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Cross Border Planning for Inbound Clients from China

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Rowbotham & Company LLP

This document provides information on cross-border tax and estate planning solutions for Chinese clients investing or doing business in the United States. It discusses typical structures like using foreign corporations and trusts to hold US and foreign assets. It also covers topics such as US tax residence rules, foreign reporting requirements, expatriation tax, and the EB-5 immigrant investor program.

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Rowbotham & c o m p a n y l l p Brian Rowbotham br@rowbotham.com (415) 433-1177 www.rowbotham.com Los Angeles Chapter May 8, 2014 CROSS BORDER PLANNING FOR INBOUND CLIENTS FROM CHINA
Rowbotham & c o m p a n y l l p Table of Contents Typical “One Stop Shop” Solution 1 Foreign Ownership Structures for U.S. Real Property 2 Dynasty Trust Structuring 3 Solution # 1: Using a “Check-the-Box” Election 4 Solution # 2: Thirty Day Liquidation 5 U.S. Tax Residence Test 6 EB – 5 Program Process 7 EB – 5 Investor Profile 8 Business & Investment Visas 9 Dual Resident Taxpayers: Reg. § 301.7701(b)-7 10 Dual Resident Taxpayers: Article 4 on Dual Residence Taxpayer 11 Dual Resident Taxpayers: Article 4 on U.S. – China Treaty (1984) 12 Dual Resident Taxpayers – Immigration Challenges 13 Expatriation: Exit Tax – Section 877A 15 Expatriation Act by Mistake 16 Expatriation Notification 17 Expatriation: IRS Notice 18 Offshore Voluntary Disclosure initiative (OVDI) 19 OVDI: Amend 1040 to 1040X / 1040NR 20 Foreign Reporting 21 Pre-Arrival Checklist 22 Our Asia Practice Team 24
Rowbotham & c o m p a n y l l p Typical “One Stop Shop” Solution FP BVI* 1 Properties Personal Assets 1 Bonds BVI* 2 BVI* 4BVI* 3 Stocks * British Virgin Island company
Rowbotham & c o m p a n y l l p Top Federal Tax Rates Operating Income Branch / Dividend Withholding Tax Sale of Property - Capital Gain Federal Tax Return Forms: Estate Tax * 39.6% 43.4% 39.6% 35% 35% 35% - - - - 30% 30% 20% 23.8% 20% 35% 35% 35% 1040NR 1041 1040NR 1120 1120F 1120 Yes No No Yes No No CN USRP CN CN USRPUSRP U.S. Inc. BVI Ltd. U.S. Inc. CN USRP BVI Ltd. Foreign Ownership Structures for U.S. Real Property CN USRP CN USRP Irrevocable U.S. Trust 2 Irrevocable Foreign Trust * Hybrid structures, using a combination of foreign corporations and partnerships like structures may provide single level of tax and estate tax protection.
Rowbotham & c o m p a n y l l p Dynasty Trust Structuring 3 CN Parent T1 T2 T3 BVI1 BVI2 BVI3 DT1 DT2 DT3 Assets FBO Assets FBO Assets FBO S1 S2 S3 U.S. U.S. U.S. S1 S2 S3 U.S. Irrevocable Trust Funding Summer Home * * * * Upon death of foreign father: - Corporate entities will liquidate, and assets will step up to FMV - Assets fund U.S. dynasty trusts.
Rowbotham & c o m p a n y l l p Solution # 1: Using a “Check-the-Box” Election FP Foreign Corporation 1 Foreign Assets plus U.S. Securities USP Foreign Corporation 2 Foreign Corporation 3 .5.5 Election to treat as a disregarded entity [Form 8832] At date of death, USP inherits two foreign corporations Shares in Foreign Corporations (1) and (2) step up to their FMV at date of death of FP USP files Form 8832, elects to treat Foreign Corporation 3 as a disregarded entity USP can now liquidate (1) and (2) and will own all assets at their FMV Limitation: Strategy does not work with U.S. real property The election causes Foreign Corporation 3 to be treated as being liquidated Liquidation causes the assets in Foreign Corporation 3 to step up to their FMV as long as neither (1) nor (2) owns 80% or more of (3). If the election made within 75 days of date of death, liquidation of (3) is treated as being effective prior to death of foreign owner 4
Rowbotham & c o m p a n y l l p Solution # 2: Thirty Day Liquidation FP Foreign Corporation USP At date of death: USP inherits the foreign corporation with its basis stepped up to its fair market value Assets inside corporation will not step up USP now owns a “controlled foreign corporation” [Section 957] Sale of assets creates “Subpart F Income” = deemed divided to USP Exception: There is no Subpart F Income if the CFC exists for less than 30 days [Section 951] Within 30 days of death, liquidate the foreign company The gain from the liquidation of the CFC is no longer taxable to the USP since basis of FC stock = FMV of stock Question: Can the documents and liquidation be accomplished within 30 days of the death of the foreign person? 5 Foreign Assets plus U.S. Securities
Rowbotham & c o m p a n y l l p U.S. Tax Residence Test 6 • Present in the U.S. at least 31 days in the current year; and • Present in the U.S. for 183 days or more according to a formula: Year Days Multiplier 2014 120 1 120 2013 120 1/3 40 2012 120 1/6 20 180 • Exceptions: (1) Taxpayer has a closer connection to a foreign country (2) If current year’s days exceed 182: only treaty tie breaker test will override residence • Visas: H1-B, L-1, and other business or investment visas are generally not a factor for determining tax residence (1) The substantial presence test met if taxpayer is: (2) Lawful permanent resident status (green card)
