u.s.-china tax issues for dual-status taxpayers:...

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U.S.-China Tax Issues for Dual-Status Taxpayers: Tax Planning

and Compliance Requirements, Treaty Operations

WEDNESDAY, MAY 8, 2019, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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FOR LIVE PROGRAM ONLY

May 8, 2019

U.S.-China Tax Issues for Dual-Status Taxpayers

Bill Loftus, Founding Partner

Coastal Bridge Advisors, Westport, Conn.

[email protected]

Anthony E. Parent, Founding Partner

Parent & Parent, Wallingford, Conn.

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

US -China tax issues for dual-

status taxpayers

Bill Loftus, Costal Bridge [email protected]

Anthony E. Parent, Esq. Parent & Parent [email protected]

Since 2006, Parent & Parent LLP has helped thousands of US taxpayers all around the globe handle difficult tax problems. In particular, Attorney Parent’s extensive criminal law background has been instrumental to the firm becoming one of the nation’s leading offshore disclosure firms. And while fixing problems is a source of great pride, helping their clients avoid future tax problems with solid planning and year-to-year compliance also offers incredible satisfaction.

Attorney Parent developed the IRSMedic channel on YouTube which has close to two million minutes of watch time, writes extensively for the IRSMedic blog, and is a featured speaker at events around the country along with being a best-selling author of the “IRS Confidential.”

Attorney Parent volunteers as part of a pro-bono effort to represent servicemen and ex-servicemen who are facing daunting tax issues.

Attorney Parent is a source for many international media outlets including the Wall Street Journal, SmartMoney, Fox News, CNBC, ExpatFocus, and others.

Attorney Parent graduated Quinnipiac University School of Law in 2002 and is admitted to practice federal tax law with the IRS along with being a member of both the Connecticut and Vermont Bar associations.

Anthony E. Parent, Esq.

6

Why is this topic so important?

•Despite on-going tensions, in 2018, China was the United States’ largest U.S.

merchandise trading partner (total trade at $660 billion), third-largest export

market ($120 billion), and largest source of imports ($540 billion). China is

also the largest foreign holder of U.S. Treasury securities (at $1.1 trillion year-

end 2018).

•Political changes create real changes. What if tariffs really incentivize Chinese

manufacturers to build even more factories in the US?

•The tax situation regardless if there is a trade war is not is always difficult to

navigate. And these are the big issues we are going to tackle.

•The IRS has a new focus on international reporting penalties and taxation.

And Tax Reform created one unhelpful rule that we will discuss. And the PRC

just made important changes to its IIT.

7

Part I. Investment & migration into the US

•Qualitative analysis

•Quantitative analysis

•The biggest tax mistakes experienced US tax practitioners

make on a routine basis when it comes to dual-status

US/Chinese taxpayers

8

vAVV

Tax & Pre-ImmigrationPlanning

For Offshore Investors

SPANNING GENERATIONS AND MARKETS

TELEPHONE: 203.683.15 30

TOLL FREE: 800.700.55 2 4

FAX: 888.778.38 9 2

coasta lbr idgeadv isors .com

2121 AVENUE OF THE STARS, SUITE 2300

LOS ANGELES, CA 90067

33 R IVERSIDE AVENUE, 5 TH FLOOR

WESTPORT, CT 06880

AGENDA

10

Topics:

Tax Planning Pre-Immigration Planning Family Office Services

C O A S T A L B R I D G E A D V I S O R S

11

TAX PLANNING

T A X P L A N N I N G

U.S. TAX SYSTEM OVERVIEW

12

Los Angeles, California(Based on Beverly Hills 90210)

New York, NY(Based on Upper West Side 10023)

Seattle, Washington(Based on Downtown Seattle 98101)

Federal Income Tax 39.6% over $464,851 for Married Filing Jointly

State and City Income Tax12.3% state and 0% city income tax

over $519,6888.97% state income tax and 3.876% city

income tax over $500,000 No income tax

Federal Capital GainsLong Term: 20% plus 3.8% Medicare Surcharge on net investment income for taxpayers with AGI over $250,000 (MFJ)

