International Taxation with Clayton Cartwright – Episode 94
How does taxation impact EB-5 investors? On this episode, Mona and Mark are joined by Clayton Cartwright to discuss the ins and outs of citizenship-based taxation, explaining how the foreign tax credit works and when even non-immigrant petitions are subject to taxation. Listen in for insight around the taxation of gifts used as source of funds and learn about the taxes associated with your EB-5 investment.
If you are interested in coming to the US, the time to enlist the help of a qualified tax advisor is NOW. Yes, the laws surrounding taxation are complex, but compliance is not as difficult as it sounds, pending you have the right guidance from a competent international tax lawyer.
Clayton Cartwright is the managing member of The Cartwright Law Firm in Columbus, Georgia, which specializes in international taxation and employee benefits. On this episode of EB-5 Investment Voice, Clayton joins Mona and Mark to discuss the fundamentals of citizenship-based taxation, sharing the three categories of people who are required to file a US tax return and explaining how the foreign tax credit saves high-net-worth individuals from having to pay double on income earned outside the US.
Clayton goes on to cover the issues surrounding accidental Americans who may not realize they’re subject to taxes in the US and what they can do to trigger abandonment. Finally, he weighs in on the Foreign Account Tax Compliance Act as an enforcement mechanism and why it has inspired many to keep their funds in the US. Listen in to understand when gifts used as source of funds are subject to taxation and learn more about the taxes are associated with investing in EB-5.
The Idea of Citizenship-Based Taxation
- If you’re interested in coming to the US, Clayton recommends enlisting the help of a tax advisor as soon as you make the decision. The three statuses that require individuals to file a US tax return include citizenship, permanent residence, and substantial presence.
- The United States is one of two countries in the world with citizenship-based taxation on worldwide income. Per Section 1 of the IRS Code, US citizens and permanent residents must file US taxes regardless of where they live and work.
Efforts to Avoid Taxation
- In an effort to avoid taxation, a number of high-net-worth EB-5 petitioners ask their wives or children to serve as primary. However, this does NOT preclude them from paying taxes, as anyone with a green card here is pulled into the US tax net from the date published on the card.
- From the standpoint of international taxation, the US is NOT a high-tax jurisdiction. In fact, the US provides statutory tax relief in the form a foreign tax credit.
How the Foreign Tax Credit Works
- Per the guidelines of the foreign tax credit, you don’t have to pay taxes in the US as well as the country where you’re generating income. Instead, you pay the greater of the two.
- If your income is sourced in China, for example, China has primary jurisdiction to tax that income. The US gives you a credit for the taxes paid in China, and you pay the remaining balance to the US government. If your US taxes happen to be less, then the US tax is completely absorbed.
When Non-Immigrant Petitions Are Subject to Taxation
- While it is true that non-immigrant petitions such as the E-2 do not come with permanent residency, tax residency can be triggered by what is called substantial presence. This means that if a non-immigrant petitioner is a tax resident of a country without an income tax treaty, their time in the US is capped at 182 days. On Day 183, they are taxed as residents.
- Many high-net-worth E-2 petitioners count their days in the US carefully to avoid international taxation. But keep in mind that not being taxed as a resident doesn’t mean you’re free of US taxes completely. It simply means that you will only be taxed for income sourced in the US versus your worldwide income.
- Per the IRS code, students are only considered tax residents based on substantial presence. Students who qualify based on the 183-day rule are required to file whether or not they owe Uncle Sam any money.
Accidental Americans & Abandonment
- Accidental Americans are individuals who are citizens by birth but live elsewhere. They may not even realize they are part of the US tax net.
- A child who is a US citizen but decides not to return does have the option to abandon their permanent residency status. Abandonment is triggered by formally filing an I-47.
- If you’re looking to maintain permanent residency, do NOT file as a US taxed nonresident per a foreign tax treaty. Legacy guidance from the INS states that filing as a nonresident means you are presumed to have abandoned your lawful permanent residency status.
The Foreign Account Tax Compliance Act (FATCA)
- FATCA is an enforcement mechanism on the rules already in place around declaring foreign accounts. In fact, the requirement to file a Foreign Bank Act Report or FBAR has been on the books since 1970.
- Many turn FATCA on its ear, so to speak, by keeping their money in domestic trusts or US accounts. Yes, this money is subject to disclosure to US authorities, but there is no requirement to declare such accounts on an income tax return or treasury filing.
The Rules Around Taxation on Gifts
- The recipients of gifts used as EB-5 source of funds are not taxed. Donors who are not US citizens and don’t live in the US are not subject to the US gift tax UNLESS the gift is property located in the US.
- Gifts given overseas (e.g.: property outside the US) are not subject to US gift tax; however, the recipient of that gift MUST declare it on their income tax return. This disclosure has no real tax effect, but there are substantial penalties ($10K or more) for failure to disclose.
Taxes Associated with Your EB-5 Investment
- You are NOT taxed on the principal of your EB-5 investment. You ARE taxed on any income you generate from that investment, regardless of whether you’re a resident or nonresident of the US.
- Tax compliance is not as difficult as it sounds, pending you start early and seek out competent advisors. As long as you properly make disclosure, you will not be penalized.