An NRA will be engaged in a U.S. trade or business if the
NRA is an investor in an entity that is taxed as a partnership for
U.S. income tax purposes, and that entity is engaging in a U.S.
trade or business. Consequently, NRAs should invest either
through corporations, or through LLCs that elect to be taxed
as corporations.
Doing business in the United States through a corporation
results in a double tax—a tax on profits at the corporate level,
and a tax on dividends paid to the EB-5 investor (subject to the
30 percent FDAP withholding discussed above). When a foreign
corporation does business in the United States directly (without
a U.S. corporate subsidiary), the double tax is replicated through
the so-called “branch profits” tax. This is an additional 30
percent tax on U.S. profits
of the foreign corporation
that are not reinvested in the
United States.
Estate and Gift Tax
The definition of an NRA changes in the estate tax context.
Here, the inquiry looks primarily at whether the foreigner
intends to make the United States his domicile. This is a subjective inquiry that will take into account the length of stay in the
United States, frequency of travel, size and cost of home in the
United States, location of family, participation in community
activities, participation in U.S. business, ownership of assets in
the United States, and voting. An EB-5 investor will often find
himself to be a U.S. resident for income tax purposes, but an
NRA for estate tax purposes.
The estate and gift tax regime applicable to NRAs is conceptually similar to the standard transfer tax regime, but with
some important practical differences. The estate tax is imposed
only on the part of the NRA’s gross estate that is situated in the
United States at the time of death. The rate of NRA’s estate tax
is the same as that imposed on U.S. citizens and resident aliens,
but the unified credit is only $13,000 (equivalent to about
$60,000 of property value).
With proper planning, these harsh results may be avoided.
For example, U.S. real estate owned by an NRA is subject to the
U.S. estate tax, but not if owned through a foreign corporation
(foreign assets are not subject to U.S. estate taxes). Even if the
real estate is already owned by the NRA it may be beneficial to
pay an income tax today on the transfer
of the real estate to a foreign corporation
(usually treated as a sale) to avoid the estate tax in the future. As wi