EB-5 Investor Visas: Capital Gains for the U.S. Economy By: Stella M. Tsai & Allen C. Tucci

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1 EB-5 Investor Visas: Capital Gains for the U.S. Economy By: Stella M. Tsai & Allen C. Tucci Congress launched the EB-5 Investor Visa program in 1990 to raise foreign capital and boost the economy by adding, in theory, 40,00 full-time jobs. This employment-based visa preference category is a path to permanent residency for immigrants. The typical EB-5 visa applicant invests a minimum of $500,000 in a commercial enterprise located in high unemployment areas. This investment must create at least ten full- time jobs over a twoyear period of conditional permanent residency. For some small to mid-sized businesses in the United States, this EB-5 program represents a tidy source of capital to be supplied by the new legions of millionaires in the People s Republic of China with substantial liquidity in pursuit of a path to permanent residency in the United States and a tangible investment opportunity. Based on recent inquiries to our office, we have become familiar with certain notions about the EB-5 Program which are corrected, amplified, or clarified below: 1. Pre-Approval of Economic Development Projects at Regional Centers Facilitate the Initial Application Process, But Do Not Guarantee a Green Card. To stimulate interest in the underused EB-5 program, the United States Citizenship and Immigration Services (USCIS) developed a pilot program for Regional Centers (RC) in This pilot program allowed investors to place their funds with a Regional Center which, in turn, invested the combined funds in economic development projects and managed the investments. In addition, the USCIS relaxed the job generation requirements and allowed Regional Centers to count indirect jobs. The USCIS recently developed a process for pre-approval of projects sponsored by the Regional Centers, but this pre-approval is most beneficial at the outset when filing the initial I-526 application for a conditional green card. Even with the "pre-approval," the investment remains "at risk" and the Regional Centers come with no guarantees that they will meet the job creation requirements necessary to secure permanent residency in the end. If a "pre-approved" project does not generate the jobs (or goes bankrupt), the nonconditional green card (the I-829) will not be granted. The applicant s current option is to file another I-526 application with another 2-year deadline and additional investment. 1 1 Immigration lawyers continue to lobby the USCIS for more flexibility with those investors who have fulfilled their end of the bargain and the failure of the business or compliance with job generation requirements is due to circumstances beyond his or her control. 1

2 2. No Program Can Guarantee that an Investor will Get His or Her Money Back. Under the terms of the EB-5 program, an investor is required to put his or her capital at risk. The USCIS allows the investor to mitigate the risk through the purchase of insurance and other measures. Further, Regional Centers have been permitted to structure their investments in economic development projects as loans. Any program or project that guarantees that an investor will earn a return on the investment or will not lose money, however, is not likely to be approved for EB-5 investment. 3. All Regional Centers Are Not Created Equal. As indicated above, although having a Regional Center designation can streamline the initial application processes for the EB-5 applicant, there is no guarantee that the applicant will secure a green card if the job requirements are not met or the project fails. Likewise, the RC designation does not guarantee that the project will succeed. It is critical that the investor carefully review the limited partnership document which forms the basis of the relationship with the Regional Center operators; retain counsel who is equipped to analyze the terms and conditions; look beyond the schematics and colorful brochures, and ask hard questions about the viability of the project. 4. There are Pros/Cons of Regular vs. Regional Center EB-5 Program Requirements. Under the Regular Program, which has no formal association with a Regional Center, EB-5 investors are required to have an actual management role in the project by, for example, sitting as an officer or as a member of the project s Board of Directors. This allows the investor to have more say in the operation of the business, which may be an advantage to certain investors. Also, the EB-5 investor will have more direct and ready access to information about the project s financial status and ability to meet the job requirements. Finally, the investment must generate 10 full-time jobs; the indirect jobs (e.g. the medical professionals who now work at the building constructed with EB-5 investment) do not count. 2 The Regional Center investor relies on the operator to provide the oversight and management of the project. Also, RC I-526 applications are supposed to be given priority, although the actual time frame may depend on the quality of the information which the applicant provides. Certain Regional Centers, such as PIDC/Can Am, have secured permanent residency for their investors by cultivating large-scale real estate development projects, which have been fully subscribed, and are now engaged in developing new projects for investment. 5. Permanent Residents Are Not Subject to a Flat Tax on All Investments. 2 Construction jobs, while temporal, will count if the construction takes two years to complete. 2

