EB-5 Investor Visa (U.S. Tax Issues)

Written by admin on May 20th, 2011

is to be used within the U.S. Basis of property, acquired by gift from a non-resident alien is determined in the same manner as property basis acquired by gift from a resident alien (IRC §1015, 1015(d)).

U.S. Income Tax (Non-Resident Aliens)

Non-resident aliens are subject to U.S. Income Tax on U.S. source: (1) FDAP Income, (2) Effectively Connected Income.

(1) “FDAP” Income

 U.S. Source “FDAP Income” i.e., Fixed or Determinable Annual or Periodical Income (e.g., salaries, wages, interest, rents, dividends and royalties).

A non-resident alien is subject to U.S. federal income tax on FDAP income at a flat 30% tax rate (without the benefit of any related deductions) IRC §871(a), 873(a).  The flat 30% income tax is withheld at the income source (IRC §1441).

“FDAP Income” includes:

Gains from sale of intangible property (i.e., patents, copyrights or other intangibles) (IRC §871(a)(1)(D)).

“FDAP Income” does not include:

Gain from the sale of stock of a domestic corporation (Treas Reg §1.871-7(a)(1)). Interest on bank deposits and “portfolio interest” (IRC §871(h) and (i).

Income tax treaties may reduce or eliminate the 30% flat tax on the FDAP Income.

(2) Effectively Connected Income

Income that is “effectively connected” to a U.S. trade or business.

A non-resident alien, who is engaged in a U.S. trade or business, is subject to U.S. federal income tax on his “effectively connected income”, at same tax rates as U.S. citizens and resident aliens (IRC §871(b)).

For a non-resident alien, engaging in a U.S. trade or business is not the basis for U.S. income tax.  U.S. income tax is imposed if a non-resident alien owns a business through a permanent establishment in the U.S., i.e., a fixed place of business, (e.g., place of management, a branch, an office, a factory).

If the non-resident alien is a resident of a country with which the U.S. has an income tax treaty, the treaty may reduce or eliminate U.S. federal income tax on effectively connected income.

A non-resident alien must file IRS Form 8833 to disclose reliance on a U.S. tax treaty for an exemption from U.S. tax on “effectively connected income.”

(4)     U.S. Tax Treaties


          In the 21st Century, world globalization has produced the following results:

Instantaneous global communications Multi-national investors (with transnational families) International mobility of people on a previously unimagined scale

International investors in the U.S. face immigration issues (i.e., legal presence) and Income, Estate & Gift Tax issues, potential “double taxation” (in the U.S. and their country of citizenship), potential “triple taxation” (if they have a third country of residence).

The U.S. currently has 61 Income Tax and 18 Estate & Gift Tax Treaties (see, below).  A Tax Treaty is a bi-lateral agreement, between two (2) countries, in which country modifies their tax laws for reciprocal benefits.

Tax Treaties have three (3) objectives:

Prevent double taxation Prevent discriminatory tax treatment of a resident of a treaty-country Permit reciprocal tax administration to prevent tax avoidance and evasion (see: Rev. Rul. 91-23, §2.01, 1991-1 C.B. 534)

U.S. Estate & Gift Tax Treaties

Under U.S. Federal Estate & Gift Tax Laws, an alien is taxed as a U.S. Estate & Gift Tax Resident once he establishes a U.S. domicile.  An alien acquires a U.S. domicile by living in the U.S. (for even a brief period of time) with the requisite intention to indefinitely remain (Treas Reg §20.0 – 1 (b)(1) Treas Reg §25.2501 – 1(b))

An alien, who establishes a U.S. domicile, is subject to:

A U.S. Gift tax on the donor’s act of making the gift (transfer of asset) (IRC §2501(a)) A U.S. Estate tax on the transfer of their taxable estate (worldwide assets) (IRC §2001(a))

Since 1976, a unified tax rate is applied to assets transferred for both estate and gift tax (tax free gifts up to M, tax free estate up to .5M (2009), which includes gifts).

Top Tax Rate (2009): 45%

The United States has 18 estate & gift tax treaties (see below).  To qualify for the treaty tax benefits, an alien must be domiciled in either the U.S. or a U.S. Treaty Country i.e., country of origin (or choice), at the time of his death or at the time of the gift.

The treaties contain special tax rules which may reduce the alien’s U.S. Federal estate and gift tax liability.  The treaties are designed to prevent double taxation on the transfer of the same asset (which is the subject of the estate or gift tax).

