On August 7, 2014, Miami Mayor Tomás Regalado announced that the City of Miami had been approved by U.S. Citizenship and Immigration Services (USCIS) to be a “Regional Center” for the agency’s EB-5 Immigrant Investor Program.

The EB-5 Program allows foreigners to invest $1,000,000 (or $500,000 in certain high-unemployment or rural areas) in new commercial enterprises in the U.S. that create or preserve at least 10 full-time jobs for qualifying U.S. workers within two years. In return, investors (and their family members) can obtain conditional status to immigrate to the United States. If the jobs actually are created within two years, the investors obtain permanent status and can become U.S. citizens.

To promote the EB-5 Program in South Florida, the City of Miami has established the Regional Center (and its Office of International Business Development) to match up local Miami-Dade, Broward, and Palm Beach County businesses seeking to grow with foreign investors seeking an investment opportunity and an immigrant visa to the United States.

Yet while foreign investors participating in the EB-5 Program have obvious immigration law issues, this same program is fraught with not-so-obvious tax, transactional, and other business and legal issues for both U.S. businesses and foreign investors.

In order to qualify to receive EB-5 investments, businesses must submit a proposal to the Regional Center describing, among other things, the company’s overall business plan, its specific plan for using the investment, and its marketing plan to attract investors. Given the complexity of the application process, the City of Miami has recommended that businesses have an attorney to guide them. This legal guidance is critical because of the complicated financial structure of the investment as well as the due diligence process that will occur.

It is forecast that all foreign investor dollars will be escrowed in separate accounts until they are deployed by the U.S. business recipients. The Miami Regional Center is also contemplating using special neighborhood lending associations to oversee the investment process. These mechanisms, along with the investment proposals being created by the U.S. businesses, are being carefully scrutinized by the Regional Center, USCIS, and the U.S. Securities and Exchange Commission, which are looking to prevent investor scams. Moreover, each U.S. business applying for EB-5 funding will be reviewed (investigated) to ensure the legitimacy of the company and its investment proposal. Because of this heightened scrutiny, many U.S. businesses taking part in the program elect to set up special corporate entities to serve as the investment platform.

Given these considerations, it is imperative that local businesses seeking investment under this initiative have in place a comprehensive plan to meet the legal, regulatory, and transactional requirements of the EB-5 Program.

While foreign investors utilizing the EB-5 Program as a pathway to economic growth and U.S. citizenship may not face as many transactional issues, they will face an abundance of U.S. tax issues that may not be immediately apparent.

After making their required investment and entering the United States under conditional status, an EB-5 investor becomes a “U.S. person” for income tax purposes.

This means the investor now is responsible for full U.S. tax compliance and is subject to U.S. taxation on his or her total individual worldwide income. Because EB-5 investors tend to be well-heeled and have income in their native country and elsewhere, these tax consequences can be significant, making effective tax planning all the more important.

Furthermore, these newly minted U.S. income tax residents invariably have foreign bank accounts and investments. Each such foreign bank account holding more than $10,000 or more than $10,000 in the aggregate must be reported on FinCEN Form 114, “Report of Foreign Bank and Financial Accounts” – the so-called FBAR reporting requirement. Furthermore, the IRS may require the EB-5 investor to file Form 8938, “Specified Foreign Financial Assets,” which reports financial assets above a certain threshold. Participation in the EB-5 Program may also subject investors to U.S. estate and gift tax requirements on their worldwide assets.

If the EB-5 investor fails to consider these tax issues and make required filings, higher taxes and onerous penalties may result. Therefore, individuals using the EB-5 Program for investment and immigration purposes must have comprehensive tax advice from a well-qualified tax attorney.

Once EB-5 investors have successfully immigrated to the United States, they must now also consider how U.S. law – in particular, U.S. criminal law – may apply to any business activities they still have in their native country.

In Pasquantino v. U.S., 125 S.Ct. 1766 (2005), the U.S. Supreme Court determined that a foreign government’s right to collect tax is a “property right” within the meaning of 18 U.S.C. § 1343, the U.S. wire fraud statute. The court further determined that the revenue rule does not bar the U.S. government from using the federal wire fraud statute to prosecute those who attempt to defraud a foreign government of that government’s tax revenues when using an instrumentality of the U.S. to effectuate the non-payment of that country’s tax.

In other words, under the Pasquantino decision, a U.S. federal court may prosecute foreign investors who do not fully and accurately disclose their income and assets to their home government, provided that they used U.S.-based telephones, computers, wire transfers, etc.

In a “reverse Pasquantino” situation, foreign governments may also prosecute an EB-5 investor for failing to disclose his or her income and assets under the law of the investor’s native country. Reverse Pasquantino considerations must be given strong consideration as a result of the Foreign Account Tax Compliance Act (FATCA) and the trend toward foreign governments seeking reporting of U.S. bank accounts held by their citizens. 

As demonstrated above, EB-5 investors and U.S. businesses have numerous considerations when taking part in this lucrative program. Corporate, transactional, tax, estate, and criminal law considerations abound. Each of these issues requires the guidance, planning, and execution that effective legal counsel can bring. 

South Florida Legal Guide 2014 Financial Edition