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‘Smart’ tax planning for EB-5 investors begins long before a Green Card

  • Posted on April 29, 2020 | Updated on May 5, 2020 | 5 min read

EB5 Investors Magazine has published an article on how Green Card holders can minimize their tax obligations. The process should start at least two years before the move to the U.S. Pre-residency strategies include selling assets with unrealized built-in gains; for assets with built-in gains that can’t be sold, investors should bring their cost value to fair market value. 

Founder of 2A International Tax Advisors, Christina S. Teixeira, has written an article for EB5 Investors Magazine that offers some helpful advice for those wishing to get their Green Cards. First, she notes that one becomes a U.S. tax resident if they have a Green Card; tax residency begins when they first enter the U.S. with a Green Card, or the date the Green Card is issued, if they are already in the U.S. There can be exceptions for Green Card holders with a vital center of interest in countries that the U.S. has signed a tax treaty with.

Worldwide income can be taxed

As Green Card holders are U.S. tax residents, all of their worldwide income is subject to U.S. taxation. Teixeira points out, however, that strategies exist to avoid “double taxation,” and minimize — or in some cases even avoid — U.S. taxation. It is important to realize that such strategies should be implemented long before becoming a permanent resident of the U.S.

How to handle assets with built-in gains

Acceleration of events is one strategy to employ. Investors sometimes own foreign entities with increasing profits that have yet to be distributed. Additionally, the investor may want to sell assets with unrealized built-in gains. An acceleration of these events can avoid future U.S. taxation.

But sometimes investors have assets with unrealized built-in gains that cannot be sold; in such cases, an investors should bring the cost value of any such assets to fair market value prior to U.S. tax residency. A future sale of such assets will only be subject to U.S. taxation based on the increase in value since they became U.S. tax residents.   

What to do with foreign entities

Investors with foreign entities may elect for the U.S treatment of such entities to offset the taxes already paid by the foreign entity; this avoids the situation of double taxation. Teixeira reminds investors of the critical timing of such a strategy — if not chosen before U.S. tax residency begins, the opportunity to have a more favorable tax treatment of foreign income may be lost.

For those foreign companies controlled by individuals who are U.S. tax residents, the election treatment still applies, but there is the further ability to defer income taxation by the creation of a U.S. corporation and the reinvestment of profits into further business activity.

Estate taxes

Yet another factor for EB-5 investors to consider is that all worldwide assets and gifts are subject to U.S. taxation. While there is a 40% tax rate for assets worth over $1 million, keep in mind that a lifetime exemption of $11.6 million per person exists. Teixeira advises that families with significant wealth can employ strategies prior to becoming permanent residents to remove assets from U.S. estate and gift taxation: gifting assets to beneficiaries, establishing an irrevocable trust, and purchasing life insurance for estate tax liability.

Read the EB5 Investors Magazine article “Smart tax planning before becoming a U.S. tax resident via the EB-5 route”