Rowbotham & c o m p a n y l l p EB – 5 Program Process 7 “Match.com” for Investors and Project Managers CN Investors Independent Investment and Advisory Firms in China Sales & Seminar Events in China China-based Licensed Immigration Consulting Firms Intermediaries and Consultants Regional Centers and Private Projects $ $ Beijing Shanghai Guangzhou U.S. New York Boston Houston Los Angeles San Francisco July 19 Investors - Seminars – Trips to U.S. Projects evaluations U.S. immigration lawyers Processing EB – 5 with USCIS [50% success rates] Securities law on U.S. & China Immigration lawyers, USCIS qualification of projects Introductions Projects $ X X X X X X X X X
Rowbotham & c o m p a n y l l p EB – 5 Investor Profile 8 U.S. Investing GP Investors Visa Real Estate Development Debt or Equity Structures Ltd P/S $1 mm or $500,000 [Regional Centers] Status - Green card issued [U.S. Resident] - Family resides in CA - Founder/spouse runs businesses in China - Taxpayers subject to U.S. taxation on worldwide income
Rowbotham & c o m p a n y l l p Employment by U.S. Company Green Card Business & Investment Visas 9 E 2 Investor EB–5 $1m / $500k Green Card L–1 U.S. Operating Company X CN Company U.S. Subsidiary X Foreign Company U.S. Corp X Angels IP H1–B Foreign Hire in U.S. • U.S. affiliated company formed • Employee relocation - 1 year employment in foreign country • Managerial expertise • Substantial investment into U.S. Corp. - Cash - IP (software, patents) • Talent • Business plan • Employees • Quotas • Must not displace U.S. workers • Investors. - China - S. Korea - India • Creates U.S. jobs
Rowbotham & c o m p a n y l l p Dual Resident Taxpayers 10 Reg. § 301.7701(b)-7 Coordination with Income Tax Treaties Ability to compute one’s tax liability as a nonresident (a) Consistency Requirement. (1) Application. The application of this section shall be limited to an alien individual who is a dual resident taxpayer pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and its treaty partner. A “dual resident taxpayer” is an individual who is considered a resident of the United States pursuant to the internal laws of the United States and also a resident of a treaty country pursuant to the treaty partner’s internal laws. If the alien individual determines that he or she is a resident of the foreign country for treaty purposes, and the alien individual claims a treaty benefit (as a nonresident of the United States) so as to reduce the individual’s United States income tax liability with respect to any item of income covered by an applicable tax convention during a taxable year in which the individual was considered a dual resident taxpayer, then that individual shall be treated as a nonresident alien of the United States for purposes of computing that individual’s United States income tax liability under the provisions of the Internal Revenue Code and the regulations thereunder (including the withholding provisions of section 1441 and the regulations under that section in cases in which the dual resident taxpayer is the recipient of income subject to withholding) with respect to that portion of the taxable year the individual was considered a dual resident taxpayer.
Rowbotham & c o m p a n y l l p Dual Resident Taxpayers 11 Article 4: Dual Residence Taxpayers – Typical “Tie-Breaker” Rule (a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests); (b) if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; (c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national; (d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. Where … an individual is a resident of both Contracting States, then his status shall be determined as follows:
Rowbotham & c o m p a n y l l p Dual Resident Taxpayers 12 Article 4: U.S. – China Treaty (1984) Where … an individual is a resident of both Contracting States, then the competent authorities of the Contracting States shall determine through consultations the Contracting State of which that individual shall be deemed to be a resident for the purposes of this Agreement.
Rowbotham & c o m p a n y l l p Dual Resident Taxpayers – Immigration Challenges 13 Filing a Nonresident Return Filing a U.S. nonresident income tax return creates a rebuttable presumption the individual has "relinquished privileges of permanent resident status in the United States." See 8 CFR § 316.5(c)(2), which provides: Claim of nonresident alien status for income tax purposes after lawful admission as a permanent resident. An applicant who is a lawfully admitted permanent resident of the United States, but who voluntarily claims nonresident alien status to qualify for special exemptions from income tax liability, or fails to file either federal or state income tax returns because he considers himself or herself to be a nonresident alien, raises a rebuttable presumption that the applicant has relinquished the privileges of permanent resident status in the United States.
Rowbotham & c o m p a n y l l p Dual Resident Taxpayers – Immigration Challenges 14 Example of Legal Opinion Conclusion: The filing of a nonresident return will not, in and of itself, result in the forfeiture of the green card. That said, U.S. resident status and the green card can be lost through certain conduct. The U.S. Customs and Border Protection agency examines returning U.S. residents to determine if they have abandoned resident status. Failure to return to the U.S. on a regular basis, extended absences from the U.S., employment abroad, and other factors may result in the government challenging the individual’s right to retain his green card.
