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Tax Planning for EB5 Investor and Executive Relocations

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This document summarizes tax planning considerations for Chinese nationals relocating to the United States for EB-5 investment or executive positions. It discusses how to determine US tax residency status, income tax rates and treaty planning. Pre-arrival planning tips are provided like realizing income before arriving, undertaking transactions to step up the basis of assets, and establishing foreign trusts or gifting assets. Reporting requirements for non-US investment entities are also summarized.

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Tax Planning for EB5 Investor and Executive Relocations from Guangzhou… … to San Francisco Cindy Hsieh Brian Rowbotham [email_address] [email_address]

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EB5 Program Taxation as a Resident – Income Tax - Worldwide Taxation - Definition of a U.S. Resident - Income Tax Treaty Planning Visa Planning Pre-Arrival Planning Income Tax reporting Gift and Estate Tax Executive Relocations Overview

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EB5 Visa Planning Status - Green card issued - Wife & children reside in CA - Husband runs businesses in China - U.S. presence of 4 months per year - Dual resident U.S. Residence status in question - Green card vs. Income Tax Treaty - Treaty with China: - If dual resident, competent authority will determine where individual resides U.S. Investing GP Investors/Visa Real Estate Development Ltd P/S $1 mm or $500,000

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Definition of U.S. Income Tax Resident There are three principal ways to become a U.S. tax resident: Substantial presence test (formula) Lawful permanent resident (Green Card) Citizenship

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Single Filers Income Tax Rates Married Filers $110,016.50 plus 35% of excess over $379,150 $379,150+ $42,449 plus 33% of excess over $174,400 $174,400 – $379,150 $17,025 plus 28% of excess over $83,600 $83,600 – $174,400 $4,750 plus 25% of excess over $34,500 $34,500 – $83,600 $850 plus 15% of excess over $8,500 $8,500 – $34,500 10% of taxable income $0 – $8,500 Tax Taxable Income $102,574 plus 35% of excess over $379,150 $379,150+ $47,513.50 plus 33% of excess over $212,300 $212,300 – $379,150 $27,087.50 plus 28% of excess over $139,350 $139,350 – $212,300 $9,500 plus 25% of excess over $69,000 $69,000 – $139,350 $1,700 plus 15% of excess over $17,000 $17,000 – $69,000 10% of taxable income $0 – $17,000 Tax Taxable Income

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Substantial Presence Test The substantial presence test met if taxpayer is: Present in the U.S. at least 31 days in the current year; and Present in the U.S. for 183 days according to a formula: Year Days Multiplier 2011 120 1 120 2010 120 1/3 40 2009 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

7

Tax Treaty Planning Tax Planning using the U.S. - China Income Tax Treaty   - A foreign national in possession of a green card - Is subject to worldwide taxation - Exceptions may exist under the Treaty - There is no income U.S. Income Tax Treaty with:            - Hong Kong            - Macau            - Singapore             - Taiwan

8

EB5 Planning: Allow Spouse to be Investor H & W Wealth & Business in China Investments in U.S. EB5 Investments Husband retains B-1 Visa Wife & family obtain green card (1) Husband can visit U.S. (2) Husband can apply for green card in 2 years

9

Executive Relocation X China Company Officer/ Employee X China Company Employee of Parent Company U.S. Subsidiary (1) Form a U.S. subsidiary (2) Once Chinese national has been an employee of China Corporation, for one year an L-1 Visa application can be submitted (3) Officer/Employee transfers to U.S. Corporation, with family Requirements: VISA Planning: Form a U.S. Company Employee of U.S. Subsidiary

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Pre-Arrival Planning Pre-arrival planning can include: Realize income prior to becoming a U.S. tax resident Undertake transactions to step up basis in assets Pre-arrival sale of assets Pre-arrival foreign trust planning Pre-arrival gifting to U.S. or non U.S. persons

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Pre-Arrival Planning: Step Up Basis of Assets CN Steps (1) Contribute assets to a holding company (2) After electing corporate status, distribute out assets (3) Relocate to U.S. - Step 2 will result in assets stepping up to fair market value - Subsequent sale while as a U.S. resident will exclude all prior appreciation from U.S. tax Non-U.S. Partnership File Election to treat as a corporation Transfer to a partnership Before U.S. arrival Distribute assets out of entity before U.S. residence Assets in China

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CN Pre-Arrival Formation of Trusts Trust settled prior to arrival U.S. beneficiaries Foreign beneficiaries (1) Income taxed to settlor if trust established within 5 years of establishing U.S. residence (2) Income not taxed to any U.S. beneficiary Non-U.S. Trust (1) (2)

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U.S. Property Gift Tax Estate Tax Cash in U.S. Banks U.S. Bonds Non-U.S. Govt. Bonds U.S. Stocks Partnership [U.S.] U.S. Corporation Stock Real Property in U.S. Art in U.S. Non-U.S. Assets Yes No No No No No Yes Yes No Pre-Arrival Gifting: Gift & Estate Tax – Nonresident No Yes No Yes Yes Yes Yes Yes No

