Foreign nationals from all over the world migrate to the United States in hopes of accessing the many benefits that come with being a U.S. person for themselves and their families. Whether migration occurs through the EB-5 program or any other official government program, foreign nationals must inform themselves of the tax obligations that come with being a U.S. person. The U.S. tax laws mandate that all U.S. green card holders, residents, and U.S. citizens are liable to pay business tax, personal income tax, and estate tax. Such tax obligations make pre-immigration tax planning a critical and necessary step for foreign nationals who are considering moving to the U.S.
Most foreign nationals might be aware that they are required to pay taxes on their U.S. income but they may not be aware that they may also be liable to pay taxes for income acquired outside of the U.S. The below are other tax implications that the foreign national may be liable for:
- Long and short-term capital gains
Gains realized after becoming a U.S. tax resident are taxable, even if the unrealized gain accumulated before.
- Non-U.S. mutual funds
Mutual funds managed outside the U.S. are considered Passive Foreign Investment Companies (“PFIC”) under U.S. tax law, with punitive tax treatment. PFICs also have additional reporting requirements.
- Non-U.S. life insurance
If the insurance policy does not meet the U.S. definition of a life insurance, it will not be treated with the associated tax advantages. In the worst case scenario, such non-U.S. life insurance will be considered as a PFIC, which again has negative tax consequences.
- Non-U.S. companies
Once the owner migrates to the U.S., the company may become a Controlled Foreign Corporation, if the majority of its shares are owned by a U.S. person.
- Long and short-term capital gains
There are a few legal ways for prospective investors to explore prior to their move to the U.S. in an effort to minimize or eliminate the U.S. estate taxes. These steps need to be taken prior to the move to the U.S. and need to be made in conjunction with consultation with an experienced tax advisor. If the foreign investor fails to do these steps correctly and legally, then they could be subject to other unintended consequences.
- Foriegn nationals could “gift” their assets to a family member or close friend prior to moving to the U.S. This process would reduce the U.S. personal and business income taxes as the U.S. cannot tax assets that have been sold and that do not belong to the foriegn national.
- Foriegn nationals that want to maintain control over their assets or businesses but do not want to pay U.S. income or estate taxes can look at offshore trusts. Assets managed through an offshore trust will be removed from the foriegn national’s U.S. estate, which also means that the income from these assets can be removed from the foreign national’s U.S. income tax. However, this requires foreign nationals to set up the offshore trust fund at a minimum of 5 years prior to their efforts to relocate to the U.S.
Evidently by virtue of being a U.S. green card holder, the foreign national will be responsible for U.S. tax obligations and they will have to ensure that payment is made irrespective of where in the world the income is accumulated. It is thus important for prospective investors to start the process of pre-immigration tax planning before they move to the U.S. and that they do this with the assistance of a U.S. tax advisor.
Our firm specializes in the EB-5 program and we assist clients navigate through the program requirements. We also understand that certain clients need tax advice prior to starting their application process and thus we advise all clients to connect with a U.S. tax consultant who can assist all prospective investors in making the right decision for their future. This article is for informational purposes only and shall not be construed as legal or tax advice. Our firm does not specialize in any tax laws and the above should be confirmed by a tax advisor prior to implementation.