Rowbotham & c o m p a n y l l p Expatriation: Exit Tax – Section 877A 15 - U.S. Citizen or U.S. Green Card holder for more than 7 years, and - Assets fair market value exceeds $2 million or - Average taxes paid in each of 5 years exceeds $157,000 (2014) - Exit tax exposure (1) Indexed for inflation (2) “Mark to market” approach since June 2008 (3) Expatriation requires filing of IRS Form 8854 Example: Fair market value of assets (worldwide) $10,000,000 Tax basis <1,000,000> Exclusion – specific exclusion (2014) <680,000> Taxable 8,320,000 - Gifts/bequests to U.S. beneficiaries taxed at highest estate/gift tax rate.
Rowbotham & c o m p a n y l l p Expatriation Act by Mistake 16 Filing 1040NR – Section 7701 (b)(6): An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.
Rowbotham & c o m p a n y l l p Expatriation Notification 17 • Section 6114 Implications? • Treaty positions must be disclosed on Form 8833 • Is this notification ? • If Form 8833 not filed, taxpayer is subject to penalty, but this does not prohibit claiming NR status • What if U.S. person obtains a re-entry permit for extended absences?
Rowbotham & c o m p a n y l l p Expatriation: IRS Notice 18 IRS Notice 2009-85 • Cessation of lawful permanent residency. Under section 7701(b)(6), as amended by the Act, a long-term resident ceases to be a lawful permanent resident if (A) the individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or if (B) the individual (1) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, (2) does not waive the benefits of the treaty applicable to residents of the foreign country, and (3) notifies the Secretary of such treatment on Forms 8833 and 8854. • Notification spelled by IRS: Forms 8833 and 8854 • Risks: regulations issued contrary to this position
Rowbotham & c o m p a n y l l p Offshore Voluntary Disclosure Initiative (OVDI) 19 Entering Chinese Nationals into OVDI • Filing amended U.S. returns to report worldwide income • Tax reporting in China • Problems with documentation - Income earned - Foreign tax paid • Position that some advisors take: - China source income reported in China - China source income excluded from U.S. return due to blocked income, Rev. Rul. 88
Rowbotham & c o m p a n y l l p OVDI: Amend 1040 to 1040X / 1040NR 20 Reg. § 301.7701(b)-7(b) An alien individual described in paragraph (a) of this section who determines his or her U.S. tax liability as if he or she were a nonresident alien shall make a return on Form 1040NR on or before the date prescribed by law (including extensions) for making an income tax return as a nonresident. The individual shall prepare a return and compute his or her tax liability as a nonresident alien. The individual shall attach a statement (in the form required in paragraph (c) of this section) to the Form 1040NR. The Form 1040NR and the attached statement, shall be filed with the Internal Revenue Service Center, Philadelphia, PA 19255. The filing of a Form 1040NR by an individual described in paragraph (a) of this section may affect the determination by the Immigration and Naturalization Service as to whether the individual qualifies to maintain a residency permit.
Rowbotham & c o m p a n y l l p Foreign Reporting 21 • Foreign Bank Account Reporting (FBAR) - FinCEN 114 • Other reporting requirements for U.S. residents and citizens - Form 926 Transfer of assets to foreign corporations - Form 3520 Gifts, inheritances and distributions or benefits from foreign trusts/estates - Form 3520A Ownership in foreign trusts - Form 5471 Ownership in foreign corporations - Form 8858 Ownership in foreign disregarded entity - Form 8865 Ownership in foreign partnership - FATCA Form 8938 – Foreign financial assets IRS Notice 2014-33 reporting Foreign Financial Institutions [FFIs] and non-FFIs.
