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Gifts of assets located in the United States are subject to gift
taxes, with the exception of intangibles, which are not taxable.
The gift of an intangible, wherever situated, by an NRA is not
subject to gift tax. Shares in U.S. corporations and interests in
partnerships or LLCs are intangibles. Consequently, real estate
owned by the NRA through a U.S. corporation, partnership or
an LLC may be removed from the NRA’s U.S. estate by gifting
entity interests to foreign relatives, gift tax-free.
Estate tax planning for NRAs is commonly accomplished
through the use of (1) foreign corporations to own U.S. assets,
or (2) the gift tax exemption for intangibles to remove assets
from the United States. Planning for EB-5 investors would
include moving assets to family members and irrevocable trusts
prior to meeting the estate tax NRA test.
Ownership Structures
An EB-5 investor can acquire U.S. assets using several alternative ownership structures. The investor’s goals and priorities
dictate the type of structure that is used. Each alternative has its
own advantages and disadvantages—there is no perfect structure.
Direct ownership of U.S. assets is simple and is either not subject
to tax or is subject to only one level of tax on the disposition. The
disadvantages of the direct investment are: no privacy, no liability
protection, the obligation to file U.S. income tax returns, and if
owned at death, the asset may be subject to U.S. estate taxes.
Under an LLC/LP structure, the NRA acquires the asset
through an LLC or a limited partnership. The LLC may be
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a disregarded entity or a tax partnership for U.S. income tax
purposes. This is an improvement over the direct ownership
structure, because this structure provides the NRA with privacy
and liability protection and allows for lifetime transfers that
escape the gift tax. The obligation to file U.S. income tax returns,
and the possibility for U.S. estate tax on death, remain.
Investment through a domestic corporation (including an
LLC taxed as a corporation) will afford privacy and liability
protection, allow lifetime gift tax-free transfers, and obviate the
investor’s need to file U.S. income tax returns.
There are three disadvantages to the ownership of U.S. assets
through a domestic corporation: (1) federal and state corporate
income tax at the corporate level will add a second layer of tax,
(2) dividends from the domestic corporation to its foreign shareholder will be subject to the 30 percent FDAP withholding, and
(3) the shares of the domestic corporation will be included in the
U.S. estate of the foreign shareholder.
Ownership of U.S. assets through a foreign corporation offers
the following advantages: (1) liability protection, (2) no U.S.
income tax or filing requirement for the foreign shareholder, (3)
shares in the foreign corporation are non-U.S. assets and are not
included in the U.S. estate, (4) dividends are not subject to U.S.
withholding, (5) no tax or filing requirement on the disposition
of the stock, and (6) no gift tax on the transfer of shares of stock.
The disadvantages of using the foreign corporation are: (1)
corporate level taxes (just like with the domestic corporation),
because the foreign corporation will be deemed engaged in a U.S.
trade or business; and (2) the foreign corporation will be subject
to the branch profits tax (a separate 30 percent tax that applies in
certain cases), the largest disadvantage of the ownership of U.S.
assets through a foreign corporation.
Because the branch profits tax is often not reduced or eliminated by a treaty, the most advantageous structure for the ownership
of U.S. assets by the EB-5 investor is through the hybrid foreign
corporation-U.S. corporation structure. Here, the investor owns
a foreign corporation, which in turn owns a U.S. LLC taxed as
a corporation. This structure affords privacy and liability protection, escapes U.S. income tax filing requirements, avoids U.S.
estate taxes, allows for gift tax-free lifetime transfers and avoids
the branch profits tax. Distributions from the U.S. subsidiary to
the foreign parent are subject to the 30 percent FDAP withholding (may be reduced by a treaty), but the timing and the amount
of such dividend is within the investor’s control.
Conclusion
There are multiple considerations and structures available
to EB-5 investors and no structure is perfect. Each structure
presents its own advantages and disadvantages which require
analysis in light of the investor’s objectives and priorities.
★
Jacob Stein, Esq. is a partner with Klueger & Stein, LLP, a Los Angeles-based law
firm focusing its practice on international taxation and structuring cross-border
transactions. You may contact the author at jstein@ksilaw.com.
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