EB5 Investors Magazine Volume 3 Issue 3 | Page 18

“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