Cross-border Tax Planning for EB-5 Visa Investors
The EB-5 Immigrant Investor Program was created to encourage foreign nationals to invest in American businesses. Much is written about the EB-5 visa process, but little has been written about the tax planning opportunities EB-5 applicants should consider before applying. Read this before applying!
Country of Origin Tax ResidenceDetermine the effect on your country of origin tax residence status of obtaining the right to live permanently in the U.S. Moving to the U.S. and spending considerable time there may cause you to lose tax resident status and become a tax nonresident. A change in your tax residence status may trigger a "departure" tax in the country of origin and cause your income sourced in the country of origin to be tax differently after your residence status changes. Planning opportunities are almost always available.
Pre-Residence U.S. Income Tax PlanningAn EB-5 investor will be treated as a U.S. tax resident for U.S.tax purposes upon gaining lawful permanent resident status. Care should be taken not to become a U.S. tax resident under the "substantial presence" test prior to that time (by spending too much time in the U.S. in any particular year). Otherwise, some of your tax planning opportunities will be lost.
The U.S. does not award an immigrating taxpayer a fair market value tax basis in his or her assets when he or she becomes a US tax resident. Rather, the tax basis of his or her assets for depreciation and later calculation of taxable gain on sale is computed based on the taxpayer*s original tax basis (adjusted for U.S. tax rules). Thus, highly appreciated assets may have the potential for significant tax when actually sold after immigrating, unless steps are taken to actually trigger the gain before immigrating, to create a new FMV tax basis.
Upon becoming a U.S. tax resident, the EB-5 investor will be taxed thereafter by the U.S. on their worldwide income. Thus, planning opportunities should be considered before becoming a U.S. income tax resident.
Pre-Residence State Income Tax PlanningState tax residence rules often do not follow the U.S. federal rules. Accordingly, in some circumstances, it is possible to be a U.S. income tax resident (e.g., under the lawful permanent residence test), but not become a state income tax resident. If an EB-5 investor does not plan to be present in the state he or she resides in more than half the year, state tax planning opportunities usually exist.
Even if an EB-5 investor does plan to become a tax resident in the state he or she chooses to live in, pre-residence income tax opportunities similar to those available for pre-residence U.S. income tax planning (particularly including use of trusts) should be considered before arriving to commence residence.
Pre-Residence U.S. Estate and Gift Tax PlanningThe U.S. has a fair market value-based system of estate and gift taxes, as well as a generation-skipping transfer tax (*GSTT*), in addition to its income tax. Tax rates reach 40% of the value of assets gifted or included in a taxpayer*s taxable estate, and may be taxed again at a similar rate if GSST is triggered by a generation-skipping transfer. Residents are taxed on their worldwide assets, while nonresidents are taxable on a much smaller class of assets considered to have a U.S. *situs.*
Importantly, the concept of residence for these purposes differs markedly from the U.S. income tax definition of residence and more closely tracks the common law notion of *domicile,* which is an even stronger connection to a place than *ordinary residence.*
Thus, it is possible for an EB-5 visa investor to become a U.S. income tax resident (e.g., through lawful permanent residence) without becoming an estate and gift tax (and GSST) resident. In that case, most EB-5 investors will not qualify for the generous tax exemption amounts available to U.S. citizens and residents. Rather they can be taxed on U.S. situs assets exceeding US$60,000. Planning is crucial to avoid exposure to the nonresident U.S. estate tax.
If the EB-5 investor does acquire "domicile" in the U.S. upon moving here, they would qualify for the basic exemptions for these three taxes, which have reached historical highs for U.S. citizens and residents ($11.4 million) and some unique tax treaty protections exist. Nevertheless, for high net worth individuals, it is still possible to be subject to these taxes.
In cases of high net worth individuals who may potentially become exposed to these taxes, significant planning opportunities exist prior to become resident for these purposes.
U.S. Departure Tax PlanningFor those EB-5 visa holders who think they may someday return to their country of origin, (perhaps after selling their U.S. business or investment), long-term planning should include consideration of the U.S. *departure* tax. Also referred to as the *Expatriation* tax, this tax is triggered when a *long-term resident* green card holder gives up, loses or abandons their green card or is treated as a non U.S. resident under tax treaty residence tie breaker rules and does not waive the benefit of the treaty.
The tax applies generally to green card holders who have had US lawful permanent residence for 8 of the 15 taxable years preceding the loss of their green card if they either: (1) have an average annual net income tax of $168,000 over the most recent five-year period; (2) have a net worth exceeding $2 million; or (3) they fail to certify that they have met all of their U.S. tax requirements for the 5 taxable years preceding the expatriation date.
The tax treats a *covered expatriate* as having sold all of his or her assets (with a few exceptions) on the day before their expatriation date for their fair market value. The tax falls on the net gains over an inflation-adjusted exemption amount of $725,000 (in 2019).
In cases of high net worth individuals who may potentially become exposed to this departure tax, significant planning opportunities exist prior to relinquishing a green card.