EB5INVESTOR.COM
THE TAX GUIDE TO
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A foreigner desiring to invest in a U.S. business or joint venture has many goals, including privacy,
liability protection and the need to minimize world-wide income and estate tax liability. EB-5
investors are also concerned with the tax planning that needs to take place before the investor
is granted permanent residence status in the United States.
Privacy and Liability
It is the author’s experience that most EB-5 investors are
concerned with privacy from inquiries by governments,
competitors and prospective plaintiffs. Privacy is attainable
by acquiring U.S. assets in a name other than that of the
investors. Commonly used structures include trusts (with
a generic name and a third-party trustee) and legal entities
(look to Delaware for true anonymity of ownership).
Corporations, limited partnerships and LLCs will afford
their individual owners a liability shield for any liability
arising from the assets or the business of the entity. Interests
in limited partnerships and LLCs are not attachable by thirdparty creditors, making them a more effective asset protection
vehicle than corporations.
Income Taxation of U.S. Income
The U.S. tax regime has its own jargon. An EB-5 investor is
known as a “non-resident alien” (“NRA”) for federal income
tax purposes. An NRA is defined as a foreign person who
is (1) physically present in the U.S. for less than 183 days
in any given year, (2) less than 31 days in the current year,
(3) physically present for less than 183 total days for a three
year period (using a weighing formula), and (4) does not hold
a green card. EB-5 investors are generally NRAs until they
obtain their permanent residence status. For the purpose of
calculating the U.S. income tax liability, the NRA classification may continue to apply even following the
receipt of a green card (pursuant to the residence
tie break rule of an applicable tax treaty).
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Income tax rules applicable to NRAs are complex. An
NRA pays a flat 30 percent tax on U.S.-source “fixed or determinable, annual or periodical” (“FDAP”) income that is not
effectively connected to a U.S. trade or business, and which
is subject to tax withholding by the payor. FDAP includes
interest, dividends, royalties and rents, insurance premiums,
annuity payments, etc. The rate of tax may be reduced by
an applicable treaty. The income is taxed on a gross basis,
with almost no offsetting deductions. Practically, this means
that almost any payment made to an NRA from the United
States is subject to a 30 percent tax withheld at the time of
payment. The FDAP tax and withholding may be reduced or
eliminated by a tax treaty.
An important exception applies to capital gains—foreigners are generally not taxable on their capital gains from U.S.
sources. For this reason, a large component of pre-immigration tax planning for EB-5 investors focuses on triggering
world-wide capital gains prior to the NRA becoming a U.S.
taxpayer.
When an NRA has income from a U.S. trade or business
(“effectively connected” income) he is taxed on that income
just like any other U.S. taxpayer. U.S. trade or business has
been held to include the provision of personal services in the
United States, sale of products in the United States directly
or through an agent, solicitation of orders from the
United States and subsequent exportation of merchandise outside the United States, manufacture,
maintenance of a retail store, and maintenance of
corporate offices in the United States.
E B 5 I n v e s to r s M ag a z i n e