I Want to Live in America! – Part 2 - Minimizing the Tax Implications of U.S. Tax Residency for EB-5 Investors
If you have read any of my articles in the past, you should know by now that I am a major fan of Afro-Cuban music, aka Salsa. You also know by now that I grew up in the Panama Canal Zone. One of my friends at West Point was an exchange cadet from Panama who cleverly referred to me as an American-Panamanian friend to his Panamanian friends. For most Zonians, Panama is the only country that they knew growing up.
Ruben Blades, the Panamanian singer, actor, politician and social activist, et al, is perhaps best known for his song, Pedro Navaja, the Salsa-version of Mack the Knife. The translated lyrics of the song say that “it’s a life that gives you surprises but it’s surprising that give you life.” The song then cites the crime series Naked City repeats the introduction in each episode that there are eight million stories in the Naked City (New York City) and this is one of them. The chorus then cites West Side Story’s “Ï Want to Live in America.” If you don’t believe me, get your dancing shoes on and “google” the song.
The EB-5 Visa program has been widely promoted as a legal basis for foreign business owners to gain conditional residency followed by a permanent residency in the United States. The program is a great solution to the proposition “Ï want to live in America.” A high percentage of EB-5 visa has been allocated to Chinese investors. The minimum investment investments in a final rule from USCIS have increased the minimum investment from$500,000 to $900,000 in regional investment. The current minimum investment in non-regional programs is increasing from $1 million to $1.8 million.
The decision to become a permanent resident or U.S. citizen has significant, potentially costly, tradeoffs from a tax perspective. These tradeoffs should make a wealthy foreigner think twice about becoming a U.S. permanent resident or citizen particularly if there are other ways to spend a substantial amount of time in the U.S. without being locked into a permanent residency or U.S. citizenship from a tax perspective. Nevertheless, where the issue of safety and freedom are at issue, many EB-5 investors would probably conclude that paying taxes sounds to Uncle Sam sounds like a solid proposition.
Despite the tax tradeoffs in becoming a resident for tax purposes in the United States, many foreigners opt for U.S. residency and ultimately U.S. citizenship. As a result, inbound tax planning for EB-5 investors should be a major planning consideration as part of the EB-5 planning process. Once the EB-5 has achieved conditional residency, the EB-5 investor will be treated as a U.S. taxpayer that is taxable on worldwide income. The EB-5 investor will also become subject to U.S. estate and gift taxes as well.
This article explores the use of Malta Pension Plans as a tax structuring vehicle for current and new EB-5 investors like their Green Card but don’t like the surprise of being taxed on their worldwide income. The strategy works for existing or new EB-5 investors.
Using the Malta Pension Plan as a “Drop Off” Vehicle for EB-5 Investors
Since EB-5 Investors are taxed on their worldwide income once they receive approval, the Malta Pension Plan (MPP) is an excellent vehicle to “drop off” existing investments prior to emigrating to the United States. The MPP will provide tax deferral on those investments eliminating U.S. taxation.
The Malta Pension Scheme in many respects is a surrogate to the Roth IRA. A taxpayer can make an unlimited contribution to the Malta Pension Scheme. Unlike the Roth IRA, the taxpayer may make in-kind contributions to the MPP through the contribution of the asset or an interest in an entity holding the asset.
The MPP is treated as a grantor trust from a federal perspective. As a result, the contribution of an appreciated asset will not trigger any tax consequences on the transfer of an asset. The contribution to the MPP is not deductible. FIRPTA (IRC Sec 897) and effectively connected income to a U.S. trade or business (IRC Sec 1445) is not applicable because the trust is treated as a foreign grantor trust for tax purposes. As a result, of the foreign grantor status treatment, the MPP will avoid UBTI treatment of debt-financed real estate and business income within the MPP. This is a significant advantage in favor of the MPP.
Malta law permits distributions to be made from such plans as early as age 50. The rules allow an initial lump sum payment of up to 30% of the value of the member’s pension fund to be made free of Maltese tax. Based on treaty provisions, distributions that are non-taxable for Malta tax purposes are also non-taxable in the United States. Under Malta law, three years must pass after the initial lump sum distribution before additional lump sum distributions could be made to a resident of Malta tax-free.
In Year 4, the MPP may distribute additional funds to the participant on a lump-sum basis. The tax-free portion of the distribution is equal to fifty percent of the difference between the distribution and the value of a minimum retirement annuity using IRS Table V. The taxpayer may take additional lump-sum each year after Year 4. The non-tax exempt portion is taxable under IRC Sec 72 for U.S. purposes. Part of each distribution is treated as a return of principal and part of each payment is treated as ordinary income or capital gains depending upon the underlying asset.
Using the Malta Pension Plan for Existing EB-5 Investors
If you are an existing EB-5 investor, it is not too late to avail yourself of the Malta Pension Plan. Since the Malta Pension Plan is treated as a foreign grantor trust for federal tax purposes, a Green Card holder or existing EB-5 investor may contribute appreciated assets or income-producing to the Malta Pension Plan. For assets such as businesses controlled by the taxpayer, additional planning may be necessary, but when it is all said and done, the assets within the Malta Pension Plan will not be subject to current taxation. This remedy is an important solution for EB-5 investors who want to reside in the U.S. but avoid the confiscatory reach of Uncle Sam. The distribution scheme above provides a method to distribute substantial funds from the Malta Pension Plan with no taxation.
U.S. Tax Compliance Requirements
Participation in the MPP requires compliance with the FinCEN reporting requirements for foreign bank and financial accounts. FinCEN Form 114 (Report of Foreign Bank and Financial Accounts) must be filed annually with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury.
Code Section 6038D, also enacted as part of FATCA, requires that any individual who holds any interest in a “specified foreign financial asset” must disclose such assets if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amounts as may be prescribed).IRS Form 8938 is used to report specified foreign financial assets if the total value of all the specified foreign financial assets in which you have an interest is more than the appropriate reporting threshold. The filing threshold for a married taxpayer filing a joint tax return if the specified financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. As a foreign grantor trust, the taxpayer will most likely be required to file Form 3520.
The world is a pretty unsafe place with uncertainty lurking in every corner of the globe. Flexibility is always a prudent posture whenever possible. A number of countries have investor programs to attract foreign investment. One of the problems is the high investment threshold. A second problem is the quota system on investor visas. The weather in Canada is too cold and I personally cannot imagine a Latin American moving to Australia. It is hard to learn English already without the Australian accent.
The MPP is an excellent pre-immigration tax planning tool that may be used to manage investment and business assets on a tax-deferred basis to minimize U.S. taxation on worldwide income. The MPP provides an excellent opportunity to distribute a significant portion of the tax-deferred income on a tax-exempt basis beginning at age 50. The MPP may also be used to reduce and defer income on U.S. taxable income. The strategy also works very well for existing EB-5 investors and Green card holders for that matter.
Immigration attorneys and tax and securities lawyers and EB-5 promoters need to become familiar with the Malta Pension Plan. The MPP reduces the adverse tax impact on worldwide income for new permanent residents through the EB-5 Plan.
- New York
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