EB5 Investors Magazine Volume 1 Issue 2 | Page 46

Continued from page 45 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 VISA LAW GROUP ATTORNEYS AT LAW Visa Law Group (VLG) congratulates our own David M. Morris, Esq as one of the Top 25 EB5 Lawyers VLG has helped more than 200 EB5 investors in just the past 12 months realize their Green Card dreams. Based in DC and staffed with US & Chinese lawyers, VLG solves the most complex EB5 cases, RFEs and RC Applications. Contact us for a free evaluation Visa Law Group, PLLC [email protected] www.VisaLawGroup.com 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 [email protected]. 46 E B 5 I n v e s to r s M ag a z i n e