Pre-Immigration Tax Planning and Post-Immigration Tax Compliance for EB-5 Investors

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1 Pre-Immigration Tax Planning and Post-Immigration Tax Compliance for EB-5 Investors Alan Winston Granwell DLA Piper Steve Trow Trow & Rahal, PC This presentation is offered for informational purposes only and the contents should not be construed as legal advice on any matter

2 Scope of Presentation This presentation provides a high level review of US federal tax issues for EB-5 investors who become US green card holders. The presentation does not go into detail. A non-us individual planning on becoming a green card holder should obtain pre-immigration tax planning advice, and postimmigration tax compliance assistance. 10/16/2012 2

3 What a EB-5 Investor Moving to the US Needs to Know A non-us individual that becomes a lawful permanent resident -- a green card holder -- obtains certain rights and is subject to certain responsibilities. Rights include: To live permanently in the US. To work in the US. Obligations include: Report and pay tax on worldwide income as a US resident. Estate and gift tax obligations. Warning. Obtaining a green card imposes serious tax obligations on the holder that must be carefully considered. 10/16/2012 3

4 Special Considerations for EB-5 Investors EB-5 investors often retain home-country assets and income streams after immigrating to the US. These foreign assets and income streams pose US tax planning and compliance challenges. Source of funds documentation in I-526 petition gives USCIS detailed information about investors income and assets. IRS can obtain information from USCIS. IRS can obtain information from foreign tax authorities. 10/16/2012 4

5 Common Source of Funds Fact Patterns Considered Investor uses loan secured by foreign residence for EB-5, then has rental income after immigrating and later gain on sale. Investor owns shares in foreign company with undistributed profits, takes shareholder s loan for EB-5, then takes out profits to repay loan after immigrating may continue to own and manage foreign company from US, or may sell shares. High net worth investor uses liquid assets for EB-5 and continues to hold foreign stocks, bonds, mutual funds, real estate, life insurance and tax-deferred retirement accounts. Investor is F-1 student at US university, or H-1 stuck in EB-3 backlog, and uses gift from parents residing abroad for EB-5. 10/16/2012 5

6 Green Card Holder: US Income Tax Obligations A green card holder is a US resident for US federal income tax purposes. It is important to determine when a non-us individual becomes a US resident. A US resident is taxable on worldwide income. A US resident may be taxable in income constructively as a result of owning interests in non-us corporations, partnerships and trusts. A US resident is required to file US federal income tax and information returns. Information returns required to be filled include FBARs (a financial interest in or signature authority over a foreign financial account), Form 8938 (foreign financial assets) and other forms related to the US resident s interest in non-us corporations, partnerships and trusts and with respect to certain gifts/inheritances. If a US resident does not properly file a US tax return reporting his or her US taxable income and/or does not properly file the required information returns, severe penalties can arise. Commencing in 2013, non-us financial institutions will be required to report non- US-financial account information to the IRS or suffer a new US withholding tax. An individual that holds a green card for eight of 15 years may become subject to the US expatriation provisions, which apply when a green card holder terminates green card status. 10/16/2012 6

7 Green Card Holder: US Estate and Gift Tax Obligations A green card holder also can become a resident for US federal estate and gift tax purposes, although the test for residency under the US estate and gift tax is different than that under the income tax. Income tax. Holding a green card, irrespective of whether that green card is valid for US immigration purposes. Estate and gift tax. Becoming a US domiciliary. US Domicile is based on two factors: Living in the US. Having no intention of leaving. Consequences. Taxable on lifetime and death transfers of property wherever situated over a certain amount. A green card holder that is not a US resident can still be subject to US estate and gift tax in respect of certain transfers. 10/16/2012 7

8 Trap for the Green Card Holder: US Expatriation Rules The expatriation tax applies to green card holders who: held green card for 8 out of 15 years, are covered expatriates and terminate their green card status. Green card holders who continue to reside abroad, or take up residence abroad, can lose permanent resident status through abandonment. This can trigger the expatriation tax if status is lost during or after 8 th year of permanent residence. 8 Years can be 6 years and 2 days December 31 of Year 1, plus 6 years, plus January 1 of Year 8. 10/16/2012 8

9 Covered Expatriate A covered expatriate is an individual whose: average annual net income tax (not income) for the period of 5 taxable years ending before the date of expatriation is greater than $151,000 in 2012 (adjusted for inflation); net worth of the individual as of the expatriation date is $2,000,000 or more; or even if the individual does not meet the above two tests, cannot certify that he or she is US tax compliant for the five years prior to expatriation. 10/16/2012 9