Short Term: Taxed as Ordinary Income

State & City Capital Gains 13.3% state and 0% city 8.8% state and 3.876% city None

Federal Estate Tax Top rate of 40% over $10.86 million for Married Couples

State Estate Tax None$3,125,000 Exclusion Amount :

Tax of $1,082,800 plus 16.0% for taxable estates greater than $10,100,000

Graduated 10% to 20% Rate

Federal GST Tax Top Rate of 40% over $10.86 million for Married Couples

Real Estate/Property Tax 1.0874%12.855% of Assessed Value (complex

calculation with discounts built in)1.05%


BENEFITS OF BEING A GREEN CARD HOLDER

13

◻ Ability to leave/enter the U.S. at will

◻ Right to qualify for government financial aid for education and in-state tuition

◻ No need for employer sponsorship to work in any company in the U.S.

◻ Permission to start own business and create a corporation

◻ Eligible for social security benefits

◻ Spouse and unmarried children under age 21 can be sponsored for permanent status


GREEN CARD HOLDERS ARE CONSIDERED US TAXPAYERS

14

TAXES YOU ARE SUBJECT TO:

◻ Federal and State Income Tax

◻ Federal and State Capital Gains Tax

◻ Federal and State Estate Tax

◻ Federal GST Tax

◻ Real Estate/Property Taxes

REPORTING REQUIREMENTS:

◻ Under FATCA (Foreign Account Tax Compliance Act), if a couple has more than $400,000 USD abroad, US taxpayers must report all assets held worldwide to the IRS on Form 8938

◻ If you fail to file Form 8938, you may be subject to penalties- including onerous fines

◻ We will recommend experienced tax and legal professionals in this area to ensure that all reporting is done correctly


PRE-PLANNING CAN REDUCE YOUR TAX BURDEN

15

PRIVATE PLACEMENT VARIABLE ANNUITIES:

◻ Tax-deferred growth on investments held within a client’s contract

◻ Clients pay a premium to an insurance company and receives future payments

◻ Unrelated to the client’s health and does not require a medical exam

◻ Does not provide a death benefit

◻ No cap on contribution limits

◻ Potential for significant estate tax savings due to benefit of compounding/tax-deferred growth

PRIVATE PLACEMENT LIFE INSURANCE:

◻ Variable universal life insurance

◻ Cash value and death benefit grow tax-free

◻ Provides a means of investing while following the tax code for life insurance (IRC Section 7702(a))


TAX BENEFITS OF A PPLI STRUCTURE

16

# of YearsCurrent Situation

($10 Million Taxable Portfolio)Recommended Solution

($10 Million PPLI Policy In Trust)

After Income & Estate Tax No Income or Estate Tax Benefit of Tax Savings

20 $15.46 million $24.72 million +$9.26 million

30 $21.99 million $38. 87 million +$16.88 million

40 $31.73 million $61.13 million +$29.4 million

N o t e : F o r p u r p o s e s o f t h i s i l l u s t r a t i o n , w e a r e a s s u m i n g a 7 % a n n u a l r e t u r n a n d a l l f e e s / t a x e s f o r h i g h U . S . t a x r e g i m e ( e . g . r e s i d e n t s o f C a l i f o r n i a ) .

A S S E T P R O T E C T I O N

OFF-SHORE AND/OR DOMESTIC TRUST STRUCTURE

17

PPLI/PPVA Contract

(SUB-ACCOUNTS BELOW INVESTED IN A DIVERSIFIED PORTFOLIO)

TAX BONDSREITs

INTL EQUITY LG CAP VALUELG CAP

GROWTHMLPS REINSURANCE

COMMODITIESFUND OF FUNDS

Insurance CompanyClient’s Off-Shore

Trust

Coastal Bridge

Advisors

Client Purchases PPLI/PPVA Contract from Insurance

Company

Insurance Company Issues Contract to Client

Coastal Bridge Oversees Various Sub-Account Managers and Allocations similar

to your taxable portfolio

IMMIGRATION PLANNING

18

I M M I G R A T I O N P L A N N I N G

PRE-IMMIGRATION PLANNING

19

SHOULD INCLUDE CONSIDERATIONS OF IMMIGRATION ALTERNATIVES SUCH AS:

