EB5 Investors Magazine Volume 3 Issue 3 | Page 17

Wealthy immigrants often come from countries that use a residence-based tax system (where income taxation may be avoided or minimized by splitting residence between two countries), that use a territorial tax system (no taxation of income earned abroad), have a low tax rate, or a lax tax collection system. They are often unprepared for the U.S. tax system, which not only will tax their worldwide earnings, but will do so aggressively and in a well-structured manner. Residence All tax planning for an immigrant starts with the determination of when the immigrant becomes a U.S. resident alien for tax purposes (“U.S. tax resident”). This is the day on which the immigrant becomes subject to the U.S. tax regime. All preimmigration tax planning must be in place prior to this date. Determining the residence start date is very different for income tax and for estate tax purposes. For income tax purposes, an NRA becomes a U.S. tax resident if: (1) he holds a green card at any time during the taxable year, (2) meets the substantial presence test or (3) makes an election to be deemed a U.S. tax resident for a tax year when present in the United States for at least 31 days. Under the substantial presence test, U.S. income tax residence is triggered as follows: (i) presence in the United States for at least 31 days during the calendar year, and (ii) presence in the United States for 183 days or more taking into account: all the days of the calendar year at issue, one-third of the days of the first preceding calendar year, and one-sixth of the days of the second preceding calendar year. If a non-resident alien becomes a U.S. tax resident under the s ubstantial presence test, then he is deemed to be a U.S. tax resident for U.S. income tax purposes from January 1 of that year. An immigrant who comes to the United States on a “green card” or an EB-5 visa will be deemed a U.S. tax resident on the date when he obtains permanent residence and is physically present in the United States. If an immigrant meets the substantial presence test and obtains an EB-5 visa in the same calendar year, then the residence start date will be determined under the substantial presence test (i.e., January 1). An NRA may stay in the U.S. for up to 183 days a year without becoming a U.S. tax resident if the NRA has a tax home in a foreign country and a closer connection to that foreign country. This is also mirrored in some income tax treaties. All income tax treaties also use a residence tie-break test if an individual can be deemed a tax resident of both treaty countries. Using the treaty tie-break must be disclosed to the Internal Revenue Service and does not relieve the NRA of certain reporting requirements (like disclosure of foreign bank accounts). Using the treaty tie-break may be problematic for an immigrant seeking a permanent residence visa in the United States. Claiming a foreign country residence would usually contradict the stated intent of an immigrant visa applicant to reside permanently in the United States. For estate tax purposes an NRA becomes a U.S. tax resident when the NRA has intent to make the United States his domicile (no intention of leaving). This is a subjective test, and intent is inferred through circumstantial evidence, such as the length of stay in the United States, statements of intent on visa application, frequency of travel, size and cost of U.S. home, location of close family members, social activities, business interests and voting records. For an immigrant seeking an EB-5 visa it would be difficult to argue that his domicile is intended to be outside the United States. Taxation of NRAs Having determined the residence start date, the focus shifts to how the United States will tax the NRA’s pre-immigration planning transactions. Income tax rules applicable to NRAs are complex. As a general rule, 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. The rate of tax may be reduced by an applicable treaty to anywhere between zero and 15 percent. FDAP income includes interest, dividends, royalties, rents annuity payments, and alimony. For example, if an NRA receives interest income from U.S. sources (other than interest on bank deposits), he is subject to a 30 percent tax. Note that the NRA is subject to this tax but does not pay it. The 30 percent FDAP tax is withheld by the payor at the time of payment and remitted to the U.S. Treasury. The NRA receives the remaining 70 percent. NRAs are generally not taxable on their capital gains from U.S. sources unless (i) the NRA is present in the United States for more than 183 days, (ii) the gains are effectively connected to a U.S. trade or business (this includes gain from sale of U.S. real property), or (iii) gains are from the sale of certain timber, coal or domestic iron ore assets. When these exceptions apply, the NRA is taxed on U.S. source capital gains at the rate of 30 percent. NRAs may be subject to U.S. transfer taxes (estate and gift) if they have property in the United States. The estate tax is imposed only on the NRA’s property that at the time of death is situated in the United States. An NRA is subject to the same 40 percent estate tax rate as a U.S. taxpayer, but only the first $60,000 of property value is exempt. These harsh rules may be ameliorated by an estate tax treaty. The United States does not maintain as many estate tax treaties as income tax treaties, but there are estate tax treaties in place with most Western European countries, Australia and Japan. The following assets are specifically included in the definition of property situated in the United States: (1) shares of stock of Continued to page 16 WWW.EB5INVESTORS.COM 15