10 Expatriation Tax Consequences Income tax. Generally, subject to an exit tax on the appreciation on worldwide property. Estate and gift tax. Applies to US recipients of transfers (lifetime or death) from covered expatriates. The US recipients are liable for payment of the US estate or gift tax. 10/16/

11 Another Trap for Unwary: Holding Green Card Outside US An individual can only relinquish a green card in a certain fashion to become a nonresident for US tax purposes. A green card holder is treated as losing green card status, for tax purposes, on either: the date such individual s green-card status is revoked; the date such individual s green card status is administratively or judicially determined to have been abandoned; or the date such individual commenced to be treated as a resident of another country under a tax treaty (and the individual does not elect to waive the benefits of such treaty). Green card status is not terminated for tax purposes simply by moving abroad, or by letting green card expire. 10/16/

12 Another Trap for the Unwary: Community Property Community property is a marital property regime that originated in civil law jurisdictions and is now also found in some common law jurisdictions. In a community property jurisdiction, most property acquired during the marriage (except for gifts or inheritances) is owned jointly by both spouses and is divided upon divorce, annulment or death. Joint ownership is automatically presumed by law in the absence of specific evidence that would point to a contrary conclusion for a particular piece of property. Nine states are community property jurisdictions: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Whether one has community property and community income depends on the state where one is domiciled. Property that is owned by one spouse before the marriage is the separate property of that spouse, unless the property is "transmuted" into community property. A pre-nup agreement can also avoid community property issues. This issue also needs to be considered if a married couple comes from a non-us community property jurisdiction. 10/16/

13 Pre-Immigration Planning If a non-us person is planning on becoming a green card holder in the near future, he or she should consider the following planning suggestions before becoming a US resident for income or estate tax purposes. Make gifts of property situated outside the US to non-us persons. Make gifts of property situated outside the US to US persons. US recipients may have information filing obligations, depending on the amount of the gifts. Sell appreciated assets. Assets can be repurchased with cash proceeds. This steps up the cost basis in the assets. Dispose of stock in non-us corporations that have primarily passive income. Consider check-the-box entity classification elections with respect to non-us corporations to step up cost basis in assets. 10/16/

14 Use of Trusts Trusts can be used in planning. There are two types: Grantor trust. A grantor trust is a trust over which the grantor has certain powers and is treated as transparent to the grantor for US tax purposes. Irrevocable trust. Great care must be used in using trusts, particularly non-us trusts. 10/16/

15 Use of Grantor Trust to Make Tax-Free Gifts Structure: X, a non-us person (e.g., parent) creates trust (either US or foreign) for benefit of US green card beneficiary (son or daughter). Non-US person retains power to revoke trust. Non-US person funds trust with non-us income producing property. Consequences: Trust distributions to US beneficiary treated as gift. No tax consequences to non-us person who created trust. Observations: Although gift is tax free from a US point of view, there may be reporting consequences to US beneficiary, depending on size of gift. If use foreign trust, upon death of X, trust should be converted to US trust to avoid disadvantageous consequences to US beneficiary. 10/16/

16 Use of Irrevocable Foreign Trusts The use of irrevocable foreign trusts for pre-immigration planning is a complicated matter, involving income, gift and estate tax issues. Caution. Even though it is possible to structure the trust to avoid US gift and estate tax consequences if transfers are made before the non-us person (the pre-immigrant) becomes a US resident, there will be US income tax consequences if the pre-immigrant becomes a US resident within 5 years after transferring assets to the trust and the trust has US beneficiaries. Note, the trust will be a non-grantor foreign trust while the pre-immigrant is a non-us person, but will become a foreign grantor trust when the preimmigrant becomes a US person, with the consequence that the preimmigrant will be taxable on the income of the trust during his or her lifetime. Upon the death of the grantor of the trust, careful planning must be done to avoid detrimental US income tax consequences to the US beneficiaries of the trust. 10/16/

17 Conclusion An individual that intends to become a green card holder must carefully consider the US tax (federal, state and local) issues that may arise as a result of obtaining and maintaining that status. Tax issues include income, estate and gift tax. The issues are complex and require pre-planning and also require that the person that prepares the tax returns for a green card holder are knowledgeable about tax issues. This presentation highlights some of the significant issues. It is important to obtain advice before becoming and while an individual is a green card holder. 10/16/

18 Contact Information Alan Winston Granwell DLA Piper -- Washington, DC Steve Trow Trow & Rahal -- Washington, DC /16/

19 Circular 230 In compliance with US Treasury Regulations, please be advised that any tax advice given herein (or in any attachment) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another person any transaction or matter addressed herein. 10/16/