Rowbotham & c o m p a n y l l p Pre-Arrival Checklist 1. Consider establishing a foreign or U.S. trust for estate planning purposes. If assets are located in one’s country of origin, it may be necessary to consult with local counsel to coordinate legal and tax issues. The use of trusts may not work in civil law jurisdictions, e.g. France and Germany. 2. Determine if accelerating gift planning or contemplated sales of assets prior to entering the U.S. will save global tax. 3. Explore tax strategies that will step up the tax basis of assets to their fair market value so only appreciation after becoming a U.S. resident will be taxable in the U.S. 4. Review existing investment structures to determine whether there will be adverse tax impacts under U.S. tax laws. 5. Stock options, when exercised, usually generate ordinary income in the U.S. that is taxable at the top rate of 39.6%. Consider exercising options prior to arrival. 6. Review deferred compensation and retirement benefits, to determine how to efficiently access income minimum tax before and after arrival. 7. Foreign stock plan: Check whether vesting will be taxable after entering the U.S. 83(b) election time may have expired. 8. Plan your timing for arrival. Arriving in the last half of the calendar year will usually result in nonresident status for the full year. Foreign income and capital gains during the year should then be exempt from U.S. tax. 9. If you are being relocated to the U.S., consider whether you should be employed by the U.S. or foreign affiliate and whether you should be covered by social security in the U.S. or in your home country. 22
Rowbotham & c o m p a n y l l p Pre-Arrival Checklist 10. If you are in the U.S. for less than 183 days in the year, you may be exempt from U.S. tax under the relevant income tax treaty. 11. Transfer appreciated assets to a foreign trust or foreign company prior to arrival to avoid triggering tax will on the appreciation. 12. Expatriation: If after 7 years of residence as a green card holder, you relinquish your green card and leave the US, you may be subject to an exit tax on appreciated assets. To minimize this risk, you may wish to defer obtaining your green card if your stay in the US is not permanent. 13. Reporting bank balances and foreign investments is required under federal and state rules. The following IRS forms need to be filed: - FinCEN 114 Foreign Bank Account Report – For balances in excess of $10,000 - Form 3520 Receipt of any distributions or benefits from a foreign trust - Form 3520 Receipt of gifts or bequests over $100,000 from a foreign person - Form 3520A Annual return for a foreign trust - Form 5471 Return of U.S. person in certain foreign corporations - Form 8865 Return of U.S. person in certain foreign partnerships - Form 8621 Investment in a passive foreign investment company (e.g. foreign mutual fund) - Form 8938 New in 2011 – Statement of foreign financial assets Caution: Many foreign holding structures may fall within these reporting requirements. Significant penalties will be assessed if appropriate reporting is not done. 23
Rowbotham & c o m p a n y l l p Our Asia Practice Team Rowbotham & Company is a firm of accountants and international tax consultants with extensive experience serving individuals and businesses, globally in the high tech and cross border area. While based in San Francisco and the Silicon Valley, our clients are global companies and families with significant wealth accumulation and entrepreneurs and executives of private and publicly traded companies. We have been active with India-U.S. related cross-border business and family planning for over two decades. With clients in Mumbai, Bangalore and Delhi, and close personal relationships with the top law firms and financial institutions in India, our engagements involve both planning and compliance. Our practice includes extensive domestic and international income, gift, and estate planning services for business executives, entrepreneurs and investors from the Asia Pacific region, Europe and the Middle East. Our firm has given presentations and written extensively regarding EB-5 investor. Our services in this area include pre arrival income and estate planning the tax compliance services. Our corporate services include financial audits, due diligence for M&A, valuations and cross border tax planning. See additional information at www.rowbotham.com. Phillip Lau, Esq.: (plau@rowbotham.com) Mr. Phillip Lau is a Tax Manager at Rowbotham & Company. His practice focuses on advising corporate and partnership clients with U.S. inbound and outbound transactions, multi-state sales and income tax planning, and federal tax issues. Prior to joining Rowbotham & Company, Mr. Lau worked in a public accounting firm, as well as served as head of U.S. tax operations for a multi-national energy supply and trading company. He is a licensed attorney in the State of California. Mr. Lau graduated from the University of California Berkeley with Highest Honors earning a Bachelor of Arts in Business Administration. He also received a Doctor of Jurisprudence from the University of California Los Angeles HARRIET LEUNG, CPA: (hleung@rowbotham.com) Ms. Harriet Leung, Partner of Advisory Services at Rowbotham & Company, heads the firm’s substantial Asia practice of high net worth individuals and works with many technology startup companies in multi-media gaming and social media. Ms. Leung has spoken at various tax and financial conferences in China, Hong Kong, Thailand and the U.S. Ms. Leung serves on the Board of Directors for the Hong Kong Association of Northern California where she recently organized and chaired a highly successful event on tax and immigration planning. Ms. Leung is originally from Hong Kong, and moved to the U.S. in 1991. She has a Bachelor’s degree in Accounting and an MBA in Finance with honors from Golden Gate University, and is a Certified Public Accountant in California Peter Trieu, Esq., LL.M: (ptrieu@rowbotham.com) Mr. Peter