EB-5 and US Tax
Many wealthy foreigners considering their options for permanent residency and citizenship are rightfully concerned on US tax policy. Many have heard that the US charges tax on worldwide income. However, there are several options available to the EB-5 investor to minimize their US tax burden. As this page cannot take into account the wide variety of personal situations, you should hire a knowledgeable US tax planner before or during the EB-5 Visa process. This page describes general planning strategies which may or may not be relevant to you.
First, let us clarify a few misconceptions about US taxes:
- The US federal tax system is based on voluntary reporting. States and cities have their own taxes, which vary widely from California and New York as some of the most expensive and Texas as one of the least expensive.
- The US federal tax is based on income, not assets.
- Over 60% of Americans, especially middle and upper class, hire a tax professional to manage the filings and legally minimize their required taxes.
- Taxes are legally reduced through an endless number of deductions and credits, for example business expenses, a home office, retirement savings, donations to charitable organizations, and many others.
- With a competent planner, almost every US taxpayer pays a lower percentage tax that the commonly listed rates.
The EB-5 Investor Visa grants US Permanent Residency, and later the option for US citizenship, through investment. Learn more here.
Reduce or Eliminate US Tax on Worldwide Income
The U.S. tax code treats a foreign trust established by a Citizen or Resident Alien a “grantor trust,” meaning that it is transparent for income tax purposes; all trust activity must be reported annually and all trust income is currently taxed. However, a US Permanent Resident, at least five years prior to immigration, might create a discretionary trust in his or her own country or in a low or no tax jurisdiction, to hold assets for investment and for future distributions to U.S. beneficiaries. The Trust must be drafted to meet both foreign and U.S. criteria. If the five year rule is not met, the new resident will be treated as if the assets were transferred into trust on the date U.S. residency commenced, resulting in grantor trust treatment, and therefore to current tax and reporting requirements.
If you plan to receive a Green Card within five years, a similar foreign trust structure is still possible with the cooperation of a trusted friend, advisor or family member. A foreign Trust established by a foreign Trustor could, if it meets certain requirements, qualify to make tax-exempt distributions to U.S. beneficiaries. The U.S. beneficiaries must not have any direct ownership or control over the Trustee’s discretion to make Trust distributions.
In addition, the US Permanent Resident can receive monetary gifts from foreign sources. While such direct gifts are not subject to US tax, tax rules require that gifts from foreign sources be reported with annual tax returns. The reporting required for foreign gifts is much less extensive than that required for foreign Trusts, and does not require the taxpayer to reveal the identity of the individual donor of the gift. Partnerships or corporations, or an “intermediary” for such entity, must however be specifically identified. The tax reporting excludes annual gifts from foreign individuals under $100,000 from foreign individuals or estates.
In addition to its tax benefits, a foreign Trust can assist in sheltering assets from potential business and personal creditors. Neither a foreign Trustee nor a foreign Trust with US beneficiaries is subject to the jurisdiction of US courts. Furthermore, many offshore jurisdictions have laws which effectively preclude a creditor from reaching the assets even if the creditor were willing to undertake the expense and uncertainty of bringing legal action in that country.
Reduce or Eliminate US Estate Tax
Unlike US Citizens, the US Permanent Resident may avoid estate tax on assets located outside the U.S. if he or she (or the estate) can establish that the US is not the country of domicile. The US estate tax is based on the concept of domicile, and not on Citizenship. The long term Resident Alien will have to plan in advance to establish foreign domicile. The US Permanent Resident with a foreign domicile will pay US income taxes, but all foreign assets could be excluded from estate taxes on death.
Please consult a tax professional for specific recommendations regarding your personal situation. If you would like a referral, please contact us here.