The Tax Yin to the Immigration Yang
By Adriana Kostencki and Mitchell W. Goldberg
Every year, thousands of foreign nationals consider moving to the U.S. According to the most recent statistics from the U.S. Department of Homeland Security, in 2014 a total of 1,016,518 foreign nationals became U.S. permanent residents and more were living in the U.S. pursuant to various visas. Most concerns in immigrating to the U.S. involve the nuances of getting the proper visa that will facilitate their goals, whether studying, working, or overseeing U.S. investments. Often overlooked is the effect the U.S. taxing system may have upon entering the U.S. and the missed opportunities to mitigate exposure to U.S. tax. This article discusses, in general, methods by which a foreign national may obtain a U.S. visa and the U.S. income and transfer tax (i.e., estate, gift, and generation skipping transfer tax) consequences that should be considered.
For immigration purposes, a non-immigrant is an alien who seeks temporary entry to the U.S. for a specific purpose. A lawful permanent resident is someone who has been granted a “green card” authorizing such person to permanently live and work in the U.S. Residency for income and transfer tax purposes is determined under different laws. For income tax purposes, U.S. tax residency is established if the foreign national obtains U.S. citizenship, holds a green card or meets the substantial presence test. The substantial presence test is generally met if the foreign national spends the requisite number of days physically present in the U.S. (regardless of visa type). For transfer tax purposes, residency is established if the foreign national changes his or her domicile to the U.S. A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of leaving. As such, a person may be a non-immigrant for immigration purposes and be considered a resident for tax purposes. Once a resident for income tax purposes, worldwide income is subject to U.S. income tax and, once a resident for transfer tax purposes, worldwide assets are subject to U.S. transfer taxes.
One method to temporarily relocate to the U.S. is the E-2 visa. The E-2 visa allows certain foreign nationals to be admitted to the U.S. temporarily, as non-immigrants, when investing substantial capital in a U.S. business. To qualify for E-2 classification, the foreign national must be a national of a country that the U.S. maintains a treaty of commerce and navigation (an “E-2 Treaty”); have invested, or be actively in the process of investing, substantial capital in a bona fide enterprise in the U.S.; and be seeking to enter the U.S. solely to develop and direct such enterprise. This is established by showing at least 50 percent ownership of the enterprise or possession of operational control through a managerial position or other corporate device. A drawback of the E-2 visa is that it is limited to those foreign nationals from countries with an E-2 Treaty.
A method to permanently relocate to the U.S. is the EB-5 visa. Many high net worth individuals consider the EB-5 category for multiple reasons, including no E-2 Treaty requirement and that it leads to U.S permanent residency. The EB-5 category requires an investment of $1 million (or $500,000 in a high unemployment or rural area) in a commercial enterprise that will employ 10 full-time U.S. workers. Although the investor’s role cannot be completely passive, he or she does not have to be involved in any way in the day-to-day management of the business unless he or she wants to do so.
Whether pursuant to an E-2, or other non-immigrant visa, once the foreign national physically enters the U.S., he or she generally becomes subject to the substantial presence test. Assuming the test is satisfied, such foreign national is considered an income tax resident, even though a non-immigrant for immigration purposes, and is required to pay U.S. income taxes on his or her worldwide income. However, such foreign national may not be domiciled in the U.S. and may not be a transfer tax resident, particularly where the applicable visa only permits temporary residence in the U.S. and such foreign national intends to leave the U.S. However, an immigrant entering the U.S. under an EB-5 visa, which permits permanent residency, may become a transfer tax resident upon changing his or her domicile to the U.S., thereby becoming both an income and transfer tax resident.
With proper planning, U.S. income and transfer tax of immigrants can be minimized. The key is to plan before relocating to the U.S. and coordinating with local counsel. For income tax purposes, planning involves accelerating non-U.S. source income items so that income is recognized prior to becoming an income tax resident, deferring losses until after becoming an income tax resident, and making check-the-box elections on certain eligible foreign entities to create pass through entities and avoid the CFC and PFIC anti-deferral regimes under the Internal Revenue Code. For transfer tax purposes, planning generally involves making gifts of non-U.S. situs assets. When immigrating to the U.S. with family members, including a spouse or descendants, such gifts are commonly made to U.S. trusts for the benefit of any one or more of the immigrating family members. A nonresident for U.S. transfer tax purposes can gift an unlimited amount of non-U.S. situs assets in trust free of any U.S. gift tax. Such assets may then grow free of U.S. estate tax and provide significant tax savings.
Individuals and families considering immigration to the U.S. or foreign investment here will be well served to consider both immigration and tax planning issues well in advance of relocating to or investing in the U.S.