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Pre-Arrival Planning Liquidating Controlled Foreign Corporation Portfolio Assets Nonresident U.S. Resident BVI Corporation In general, holding assets in a controlled non-U.S. corporation creates unnecessary tax complexity, increased taxes, and additional tax reporting Controlled Foreign Corporation rules will convert capital gain (taxable at 15%) into ordinary income (taxed at 35%) Investment income will be taxed currently to U.S. resident

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Reporting Non-U.S. Investment Filing “Activities” include ownership in: Potential Penalties IRS Forms for Non-compliance (*) (1) Non-U.S. Corporation 5471 $10,000 / year per company (2) Non-U.S. Partnership 8865 $10,000/ year per entity (3) Non-U.S. Trust 3520 25% of distribution 3520A 5% per month up to 25% (4) Transfers of Assets to 926 25% of value, a non-U.S. corporation maximum of $10,000 (5) Non-U.S. Bank TDF 90-22.1 50% of highest balance Account Report in prior years (*) Potential criminal prosecution can result for non-reporting.

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Gift and Estate Taxes: Resident in U.S. U.S. Resident Gift Tax Exemption $5 million Estate Tax Exemption $5 million Nonresident Gift Tax - U.S. Property $13,000 per person Estate Tax – U.S. Property $60,000 Residence: definition for gift and estate tax is “domicile”. Domicile is based on facts and circumstance to determine where one’s permanent home is located (1) Green Card, residing in U.S. = resident (2) Green Card Holder residing outside the U.S. - Uncertain

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U.S. Estate Planning $5mm Exemption U.S. Citizen or U.S. Resident Remainder of Assets Taxed at 35% Worldwide Assets To U.S. or non-U.S. Relatives $5 mm + U.S. Spouse Exemption $10mm Exemption =

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Executive Relocation China Corporation U.S. Corporation Treaty Exemption - Employed by China Corporation - In U.S. for ≤ 183 days - Wages exempt from U.S. tax Article 16, U.S.-China Income Tax Treaty CN visits U.S. for less than 183 days

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Example Annual Comp. 200 Exclusion <72> Taxable Comp 128 Executive Relocation – Per Diem Exclusion China Corporation U.S. Corporation Wages - One year rule - Employment still with China Corporation - Contract period does not exceed one year - $200/day of living allowances can be excluded Employee relocation

