U.S. Taxes for EB-5 investors: Pre-immigration tax planning

As high net worth individuals, EB-5 investors should begin planning for the tax liabilities they will face before they enter the United States. They should consider all options to reduce their tax burden.

There are many ways in which EB-5 investors presently abroad can reduce their tax obligations in the U.S. Primarily, this occurs by minimizing the capital gains and real estate taxes which could be imposed by the IRS. 

One strategy an investor may use is offloading assets to trusted family members, friends, or other beneficiaries. An asset that is not nominally owned by an investor with LPR status will not become taxable by the IRS. Some investors have, hence, transferred the ownership of assets to their spouses, children, parents, or sold them altogether. 

Investors should note that all non-U.S. income is not taxable before they become LPRs and, thus, become residents for tax purposes. Therefore, some investors often “accelerate their income” before immigrating to the U.S. — by trading securities with unrealized gains and receiving early payouts on foreign pensions. Investors who either partly or wholly own a foreign corporation may also consider distributing profits and earnings amongst employees, to avoid high taxes levied on their shares and other income. Investors can also defer losses for assets, which have depreciated in value, to offset taxes levied on assets which have gained value and brought in new income. You should consult your U.S. accountant about these matters.

Investors may also consider transferring their assets to a foreign trust before moving to the U.S. to reduce tax obligations. However, there are many regulations on foreign trust transfers because the U.S. government generally dislikes them, and the process can get complicated very quickly. For instance, any payments made from a foreign trust to a U.S. citizen are subject to a throwback tax (i.e., a large tax imposed on trust income that is disbursed in a year after it is earned).

Alternatively, many investors choose to create a domestic American trust to hold their income and, simultaneously, plan for inheritance and tax disbursement to children and grandchildren

Ownership of a U.S.-based company by a non-resident non-LPR investor imposes several obligations. When a foreign investor owns a U.S.-based limited liability company (LLC), the U.S. Department of the Treasury and IRS require them to file Form 5472 annually to collect all information pertaining to the foreign-owned LLC’s assets, ownership structure, and any transactions between owners, the LLC, and other related parties. These LLCs must also include specific information pertaining to record maintenance.

Regarding taxes for a foreign-owned LLC, such as a direct EB-5 investment project, investors should seek out the assistance of an accountant or tax professional to be compliant with IRS regulations.

Tax Structures for Real Estate Ownership

Owning real estate in the United States as a foreign national without LPR status can be complicated. There are three basic tax structures that such investors should be acquainted with before investing in U.S. real estate. Each structure allows the individual to adjust their estate tax liability through minimizing income and capital gains.These structure are as follows:

1. Individual ownership or pass-through entity ownership. It is regarded as the best structure for income tax purposes, as it taxes capital gains at 20% without additional net investment income taxes. This type of structure requires the owner to file a U.S. tax return and subjects them to further estate taxes on their property.
2. Foreign Corporate Ownership. This structure can be used to avoid estate taxes for passive real estate investments, where a single corporation can anonymously own a piece of real estate. These types of structure typically has less capital gains from sale of property. However, the structure avoids the “branch profits tax,” which is defined as an additional tax placed on outward-bound profits earned by U.S.-based “branches” of foreign corporations. When these profits are not reinvested in the U.S, the branch tax usually taxes the profit leaving the U.S. to the foreign corporation.
3. Real estate holding companies. These companies can be created and used by investors to avoid both branch and estate taxes imposed by the IRS. However, they require complex agreements and have expensive setup costs. This structure is most often used for investors heavily involved in real estate, who are actively earning income from real estate transactions. This structure is created by setting up a holding company which is considered the “owner” of a U.S. corporation. Therefore, the investor does not nominally own the real estate but, rather, the holding company owns it. Therefore, the holding company is a domestic corporation which is exempt from the branch tax, and the investor is a shareholder rather than an owner of the real estate, making them exempt from real estate tax.

Investors should note that recent laws passed by some states limits foreign nationals of certain nationalities from owning property in certain areas of those states. These limits generally apply to citizens of the People’s Republic of China, but may also apply to Russian, Iranian, North Korean, and other countries’ citizens.

EB-5 investments are a pathway to US citizenship so these restrictions may not apply once the immigrant has their citizenship.

Tax Treaties

An income tax treaty between the U.S. and your home country allows investors to access foreign tax credits, which permits them to pay a smaller percentage of taxes than typically required. In the case of treaties, interest is generally covered under the portfolio exception and not subject to income tax. Interest gained on an investment portfolio, excluding interest paid to a non-U.S. individual, is usually also covered under the portfolio exception and not subject to tax.

Investors who are eligible to receive repayments from their investment issuer are liable for withholding taxes until they achieve conditional LPR status. Once investors formally become conditional LPRs, they are subject to federal income tax on all their sources of income, domestically and internationally. However, investors who have filed for adjustment of status inside the U.S. are not subject to withholding tax but, instead, are subject to regular income tax on these returns.

International income which is earned abroad may not be subject to taxes if the U.S. has a tax treaty with the country where the income is earned.. Additionally, a Double Taxation Avoidance Agreement (DTAA) between the U.S. and an investor’s former country of residence can prevent the same source of income from being taxed by both respective governments.

Investors may also be taxed on their estate and be subject to taxes on financial gifts, generation-skipping transfer taxes, and property taxes (if applicable). Investors may also be subject to filing state taxes and local taxes on their income, property, and estate if applicable. If an EB-5 investor begins receiving repayment on their investment from a Regional Center (RC) or commercial enterprise, they may be subject to withholding tax until they become a conditional permanent resident. 

It is important for EB-5 investors to work with a knowledgeable CPA on how to manage their taxes even before they move to the United States.