Trieu is a Partner at Rowbotham & Company. His practice focuses on advising clients regarding domestic and international tax planning and compliance. He also assists clients with their estate plans. His clients include entrepreneurs, multi-national families, high net-worth individuals and businesses. Prior to joining the firm, Mr. Trieu worked for several years as a Trusts and Estates attorney. Mr. Trieu is an attorney licensed to practice law in the State of California. He earned a Bachelor of Arts in Business-Economics with a minor in Accounting from University of California, Los Angeles. He graduated cum laude from University of California, Hastings College of Law, where he had a concentration in taxation, and earned a Master of Laws (LL.M.) in Taxation, with honors, at Golden Gate University. BRIAN ROWBOTHAM, CPA: (br@rowbotham.com) Mr. Brian Rowbotham, Managing Partner at Rowbotham & Company in San Francisco, advises executives and high net worth families on global tax planning. With over 35 years experience, he provides consulting services to real estate and investment funds, U.S. and foreign technology companies. Mr. Rowbotham is a frequent speaker to international tax associations and is a guest lecturer at the Haas Business School at the University of California, Berkeley. He was recently featured on the cover of the California CPA magazine for tax and business planning for U.S. companies expanding into Asia. Mr. Rowbotham has a Bachelor’s degree and MBA (with Honors) from the University of California, Berkeley, and is a Certified Public Accountant in California. 24

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Cross Border Planning for Inbound Clients from China

  • 1. Rowbotham & c o m p a n y l l p Brian Rowbotham br@rowbotham.com (415) 433-1177 www.rowbotham.com Los Angeles Chapter May 8, 2014 CROSS BORDER PLANNING FOR INBOUND CLIENTS FROM CHINA
  • 2. Rowbotham & c o m p a n y l l p Table of Contents Typical “One Stop Shop” Solution 1 Foreign Ownership Structures for U.S. Real Property 2 Dynasty Trust Structuring 3 Solution # 1: Using a “Check-the-Box” Election 4 Solution # 2: Thirty Day Liquidation 5 U.S. Tax Residence Test 6 EB – 5 Program Process 7 EB – 5 Investor Profile 8 Business & Investment Visas 9 Dual Resident Taxpayers: Reg. § 301.7701(b)-7 10 Dual Resident Taxpayers: Article 4 on Dual Residence Taxpayer 11 Dual Resident Taxpayers: Article 4 on U.S. – China Treaty (1984) 12 Dual Resident Taxpayers – Immigration Challenges 13 Expatriation: Exit Tax – Section 877A 15 Expatriation Act by Mistake 16 Expatriation Notification 17 Expatriation: IRS Notice 18 Offshore Voluntary Disclosure initiative (OVDI) 19 OVDI: Amend 1040 to 1040X / 1040NR 20 Foreign Reporting 21 Pre-Arrival Checklist 22 Our Asia Practice Team 24
  • 3. Rowbotham & c o m p a n y l l p Typical “One Stop Shop” Solution FP BVI* 1 Properties Personal Assets 1 Bonds BVI* 2 BVI* 4BVI* 3 Stocks * British Virgin Island company
  • 4. Rowbotham & c o m p a n y l l p Top Federal Tax Rates Operating Income Branch / Dividend Withholding Tax Sale of Property - Capital Gain Federal Tax Return Forms: Estate Tax * 39.6% 43.4% 39.6% 35% 35% 35% - - - - 30% 30% 20% 23.8% 20% 35% 35% 35% 1040NR 1041 1040NR 1120 1120F 1120 Yes No No Yes No No CN USRP CN CN USRPUSRP U.S. Inc. BVI Ltd. U.S. Inc. CN USRP BVI Ltd. Foreign Ownership Structures for U.S. Real Property CN USRP CN USRP Irrevocable U.S. Trust 2 Irrevocable Foreign Trust * Hybrid structures, using a combination of foreign corporations and partnerships like structures may provide single level of tax and estate tax protection.
  • 5. Rowbotham & c o m p a n y l l p Dynasty Trust Structuring 3 CN Parent T1 T2 T3 BVI1 BVI2 BVI3 DT1 DT2 DT3 Assets FBO Assets FBO Assets FBO S1 S2 S3 U.S. U.S. U.S. S1 S2 S3 U.S. Irrevocable Trust Funding Summer Home * * * * Upon death of foreign father: - Corporate entities will liquidate, and assets will step up to FMV - Assets fund U.S. dynasty trusts.
  • 6. Rowbotham & c o m p a n y l l p Solution # 1: Using a “Check-the-Box” Election FP Foreign Corporation 1 Foreign Assets plus U.S. Securities USP Foreign Corporation 2 Foreign Corporation 3 .5.5 Election to treat as a disregarded entity [Form 8832] At date of death, USP inherits two foreign corporations Shares in Foreign Corporations (1) and (2) step up to their FMV at date of death of FP USP files Form 8832, elects to treat Foreign Corporation 3 as a disregarded entity USP can now liquidate (1) and (2) and will own all assets at their FMV Limitation: Strategy does not work with U.S. real property The election causes Foreign Corporation 3 to be treated as being liquidated Liquidation causes the assets in Foreign Corporation 3 to step up to their FMV as long as neither (1) nor (2) owns 80% or more of (3). If the election made within 75 days of date of death, liquidation of (3) is treated as being effective prior to death of foreign owner 4
  • 7. Rowbotham & c o m p a n y l l p Solution # 2: Thirty Day Liquidation FP Foreign Corporation USP At date of death: USP inherits the foreign corporation with its basis stepped up to its fair market value Assets inside corporation will not step up USP now owns a “controlled foreign corporation” [Section 957] Sale of assets creates “Subpart F Income” = deemed divided to USP Exception: There is no Subpart F Income if the CFC exists for less than 30 days [Section 951] Within 30 days of death, liquidate the foreign company The gain from the liquidation of the CFC is no longer taxable to the USP since basis of FC stock = FMV of stock Question: Can the documents and liquidation be accomplished within 30 days of the death of the foreign person? 5 Foreign Assets plus U.S. Securities