More Related Content

Tax Planning for EB5 Investor and Executive Relocations

  • 1. Tax Planning for EB5 Investor and Executive Relocations from Guangzhou… … to San Francisco Cindy Hsieh Brian Rowbotham [email_address] [email_address]
  • 2. EB5 Program Taxation as a Resident – Income Tax - Worldwide Taxation - Definition of a U.S. Resident - Income Tax Treaty Planning Visa Planning Pre-Arrival Planning Income Tax reporting Gift and Estate Tax Executive Relocations Overview
  • 3. EB5 Visa Planning Status - Green card issued - Wife & children reside in CA - Husband runs businesses in China - U.S. presence of 4 months per year - Dual resident U.S. Residence status in question - Green card vs. Income Tax Treaty - Treaty with China: - If dual resident, competent authority will determine where individual resides U.S. Investing GP Investors/Visa Real Estate Development Ltd P/S $1 mm or $500,000
  • 4. Definition of U.S. Income Tax Resident There are three principal ways to become a U.S. tax resident: Substantial presence test (formula) Lawful permanent resident (Green Card) Citizenship
  • 5. Single Filers Income Tax Rates Married Filers $110,016.50 plus 35% of excess over $379,150 $379,150+ $42,449 plus 33% of excess over $174,400 $174,400 – $379,150 $17,025 plus 28% of excess over $83,600 $83,600 – $174,400 $4,750 plus 25% of excess over $34,500 $34,500 – $83,600 $850 plus 15% of excess over $8,500 $8,500 – $34,500 10% of taxable income $0 – $8,500 Tax Taxable Income $102,574 plus 35% of excess over $379,150 $379,150+ $47,513.50 plus 33% of excess over $212,300 $212,300 – $379,150 $27,087.50 plus 28% of excess over $139,350 $139,350 – $212,300 $9,500 plus 25% of excess over $69,000 $69,000 – $139,350 $1,700 plus 15% of excess over $17,000 $17,000 – $69,000 10% of taxable income $0 – $17,000 Tax Taxable Income
  • 6. Substantial Presence Test The substantial presence test met if taxpayer is: Present in the U.S. at least 31 days in the current year; and Present in the U.S. for 183 days according to a formula: Year Days Multiplier 2011 120 1 120 2010 120 1/3 40 2009 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
  • 7. Tax Treaty Planning Tax Planning using the U.S. - China Income Tax Treaty   - A foreign national in possession of a green card - Is subject to worldwide taxation - Exceptions may exist under the Treaty - There is no income U.S. Income Tax Treaty with:            - Hong Kong            - Macau            - Singapore             - Taiwan
  • 8. EB5 Planning: Allow Spouse to be Investor H & W Wealth & Business in China Investments in U.S. EB5 Investments Husband retains B-1 Visa Wife & family obtain green card (1) Husband can visit U.S. (2) Husband can apply for green card in 2 years
  • 9. Executive Relocation X China Company Officer/ Employee X China Company Employee of Parent Company U.S. Subsidiary (1) Form a U.S. subsidiary (2) Once Chinese national has been an employee of China Corporation, for one year an L-1 Visa application can be submitted (3) Officer/Employee transfers to U.S. Corporation, with family Requirements: VISA Planning: Form a U.S. Company Employee of U.S. Subsidiary
  • 10. Pre-Arrival Planning Pre-arrival planning can include: Realize income prior to becoming a U.S. tax resident Undertake transactions to step up basis in assets Pre-arrival sale of assets Pre-arrival foreign trust planning Pre-arrival gifting to U.S. or non U.S. persons
  • 11. Pre-Arrival Planning: Step Up Basis of Assets CN Steps (1) Contribute assets to a holding company (2) After electing corporate status, distribute out assets (3) Relocate to U.S. - Step 2 will result in assets stepping up to fair market value - Subsequent sale while as a U.S. resident will exclude all prior appreciation from U.S. tax Non-U.S. Partnership File Election to treat as a corporation Transfer to a partnership Before U.S. arrival Distribute assets out of entity before U.S. residence Assets in China
  • 12. CN Pre-Arrival Formation of Trusts Trust settled prior to arrival U.S. beneficiaries Foreign beneficiaries (1) Income taxed to settlor if trust established within 5 years of establishing U.S. residence (2) Income not taxed to any U.S. beneficiary Non-U.S. Trust (1) (2)
  • 13. U.S. Property Gift Tax Estate Tax Cash in U.S. Banks U.S. Bonds Non-U.S. Govt. Bonds U.S. Stocks Partnership [U.S.] U.S. Corporation Stock Real Property in U.S. Art in U.S. Non-U.S. Assets Yes No No No No No Yes Yes No Pre-Arrival Gifting: Gift & Estate Tax – Nonresident No Yes No Yes Yes Yes Yes Yes No
  • 14. Pre-Arrival Planning Liquidating Controlled Foreign Corporation Portfolio Assets Nonresident U.S. Resident BVI Corporation In general, holding assets in a controlled non-U.S. corporation creates unnecessary tax complexity, increased taxes, and additional tax reporting Controlled Foreign Corporation rules will convert capital gain (taxable at 15%) into ordinary income (taxed at 35%) Investment income will be taxed currently to U.S. resident
  • 15. Reporting Non-U.S. Investment Filing “Activities” include ownership in: Potential Penalties IRS Forms for Non-compliance (*) (1) Non-U.S. Corporation 5471 $10,000 / year per company (2) Non-U.S. Partnership 8865 $10,000/ year per entity (3) Non-U.S. Trust 3520 25% of distribution 3520A 5% per month up to 25% (4) Transfers of Assets to 926 25% of value, a non-U.S. corporation maximum of $10,000 (5) Non-U.S. Bank TDF 90-22.1 50% of highest balance Account Report in prior years (*) Potential criminal prosecution can result for non-reporting.
  • 16. Gift and Estate Taxes: Resident in U.S. U.S. Resident Gift Tax Exemption $5 million Estate Tax Exemption $5 million Nonresident Gift Tax - U.S. Property $13,000 per person Estate Tax – U.S. Property $60,000 Residence: definition for gift and estate tax is “domicile”. Domicile is based on facts and circumstance to determine where one’s permanent home is located (1) Green Card, residing in U.S. = resident (2) Green Card Holder residing outside the U.S. - Uncertain
  • 17. U.S. Estate Planning $5mm Exemption U.S. Citizen or U.S. Resident Remainder of Assets Taxed at 35% Worldwide Assets To U.S. or non-U.S. Relatives $5 mm + U.S. Spouse Exemption $10mm Exemption =
  • 18. Executive Relocation China Corporation U.S. Corporation Treaty Exemption - Employed by China Corporation - In U.S. for ≤ 183 days - Wages exempt from U.S. tax Article 16, U.S.-China Income Tax Treaty CN visits U.S. for less than 183 days
  • 19. Example Annual Comp. 200 Exclusion <72> Taxable Comp 128 Executive Relocation – Per Diem Exclusion China Corporation U.S. Corporation Wages - One year rule - Employment still with China Corporation - Contract period does not exceed one year - $200/day of living allowances can be excluded Employee relocation