The employment-based fifth preference visa category for immigrant investors, commonly referred to as “EB-5,” has grown significantly over the last several years. However, the EB-5 investor presents a number of unique challenges for immigration attorneys, including matters of economic modeling, securities law and international tax law.
U.S. Citizenship and Immigration Services (USCIS) administers the EB-5 Immigrant Investor Program, which provides a path to U.S. lawful permanent residence that avoids most of the backlogs and delays associated with other green-card categories. That’s provided, of course, that the applicant has at least $500,000 of disposable capital to invest in a USCIS-approved regional center. Regional centers are essentially private equity funds that pool multiple EB-5 investments into a single fund used by larger-scale projects to create hundreds or thousands of new jobs.
EB-5 clients, by definition, are high net-worth individuals. As such, they have unique concerns not shared by lower net-worth immigrant-hopefuls, such as the tax consequences of becoming lawful permanent residents. Many immigration attorneys do have sufficient familiarity with how the U.S. tax system treats permanent residents and nonimmigrant visa holders.
The rules for the EB-5 program are relatively straightforward. Essentially, if a foreign investor can prove that a capital investment of lawfully obtained funds of either $500,000 or $1 million (depending on the program) created 10 new jobs, the investor receives immigrant status. For most applicants, the easiest route is to make this investment through one of the 243 USCIS approved regional centers. The credit crisis of 2008 and 2009 precipitated an explosion of activity in the regional center space.
Immigration attorneys new to the EB-5 arena may be unclear on how to compare regional centers and job creation proposals. Generally speaking, the most crucial question for EB-5 investors is the job creation methodology.
Some regional centers create jobs through direct hires, i.e. a manufacturing company that hires 100 new workers based on an infusion of $5 million in EB-5 money. Many other regional centers rely on indirect job creation through capital expenditures in a given industry. For example, a new sports stadium may have few direct hires but spin off hundreds of indirect jobs based on the capital expended to construct and develop the stadium.
Regardless of the job-creation methodology employed, the regional center will have a detailed economic analysis explaining the methodology and outlining the anticipated use of EB-5 capital. The most reputable regional centers utilize time-tested economic studies prepared by seasoned economists in creating similar studies for state and local governments as well as private entities.
Immigration counsel evaluating EB-5 projects for investor clients should reach out to the economist and become familiar with USCIS adjudicative trends in EB-5 investor petitions to be sure they understand the strengths and weaknesses of the various job creation formulae.
EB-5 investors also worry about the ultimate return of their capital. EB-5 capital must be at risk in the commercial sense, which precludes return-of-capital guarantees, so the lawyer should help clients identify and evaluate the return-of-capital mechanism.
Securities lawyers can be particularly helpful in this regard. One important distinction is whether the EB-5 funds for a given project are transferred as equity or as a short-term loan. In the case of equity, the job-creating project will have to generate profit for the investor to see a return of capital. In the case of loans, return-of-capital odds can be more favorable, since other sources (including other loans) might repay the EB-5 loan. In addition, some regional centers may offer to convert the investment funds into an equity stake in the job-creating enterprise. It is critically important that the lawyer factor in the likelihood of return of capital when evaluating and comparing EB-5 investment projects for a client.
Unfortunately, one aspect of EB-5 representation that immigration lawyers often miss is the tax implications of legal permanent residence. For many high net-worth global clients, getting wrapped up in the U.S. tax system can lead to more problems than the green card is worth, leading them to surrender their green cards.
Green card holders are, by default, U.S. income tax residents. Most other countries do not have tax rules like the United States, which imposes income tax on the global income of a green card holder and estate and gift tax on the global assets of a U.S. domiciliary. These two rules often come as a shock to poorly advised high net-worth immigrants.
For income tax purposes, a legal permanent resident must pay taxes to the U.S. government on worldwide income. This is no surprise. But a newly minted green card holder also must report to the U.S. government the following types of information: his foreign financial accounts, his interest in a foreign partnership, his ownership of shares of a foreign corporation, information about his home country pension plan, whether he receives any gifts or bequests from family members in his home country, the existence of a foreign trust of which he may be the beneficiary and whether he owns any specified foreign financial assets. Failure to report this information is accompanied by penalties. Coupled with these rules are punitive taxes and penalties associated with income earned in a foreign trust or generated inside a foreign mutual fund.
Counsel also must advise clients about the U.S. transfer-tax system. Once a U.S. green card holder is living in the United States with no intent to leave the country, U.S. estate tax rules, U.S. gift tax rules and U.S. generation-skipping transfer tax rules apply to all of his assets, no matter where they may be located. Nonimmigrant visas may have been less tax-toxic options than the EB-5 program.
A green card represents a profound change in how a high net-worth foreign individual is taxed and whether or not his success can be passed down effectively to his children. Immigration lawyers must be aware of the legal implications before advising such a change.