  • 8. Rowbotham & c o m p a n y l l p U.S. Tax Residence Test 6 • Present in the U.S. at least 31 days in the current year; and • Present in the U.S. for 183 days or more according to a formula: Year Days Multiplier 2014 120 1 120 2013 120 1/3 40 2012 120 1/6 20 180 • Exceptions: (1) Taxpayer has a closer connection to a foreign country (2) If current year’s days exceed 182: only treaty tie breaker test will override residence • Visas: H1-B, L-1, and other business or investment visas are generally not a factor for determining tax residence (1) The substantial presence test met if taxpayer is: (2) Lawful permanent resident status (green card)
  • 9. Rowbotham & c o m p a n y l l p EB – 5 Program Process 7 “Match.com” for Investors and Project Managers CN Investors Independent Investment and Advisory Firms in China Sales & Seminar Events in China China-based Licensed Immigration Consulting Firms Intermediaries and Consultants Regional Centers and Private Projects $ $ Beijing Shanghai Guangzhou U.S. New York Boston Houston Los Angeles San Francisco July 19 Investors - Seminars – Trips to U.S. Projects evaluations U.S. immigration lawyers Processing EB – 5 with USCIS [50% success rates] Securities law on U.S. & China Immigration lawyers, USCIS qualification of projects Introductions Projects $ X X X X X X X X X
  • 10. Rowbotham & c o m p a n y l l p EB – 5 Investor Profile 8 U.S. Investing GP Investors Visa Real Estate Development Debt or Equity Structures Ltd P/S $1 mm or $500,000 [Regional Centers] Status - Green card issued [U.S. Resident] - Family resides in CA - Founder/spouse runs businesses in China - Taxpayers subject to U.S. taxation on worldwide income
  • 11. Rowbotham & c o m p a n y l l p Employment by U.S. Company Green Card Business & Investment Visas 9 E 2 Investor EB–5 $1m / $500k Green Card L–1 U.S. Operating Company X CN Company U.S. Subsidiary X Foreign Company U.S. Corp X Angels IP H1–B Foreign Hire in U.S. • U.S. affiliated company formed • Employee relocation - 1 year employment in foreign country • Managerial expertise • Substantial investment into U.S. Corp. - Cash - IP (software, patents) • Talent • Business plan • Employees • Quotas • Must not displace U.S. workers • Investors. - China - S. Korea - India • Creates U.S. jobs
  • 12. Rowbotham & c o m p a n y l l p Dual Resident Taxpayers 10 Reg. § 301.7701(b)-7 Coordination with Income Tax Treaties Ability to compute one’s tax liability as a nonresident (a) Consistency Requirement. (1) Application. The application of this section shall be limited to an alien individual who is a dual resident taxpayer pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and its treaty partner. A “dual resident taxpayer” is an individual who is considered a resident of the United States pursuant to the internal laws of the United States and also a resident of a treaty country pursuant to the treaty partner’s internal laws. If the alien individual determines that he or she is a resident of the foreign country for treaty purposes, and the alien individual claims a treaty benefit (as a nonresident of the United States) so as to reduce the individual’s United States income tax liability with respect to any item of income covered by an applicable tax convention during a taxable year in which the individual was considered a dual resident taxpayer, then that individual shall be treated as a nonresident alien of the United States for purposes of computing that individual’s United States income tax liability under the provisions of the Internal Revenue Code and the regulations thereunder (including the withholding provisions of section 1441 and the regulations under that section in cases in which the dual resident taxpayer is the recipient of income subject to withholding) with respect to that portion of the taxable year the individual was considered a dual resident taxpayer.
  • 13. Rowbotham & c o m p a n y l l p Dual Resident Taxpayers 11 Article 4: Dual Residence Taxpayers – Typical “Tie-Breaker” Rule (a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests); (b) if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; (c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national; (d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. Where … an individual is a resident of both Contracting States, then his status shall be determined as follows:
  • 14. Rowbotham & c o m p a n y l l p Dual Resident Taxpayers 12 Article 4: U.S. – China Treaty (1984) Where … an individual is a resident of both Contracting States, then the competent authorities of the Contracting States shall determine through consultations the Contracting State of which that individual shall be deemed to be a resident for the purposes of this Agreement.
  • 15. Rowbotham & c o m p a n y l l p Dual Resident Taxpayers – Immigration Challenges 13 Filing a Nonresident Return Filing a U.S. nonresident income tax return creates a rebuttable presumption the individual has "relinquished privileges of permanent resident status in the United States." See 8 CFR § 316.5(c)(2), which provides: Claim of nonresident alien status for income tax purposes after lawful admission as a permanent resident. An applicant who is a lawfully admitted permanent resident of the United States, but who voluntarily claims nonresident alien status to qualify for special exemptions from income tax liability, or fails to file either federal or state income tax returns because he considers himself or herself to be a nonresident alien, raises a rebuttable presumption that the applicant has relinquished the privileges of permanent resident status in the United States.
  • 16. Rowbotham & c o m p a n y l l p Dual Resident Taxpayers – Immigration Challenges 14 Example of Legal Opinion Conclusion: The filing of a nonresident return will not, in and of itself, result in the forfeiture of the green card. That said, U.S. resident status and the green card can be lost through certain conduct. The U.S. Customs and Border Protection agency examines returning U.S. residents to determine if they have abandoned resident status. Failure to return to the U.S. on a regular basis, extended absences from the U.S., employment abroad, and other factors may result in the government challenging the individual’s right to retain his green card.