3 It is understandable that EB-5 applicants, who have accumulated wealth, have raised concerns about US tax policy and its impact on their assets and investments, including a report, which is not true, that the US imposes a 11 percent flat tax on all investments. We would need specific information about the asset and composition of the income in order to provide a more detailed analysis, but what follows is a brief summary of how US taxing authorities would look at the issue as to the Chinese applicant. The US-China treaty employs a simplified version of the traditional "saving clause" which preserves the right of the United States to tax its citizens and residents under its domestic law. The rule is drafted unilaterally, as China does not tax on the basis of citizenship and does not consider such a provision necessary to preserve its taxation of, and implement the Agreement with respect to, Chinese residents. As far as selection of which jurisdiction in the primary taxing country, where an individual is considered to be a resident of both The US and China, the competent authorities shall consult together to determine of which State the individual shall be a resident for purposes of the Agreement. In making that determination, the competent authorities will be guided by the rules of paragraph 2 of Article 4 of the United Nation's Model Double Taxation Convention between Developed and Developing Countries. The first test is where the individual has his permanent home. If he has a permanent home in both countries the second test is where his personal and economic ties are closer (center of vital interests). If that test is inconclusive, or if the individual does not have a permanent home in either State, the next test is his place of habitual abode. The fourth test is nationality. If the individual is a national of both States or of neither of them, the competent authorities are instructed to settle the issue so as to assign a single State of residence. This determines which will be the primary taxing state - in essence, until a person becomes a US Citizen and is no longer a Chinese national, the primary taxing country will be the country that has more business contacts with the individual. Certain income is treated in certain ways - Real Estate: Income derived by a resident of a Contracting State from real property situated in the other Contracting State may be taxed in the State where the property is situated. Business Profits: Generally, business profits of an enterprise of one Contracting State are taxable only in that State. Dividends: Are taxed in the state of residence of the shareholder (at a rate not to exceed 10%). Foreign Tax Credit: Provides the US taxpayer with a credit for taxes paid in China. 3

4 CONCLUSION The EB-5 investor visa, which offers a path to permanent residency in the United States, has become a popular investment vehicle in China. Potential EB-5 applicants should seek US counsel and look behind the representations or guarantees made by anyone promoting the investment, understand that person s relationship with the Regional Center or the investment, examine closely the investment documents, and explore the potential consequences, tax or otherwise, of making such investments. While the US EB-5 regulations are basic and fairly simple to understand, the investor should assess and clearly understand his or her stake in the limited partnership of a Regional Center or his or her role in a project under the regular program, and how the project intends to comply with the job generation requirements, before initiating the application process and making the investment. About Stella Tsai: Stella Tsai is a commercial litigation partner at the Philadelphia office of Archer & Greiner P.C. A former Chair of Administrative Law, now Social Services, at the City of Philadelphia Law Department, Ms. Tsai concentrates her practice on business litigation, representing public sector, nonprofit and commercial clients with an emphasis on ethics, regulatory compliance and international matters. She is a member of the Philadelphia Zoning Code Commission and President of the Asian Pacific American Bar Association of Pennsylvania (APABA-PA). About Allen Tucci: Allen C. Tucci is a partner with the firm and focuses his practice in the area of sophisticated corporate law transactions, in the United States and overseas. Some of Mr. Tucci s areas of expertise include: mergers and acquisitions, securities transactions and securities law, taxation and multi-state tax planning, intellectual property, general corporate transactions and formation of special purposes entities, including Delaware, Nevada and off-shore holding companies. Mr. Tucci has built upon the experience he developed over the years to create a specialized practice in advanced corporate transactions, taxation and banking. About Archer & Greiner, PC: Archer & Greiner PC is a full-service regional law firm with more than 200 lawyers and eight offices in Philadelphia, Pa.; Haddonfield, Hackensack, Princeton and Flemington, N.J.; New York, N.Y.; and Wilmington and Georgetown, Del. The Firm has been serving Fortune 100 clients, small to medium-sized businesses and individuals for more than 80 years. Each office provides full-service litigation and transactional capabilities in nearly every area of law including corporate, estate & trust, family & matrimonial, labor & employment, litigation, medical & personal injury and real estate services. For more information, visit 4

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