“Non-U.S. income
earned by an NRA
prior to the residence
start date is not
taxable by the
United States.”
Continued from page 15
a U.S. corporation, (2) revocable transfers or transfers within
three years of death of U.S. property or transfers with a retained
interest, and (3) debt issued by a U.S. person or a governmental
entity within the United States (e.g. municipal bonds).
Gift taxes are imposed on the donor. A NRA donor is not
subject to U.S. gift taxes on any gifts of non-U.S. situs property
gift to any person, including U.S. citizens and residents. U.S.
citizens and residents must report gifts from a NRA, in excess of
$100,000 on Form 3520.
Gifts of U.S.-situs assets are subject to gift taxes, with the
exception of intangibles, which are not taxable. Tangible
personal property and real property is sited within the United
States if it is physically located in the United States.
Pre-Immigration Planning
There are generally four tax planning objectives that an
immigrant may wish to accomplish prior to the resident start
date: (1) recognize capital gains and step up basis; (2) accelerate
income; (3) defer deductible expenses; and (4) transfer assets to
foreign trusts.
Recognize Capital Gains
Following the residence start date the immigrant is taxed
identically to every other American taxpayer. On a sale of a
capital asset, the United States will tax the difference between
the sale price and the tax basis (the acquisition cost, subject to
possible adjustments). The burden falls on the immigrant to
establish the tax basis, and if the immigrant cannot establish
basis, it will be presumed to be zero.
When immigrants sell their foreign assets following the
residence start date, many cannot subs tantiate tax basis, and
those that can, often have low basis. Some assets may have
been owned for decades or for generations, and the acquisition
costs are either negligible or long forgotten. This holds true
for all types of foreign assets, including real estate, investment
portfolios, interests in closely held businesses, intellectual
property and art.
16
Because basis is defined as the cost of the property, an
NRA can increase basis of an existing asset by transferring the
ownership of the asset in exchange for its fair market value. This
may include the sale of an asset, the exchange of an asset for a
similar asset, a contribution of an asset to a foreign corporation
or partnership, a liquidation of an existing entity (an actual
liquidation or by using the “check-the-box” rules to elect
disregarded entity status) or a distribution of an asset from an
existing entity.
Immigrants often engage in the above transactions by selling
or transferring assets to family members. There is no prohibition
from using related parties for these transactions, but these
transactions would be ignored if they lacked economic substance, and consequently should be structured at arm’s length.
Accelerate Income
Non-U.S. income earned by an NRA prior to the residence
start date is not taxable by the United States. It is therefore
beneficial for NRAs to recognize income, to the extent possible,
prior to the residence start date. This may include factoring
(selling) accounts receivable to increase tax basis or transferring
the incidence of taxation to another foreign person or entity,
receiving early distributions from foreign pension plans,
accelerating stock options, paying out dividends, prepaying
salaries, bonuses, commissions, interest, rents, royalties and
license fees.
Another important component of accelerating income is
to trigger existing accumulated earnings and profits of foreign
corporations. For many immigrants their foreign corporations
will be classified as controlled foreign corporations following the
residence start date, and the immigrants will be taxed on their
share of the “Subpart F” income of the foreign corporation.
Taxation of Subpart F income is limited to the extent the foreign
corporation has accumulated earnings and profits. Earnings
and profits can be stripped out of the corporation through a
dividend distribution, by liquidating the existing corporation
and incorporating a new entity or by using the check-the-box
rules to elect disregarded entity status.
EB5 INVESTORS MAGAZINE
Continued to page 18