  • 17. Rowbotham & c o m p a n y l l p Expatriation: Exit Tax – Section 877A 15 - U.S. Citizen or U.S. Green Card holder for more than 7 years, and - Assets fair market value exceeds $2 million or - Average taxes paid in each of 5 years exceeds $157,000 (2014) - Exit tax exposure (1) Indexed for inflation (2) “Mark to market” approach since June 2008 (3) Expatriation requires filing of IRS Form 8854 Example: Fair market value of assets (worldwide) $10,000,000 Tax basis <1,000,000> Exclusion – specific exclusion (2014) <680,000> Taxable 8,320,000 - Gifts/bequests to U.S. beneficiaries taxed at highest estate/gift tax rate.
  • 18. Rowbotham & c o m p a n y l l p Expatriation Act by Mistake 16 Filing 1040NR – Section 7701 (b)(6): An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.
  • 19. Rowbotham & c o m p a n y l l p Expatriation Notification 17 • Section 6114 Implications? • Treaty positions must be disclosed on Form 8833 • Is this notification ? • If Form 8833 not filed, taxpayer is subject to penalty, but this does not prohibit claiming NR status • What if U.S. person obtains a re-entry permit for extended absences?
  • 20. Rowbotham & c o m p a n y l l p Expatriation: IRS Notice 18 IRS Notice 2009-85 • Cessation of lawful permanent residency. Under section 7701(b)(6), as amended by the Act, a long-term resident ceases to be a lawful permanent resident if (A) the individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or if (B) the individual (1) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, (2) does not waive the benefits of the treaty applicable to residents of the foreign country, and (3) notifies the Secretary of such treatment on Forms 8833 and 8854. • Notification spelled by IRS: Forms 8833 and 8854 • Risks: regulations issued contrary to this position
  • 21. Rowbotham & c o m p a n y l l p Offshore Voluntary Disclosure Initiative (OVDI) 19 Entering Chinese Nationals into OVDI • Filing amended U.S. returns to report worldwide income • Tax reporting in China • Problems with documentation - Income earned - Foreign tax paid • Position that some advisors take: - China source income reported in China - China source income excluded from U.S. return due to blocked income, Rev. Rul. 88
  • 22. Rowbotham & c o m p a n y l l p OVDI: Amend 1040 to 1040X / 1040NR 20 Reg. § 301.7701(b)-7(b) An alien individual described in paragraph (a) of this section who determines his or her U.S. tax liability as if he or she were a nonresident alien shall make a return on Form 1040NR on or before the date prescribed by law (including extensions) for making an income tax return as a nonresident. The individual shall prepare a return and compute his or her tax liability as a nonresident alien. The individual shall attach a statement (in the form required in paragraph (c) of this section) to the Form 1040NR. The Form 1040NR and the attached statement, shall be filed with the Internal Revenue Service Center, Philadelphia, PA 19255. The filing of a Form 1040NR by an individual described in paragraph (a) of this section may affect the determination by the Immigration and Naturalization Service as to whether the individual qualifies to maintain a residency permit.
  • 23. Rowbotham & c o m p a n y l l p Foreign Reporting 21 • Foreign Bank Account Reporting (FBAR) - FinCEN 114 • Other reporting requirements for U.S. residents and citizens - Form 926 Transfer of assets to foreign corporations - Form 3520 Gifts, inheritances and distributions or benefits from foreign trusts/estates - Form 3520A Ownership in foreign trusts - Form 5471 Ownership in foreign corporations - Form 8858 Ownership in foreign disregarded entity - Form 8865 Ownership in foreign partnership - FATCA Form 8938 – Foreign financial assets IRS Notice 2014-33 reporting Foreign Financial Institutions [FFIs] and non-FFIs.
