EB5 Investors Magazine Volume 5, Issue 2 - Page 121

Minimizing U.S. Tax for EB-5 Investors: Advance U.S. Tax Planning is Essential Steps EB-5 investors can take before becoming a resident to significantly reduce and even eliminate their U.S. tax burden. By Jonathan Mintz B y investing through the EB-5 program, EB-5 investors are pursuing a “fast track” to a U.S. green card and ultimately U.S. citizenship. However, in obtaining a green card, these investors often unknowingly and unnecessarily subject themselves to significant U.S. income and transfer tax. What are these U.S. taxes, why should EB-5 investors plan to minimize U.S. tax before obtaining a green card, and what are some of the common U.S. planning options to reduce or eliminate U.S. tax. Moreover, once an EB-5 investor becomes a green card holder, all of the appreciation on non-U.S. assets is subject to U.S. income tax. For example, suppose an EB-5 investor has a long-held business outside the United States that is worth several million dollars. If the investor sells the business after becoming a U.S. green card holder, all of the gain will be subject to U.S. federal capital gain tax, currently 20 percent, and potentially state capital gain tax, an additional 13.3 percent in California, for a total of 33.3 percent if the investor resides in California. U.S. INCOME TAX It is important to note that the United States tax liability is based upon application of its tax rules, so the investor must prove his tax basis in the property (i.e., what he paid for the asset), or the tax basis will be presumed to be zero. This is important because, with a tax basis of zero, the entire sales price will be subject to U.S. tax. Unless there is a tax treaty to the contrary, for U.S. income tax purposes, a green card holder is a U.S. resident for U.S. income tax purposes until that green card status is rescinded or abandoned. Significantly, if one is a U.S. resident for income tax purposes, all of their worldwide income is subject to U.S. income tax. This is significant because most countries only tax locally sourced income, whereas the U.S. taxes worldwide income, regardless of where earned. "Significantly, if one is a U.S. resident for income tax purposes, all of their worldwide income is subject to U.S. income tax." Furthermore, it does not matter if all of the gains were earned before the investor became a U.S. green card holder. Back to the example above, if the business is sold after the investor is a green card holder, the United States will tax all of the sale’s gain, regardless of when that gain was earned. The same is true for any foreign gain realized after the investor becomes a U.S. green card holder. While this may seem unfair, this is how the United States taxes gain on the sales of assets. PRE-IMMIGRATION PLANNING Therefore, the EB-5 investor should take steps now, before obtaining a green card, to reduce the overall taxation on his property worldwide. By eliminating all gain before migrating to the United States, the investor can virtually EB5INVESTORS.COM 120