EB5 Investors Magazine Volume 7, Issue 1 - Page 46

EB5 INVESTORS M AGAZINE 44 Earnings of “ a non-resident from a U.S. partnership are subject to U.S. tax withholding rules. DETERMINING U.S. TAX RESIDENCY STATUS In general terms, to determine whether an individual is a U.S. resident for tax purposes, there are three questions that need to be asked. 1. Is the individual a U.S. citizen or resident alien because they have a U.S. green card? 2. Does the individual stay in the U.S. 183 days or more during the current year? 3. Does he or she meet the substantial presence test for the calendar year (Jan. 1 to Dec. 31)? If the answer to any of these questions is “yes,” then the individual is a U.S. resident for tax purposes. cause withholding on the investor’s income and the requirement to file a U.S. tax return. Often EB-5 applicants spend a significant amount of time in the U.S. on non-immigrant visa status. This time spent in the U.S. — even if as a tourist, investor and other type of visa — can cause the investor to become U.S. residents for tax purposes. In order to avoid it, EB-5 applicants need to methodically limit and track their time on U.S. soil to ensure that they do not meet the substantial presence test criteria, which might cause them to become U.S. residents prior to even receiving their green card. While this test applies to any foreign individual, it is especially relevant for EB-5 investors, as they usually have significant income and assets in their home country or other places. Once an individual becomes a U.S. tax resident, the person is subject to reporting and paying taxes in the U.S. on worldwide income; estate tax and gift tax obligations; complying with reporting requirements of the Foreign Account Tax Compliance Act (FATCA) such as FBAR, 8938, 5471; and other documents. It is because of these requirements that becoming a U.S. ta x resident, unintentionally and w ithout proper tax planning, can lead to significant taxes and penalties. THE SUBSTANTIAL PRESENCE TEST The Internal Revenue Service has clear guidelines on the substantial presence test. Investors will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States in at least: 1. 31 days during the current year, and 2. 183 days during the three-year period that includes the current year and the two years immediately before that, adding: • All the days you were present in the current year, and • 1/3 of the days you were present in the first year before the current year, and • 1/6 of the days you were present in the second year before the current year. TAXATION OF EB-5 INVESTMENTS FOR NON-RESIDENT TAXPAYERS Most EB-5 projects are structured as a partnership where the partners pay taxes associated to their projects’ gains or losses. At the end of every tax year, after the individual has invested in an EB-5 project, the investor will receive a Schedule K-1, a form that indicates the earnings (or losses)