  • 24. Rowbotham & c o m p a n y l l p Pre-Arrival Checklist 1. Consider establishing a foreign or U.S. trust for estate planning purposes. If assets are located in one’s country of origin, it may be necessary to consult with local counsel to coordinate legal and tax issues. The use of trusts may not work in civil law jurisdictions, e.g. France and Germany. 2. Determine if accelerating gift planning or contemplated sales of assets prior to entering the U.S. will save global tax. 3. Explore tax strategies that will step up the tax basis of assets to their fair market value so only appreciation after becoming a U.S. resident will be taxable in the U.S. 4. Review existing investment structures to determine whether there will be adverse tax impacts under U.S. tax laws. 5. Stock options, when exercised, usually generate ordinary income in the U.S. that is taxable at the top rate of 39.6%. Consider exercising options prior to arrival. 6. Review deferred compensation and retirement benefits, to determine how to efficiently access income minimum tax before and after arrival. 7. Foreign stock plan: Check whether vesting will be taxable after entering the U.S. 83(b) election time may have expired. 8. Plan your timing for arrival. Arriving in the last half of the calendar year will usually result in nonresident status for the full year. Foreign income and capital gains during the year should then be exempt from U.S. tax. 9. If you are being relocated to the U.S., consider whether you should be employed by the U.S. or foreign affiliate and whether you should be covered by social security in the U.S. or in your home country. 22
  • 25. Rowbotham & c o m p a n y l l p Pre-Arrival Checklist 10. If you are in the U.S. for less than 183 days in the year, you may be exempt from U.S. tax under the relevant income tax treaty. 11. Transfer appreciated assets to a foreign trust or foreign company prior to arrival to avoid triggering tax will on the appreciation. 12. Expatriation: If after 7 years of residence as a green card holder, you relinquish your green card and leave the US, you may be subject to an exit tax on appreciated assets. To minimize this risk, you may wish to defer obtaining your green card if your stay in the US is not permanent. 13. Reporting bank balances and foreign investments is required under federal and state rules. The following IRS forms need to be filed: - FinCEN 114 Foreign Bank Account Report – For balances in excess of $10,000 - Form 3520 Receipt of any distributions or benefits from a foreign trust - Form 3520 Receipt of gifts or bequests over $100,000 from a foreign person - Form 3520A Annual return for a foreign trust - Form 5471 Return of U.S. person in certain foreign corporations - Form 8865 Return of U.S. person in certain foreign partnerships - Form 8621 Investment in a passive foreign investment company (e.g. foreign mutual fund) - Form 8938 New in 2011 – Statement of foreign financial assets Caution: Many foreign holding structures may fall within these reporting requirements. Significant penalties will be assessed if appropriate reporting is not done. 23
  • 26. Rowbotham & c o m p a n y l l p Our Asia Practice Team Rowbotham & Company is a firm of accountants and international tax consultants with extensive experience serving individuals and businesses, globally in the high tech and cross border area. While based in San Francisco and the Silicon Valley, our clients are global companies and families with significant wealth accumulation and entrepreneurs and executives of private and publicly traded companies. We have been active with India-U.S. related cross-border business and family planning for over two decades. With clients in Mumbai, Bangalore and Delhi, and close personal relationships with the top law firms and financial institutions in India, our engagements involve both planning and compliance. Our practice includes extensive domestic and international income, gift, and estate planning services for business executives, entrepreneurs and investors from the Asia Pacific region, Europe and the Middle East. Our firm has given presentations and written extensively regarding EB-5 investor. Our services in this area include pre arrival income and estate planning the tax compliance services. Our corporate services include financial audits, due diligence for M&A, valuations and cross border tax planning. See additional information at www.rowbotham.com. Phillip Lau, Esq.: (plau@rowbotham.com) Mr. Phillip Lau is a Tax Manager at Rowbotham & Company. His practice focuses on advising corporate and partnership clients with U.S. inbound and outbound transactions, multi-state sales and income tax planning, and federal tax issues. Prior to joining Rowbotham & Company, Mr. Lau worked in a public accounting firm, as well as served as head of U.S. tax operations for a multi-national energy supply and trading company. He is a licensed attorney in the State of California. Mr. Lau graduated from the University of California Berkeley with Highest Honors earning a Bachelor of Arts in Business Administration. He also received a Doctor of Jurisprudence from the University of California Los Angeles HARRIET LEUNG, CPA: (hleung@rowbotham.com) Ms. Harriet Leung, Partner of Advisory Services at Rowbotham & Company, heads the firm’s substantial Asia practice of high net worth individuals and works with many technology startup companies in multi-media gaming and social media. Ms. Leung has spoken at various tax and financial conferences in China, Hong Kong, Thailand and the U.S. Ms. Leung serves on the Board of Directors for the Hong Kong Association of Northern California where she recently organized and chaired a highly successful event on tax and immigration planning. Ms. Leung is originally from Hong Kong, and moved to the U.S. in 1991. She has a Bachelor’s degree in Accounting and an MBA in Finance with honors from Golden Gate University, and is a Certified Public Accountant in California Peter Trieu, Esq., LL.M: (ptrieu@rowbotham.com) Mr. Peter Trieu is a Partner at Rowbotham & Company. His practice focuses on advising clients regarding domestic and international tax planning and compliance. He also assists clients with their estate plans. His clients include entrepreneurs, multi-national families, high net-worth individuals and businesses. Prior to joining the firm, Mr. Trieu worked for several years as a Trusts and Estates attorney. Mr. Trieu is an attorney licensed to practice law in the State of California. He earned a Bachelor of Arts in Business-Economics with a minor in Accounting from University of California, Los Angeles. He graduated cum laude from University of California, Hastings College of Law, where he had a concentration in taxation, and earned a Master of Laws (LL.M.) in Taxation, with honors, at Golden Gate University. BRIAN ROWBOTHAM, CPA: (br@rowbotham.com) Mr. Brian Rowbotham, Managing Partner at Rowbotham & Company in San Francisco, advises executives and high net worth families on global tax planning. With over 35 years experience, he provides consulting services to real estate and investment funds, U.S. and foreign technology companies. Mr. Rowbotham is a frequent speaker to international tax associations and is a guest lecturer at the Haas Business School at the University of California, Berkeley. He was recently featured on the cover of the California CPA magazine for tax and business planning for U.S. companies expanding into Asia. Mr. Rowbotham has a Bachelor’s degree and MBA (with Honors) from the University of California, Berkeley, and is a Certified Public Accountant in California. 24