets or income are not reported as required under the law?
• What are the legal consequences, including any impact on the immigration status of an individual, if the failure to report the income or assets is intentional?

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In their home country, non-U.S. citizens might be unaccustomed to reporting assets or income to their own governments. Some countries impose no income tax on income earned (e.g., Saudi Arabia and Bermuda) and many do not require extensive, or any, reporting of worldwide assets. The reason the last two general questions for non-U.S. citizens can be so important is that U.S. tax laws, in contrast, impose broad reporting requirements of both income and assets worldwide with harsh penalties for failing to comply with the law.

The U.S. tax law is, unfortunately, immensely complicated. This summary is designed to focus the reader broadly on the most important U.S. tax considerations for non-U.S. citizens and to help a non-U.S. citizen become oriented to relevant U.S. taxation issues that should be reviewed in depth with a competent U.S. tax advisor before a non-U.S. citizen becomes subject to U.S. tax laws. At the end of this article, a glossary of terms is provided to better understand the technical terms used throughout.

IV. U.S. INCOME TAXES: RESIDENT ALIENS AND U.S. CITIZENS VERSUS NONRESIDENT ALIENS

The U.S. income tax regime imposes U.S. tax on the worldwide income of U.S. LPRs who, upon obtaining this immigration status, are usually deemed to be U.S. tax residents or "resident aliens," for the purpose of taxation analysis. Those who are not LPRs, but are non-immigrants or non-resident aliens for immigration purposes, who enter the U.S. for temporary periods, are also deemed "nonresident aliens" for taxation purposes and are generally only subject to U.S. income taxation on certain U.S. source income. This "resident" versus "nonresident" status for U.S. tax purposes is a very important distinction.

Most non-U.S. citizens who obtain "LPR status" become subject to U.S. income taxation on their worldwide income. The determination of what is (i) income subject to U.S. income taxation and (ii) not income, can become particularly complex, especially so in the international context of foreign operations.¹² Generally, all earnings from services and investments of any kind are considered as income subject to taxation. Basic examples, include salaries, interest income, dividend income, profits from a business operated directly by the resident taxpayer, gains from the sale of property (e.g., real estate, stock or commodities),¹³ to name just a few types of income.

A U.S. resident alien will be currently subject to U.S. taxation on worldwide income (not just U.S. sources of income), attributable to events such as (i) rental income from real estate owned and leased abroad, (ii) dividends received from a privately held foreign corporation, (iii) interest received on promissory notes owed by foreign debtors and (iv) gain from the sale of certain assets abroad.

A resident alien, including a LPR, who was granted this immigration status under the EB-5 program, will generally be subject to U.S. income taxation quite similarly to a U.S. citizen.

A. Taxation of U.S. Citizens

For reference purposes, U.S. citizens are taxed on their worldwide income, regardless of where they might physically live.¹⁴ This system of worldwide taxation of income (plus estate and gift tax transfers)¹⁵ based only upon citizenship, regardless of the source of the income (i.e., from which country the income arises), seems odd to most individuals and tax advisors in other countries, since apparently almost all other countries impose income taxation on worldwide income only if the individual is physically resident in the country (e.g., for a sufficient number of days).¹⁶

U.S. taxation of U.S. citizens has a long history going back to 1861 and the Civil War.¹⁷ The concept of citizenship based taxation was upheld by the U.S. Supreme Court in the 1920s.¹⁸ In Cook v. Tait,¹⁹ the Court found constitutional that U.S. taxation of Mexican source income of a U.S. citizen who resided permanently and was domiciled in Mexico City with his Mexican citizen wife.

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Most EB-5 visa applicants file for this immigration status with the goal of becoming a U.S. citizen over time. This is the point where each non-U.S. citizen should understand the difference between U.S. taxation of citizens and non-U.S. citizens.

In addition to citizenship based taxation, the United States imposes a relatively more favorable tax regime on non-U.S. citizen individuals who have lived in the U.S. for many years (maybe most all of their lives in some cases) and then leave.²⁰ Certain long term residents of the U.S. who are not U.S. citizens (and LPRs who have spent generally less than seven years in the U.S.) can obtain a much more favorable tax regime than U.S. citizens, since the wealth they...