Tax Planning for EB-5 Investors Part 1

Taxation in the United States

The U.S. taxation system is somewhat unique in that it requires legal residents to not only pay income tax on income obtained in the United States but also pay an additional estate tax on foreign earnings. Thus, fully understanding taxation laws and planning appropriately are vital for EB-5 investors prior to receiving permanent resident status.

Taxation as a Legal Resident

When planning for taxes as a U.S. resident, each EB-5 immigrant investor must first decide when his or her residence in the United States first began. From that date on, the immigrant is taxed as a U.S. resident. There are two types of taxes that immigrant investors are required to pay, each with a different resident status start date: income tax and estate tax.

EB-5 immigrants are assessed income tax when any of the following conditions are met:

  • A green card has been issued. In this case, the starting date is the date permanent resident status is granted along with physical residence in the United States
  • The immigrant investor has physically resided in the United States for a minimum of 31 days in the current calendar year and a minimum total of 183 days from the current calendar year, a third of the previous calendar year, and a sixth of the calendar year before that. This is considered “substantial presence.”
  • The immigrant investor wishes to be classified as a U.S. resident for tax purposes. This can happen if he or she has been physically in the United States for 31 consecutive days during the year and for three-fourths of the days between those 31 consecutive days and the end of the year.

When determining a date of residence, “substantial presence” is used if more than one of the conditions has been met.

EB-5 immigrant investors are assessed estate tax based on the date they chose to stay in the United States. The information provided on the EB-5 petitions, relationships with friends and family in the United States, the amount of time spent in the United States and travel to and from the country, and other factors are all taken into consideration when determining this date, but in most cases, the date the investor arrived in the United States with the purpose of immigrating is considered to be the start date of residence for tax purposes.

Taxes Prior to Resident Status

EB-5 immigrant investors are subject to taxes even if the conditions for residence are not met if they are currently living in the United States. These non-resident aliens (NRAs) may have to pay additional taxes depending on any agreements the United States has with their respective home countries. A flat tax rate of 30% is assessed on most income obtained in the United States, although there is no taxation on capital gains in the United States.

If the income comes from a U.S.-based business, regular income tax rates apply. If an EB-5 investor benefits financially from his or her EB-5 investment (e.g., they are involved in the new commercial enterprise as a partner and obtaining revenues), income tax rates apply there as well.

The same estate taxes that apply to U.S. citizens and permanent residents also apply to NRAs. All property held in the United States at the time of death is assessed a 40% estate tax across the board. However, the exemption amount is smaller for NRAs in most cases. Gift taxes also apply to NRAs like they do to other residents.

For more information on how to best strategize your tax planning, see Part 2 of “Planning for Taxes”.