U.S. Estate Tax Treaties are either non-comprehensive (Estate Tax only) or comprehensive (Estate & Gift Tax).Non-Comprehensive Treaties

          Non-comprehensive treaties deal exclusively with Estate Taxes, providing “situs rules” for specific assets and determining which country has jurisdiction to impose tax on the assets.  Estate tax deductions (and specific exemptions) are allowed under the law of the country imposing the tax.

          Estate Tax Treaties provide tax credits to eliminate double taxation.  Each country allows a credit against its Estate Tax, in accordance with a formula specified in the treaty, with respect to property situated in either country or both countries.

Comprehensive Treaties

          Comprehensive Treaties address both Estate & Gift Taxes, determine primary taxing jurisdiction and Decedent’s residence (based on domicile).  Location determines primary taxing jurisdiction for real estate, business assets of a permanent establishment, and a fixed base for the performance of personal services.

          These treaties provide for “competent authority” resolution for tax disputes (and information exchange), address double taxation by tax credits, and may provide a U.S. Estate Tax deduction for property passing to a Surviving Spouse.

          If a treaty contains a savings clause, the U.S. may tax a Decedent’s Estate, or donor’s gift, as though the treaty was not in effect.

Estate & Gift Tax Treaties (18)

Australia Estate Tax Treaty Australia Gift Tax Treaty Austria Estate and Gift Tax Treaty Canada Estate Tax Treaty Denmark Estate and Gift Tax Treaty Finland Estate Tax Treaty France Estate and Gift Tax Treaty Germany Estate and Gift Tax Treaty Greece Estate Tax Treaty Ireland Estate Tax Treaty Italy Estate Tax Treaty Japan Estate and Gift Tax Treaty Netherlands Estate Tax Treaty Norway Estate and Inheritance Tax Treaty South Africa Estate Tax Treaty Sweden Estate, Inheritance and Gift Tax Treaty Switzerland Estate and Inheritance Tax Treaty United Kingdom Estate and Gift Tax Treaty

U.S. Income Tax Treaties

Under U.S. Federal Income Tax Laws, an alien is either taxed as a resident alien (subject to U.S. Income Tax on world-wide income) or a non-resident alien (subject to U.S. Income Tax on U.S. source income).

 Non-Resident Alien: U.S. Tax Resident

 An alien is classified as a resident alien (U.S. tax resident) if:

He is a U.S. lawful permanent resident at any time during the calendar year (i.e., has a “green card”). He meets the “substantial presence test” (present in the U.S. for 122 days per year over a 3 year period).

 Substantial Presence Test

An alien satisfies the “substantial presence test” for any calendar year (the “current year”) if:

He is in the U.S. for at least 31 days during the current year. The sum of the number of days in the U.S. in the current year and two preceding calendar years equals or exceeds 183 days (“183 day test”). For the “183 day test”, each day in the U.S. in the current year is counted as a full day.  Each day in the U.S. in the first preceding calendar year is counted as 1/3 of a day, each day of presence in the second preceding calendar year is counted as 1/6 of a day (IRC §7701(b)(3)(A)(ii)).

 “Substantial Presence Test”: Closer Connection Exception

          An alien who meets the substantial presence test may avoid being classified as a U.S. tax resident if:

He is present in the U.S. for fewer than 183 days during the calendar year. He maintains a tax home in a foreign country during the entire current year. He has a closer connection to the foreign country (i.e., his tax home) during the current tax year. He timely files IRS form 8840, and has not applied for a “green card” (IRC §7701(b)(3)(B) and (C)).

The United States has 61 income tax treaties (see below).  To be eligible for the benefits of an income tax treaty, an individual must qualify as a resident of either the U.S. or the other country that is a party to the treaty (“the contracting state”).

The U.S. Model Income Tax Treaty (Art 4(1)) defines “resident of a contracting state” as “any person who, under the laws of that state is liable for tax in the state, by reason of his domicile, residence, citizenship, place of management, place of incorporation”.

If an alien is classified as both a U.S. tax resident and a resident of its treaty partner (“dual resident”), the tax treaties contain “tie-breaker” provisions which determine the dual resident’s tax residence status as follows:

Tax resident in country with permanent home. If permanent home in both countries, tax resident in country with “center of vital interests” (personal and economic interests). If the center of

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