1. EB-5 Regional Center Direct Investment Program

2. Intracompany transferee (L-1) Visa

3. Student (F) visas

I M M I G R A T I O N P L A N N I N G

EB-5 PROGRAM DESCRIPTION

20

◻ Allows a foreign national and qualifying immediate family members to obtain permanent resident status (green card) by:

Investing in a new U.S. commercial enterprise

Creating or saving 10 full time U.S. jobs

◻ The usual required investment is $1 million, but this amount is reduced to $500,000 if the investment is made in a rural area or area of high unemployment

◻ Due Diligence: Legal analysis of potential projects is recommended before investment funds are committed

◻ Typical Timeline: 18 months for initial intake/petition processing followed by 6 months for initial visa issuance

◻ Retrogression: Delay of an additional 12 months (or more) is likely for mainland-born Chinese, if the annual EB-5 visa quota limit is reached.

◻ Eligibility: Children fall out of eligibility if they are 21 or older when the EB-5 visa is issued to their investor parent

21

V

FAMILY OFFICE SERVICES

F A M I L Y O F F I C E S E R V I C E S

REAL ESTATE

22

◻ Network of Real Estate Agents across the country

◻ U.S. Real Estate is a U.S. “situs asset” for Estate, Gift and GST purposes exposing non-residents to estate tax for values greater than $60,000

◻ Set-up International Business Company (IBC) capitalized with dollars to acquire Real Estate

◻ Coordinate with leading Real Estate and Tax Lawyers to properly structure Real Estate purchases


MEDICAL CONCIERGE/TOURISM

23

◻ Provide peace of mind to offshore citizens traveling abroad

◻ Access to premiere healthcare providers around the world

◻ Concierge services include travel and visa coordination, translation services, premium accommodations, and recreational activities for patients and their families

◻ Seeks to provide highest quality health care for emergency, elective, and cosmetic procedures


ADMISSIONS CONSULTING

24

Private Public

High School Tuition Expenses $35,000-$45,000/year Free

Admission Process SelectiveOpen access based on residential address (few

exceptions to note)

High School Class SizeIntimate class size

(Avg. 12 students per teacher)Bigger class size

(Avg. 25 students per teacher)

High School OfferingsBetter facilities and moreextra-curricular activities

Fewer facilities and less activity options

Demographics Gender exclusive and/or Coeducational Co-educational

College Preparedness Highly focusedLess focused (depending on affluence of

surrounding community)

College Tuition Expenses With Green Card (excl. Housing/Living costs)

Stanford, CA $44,380

Berkeley, CAIn State: $15,500

Out of State: $38,300

HYPOPTHETICAL CASE STUDY:

THE WU FAMILY

26

H Y P O T H E T I C A L C A S E S T U D Y : W U F A M I L Y

WU FAMILY PROFILE

27

This case study uses a hypothetical family, the Wu family, for illustrative purposes only in order to provide an example of the firm’s process and methodology. For additional information, please see the included Appendix

FAMILY

MEMBERS

◻ Mr. & Mrs. Wu, both 55 years old, were born and raised in Hangzhou

◻ They have two teenage children, Fu and Fen, both of whom are interested in attending high school and university in the U.S.

INDUSTRY

◻ Mr. Wu owns a business involved in the steel trade, manufacturing and real estate. He is a board member of a publicly listed company that started as a family business

◻ Mrs. Wu works in the business and Fu and Fen may join eventually but want to keep their options open

NET WORTH ◻ The Wu family net worth is valued at RMB 188 million

CURRENT

PORTFOLIO

◻ A large portion of their assets are tied up in company stock, Chinese real estate, and in the Asian stock market

PRIMARY GOAL◻ To provide and take care of their family as well as future generations


SPECIFIC NEEDS FOR THE WU FAMILY

28

ASSET PROTECTION/TAX PLANNING:

◻ The Wu’s would like to move some of their money out of China in a tax efficient way

◻ They would also like to financially insure their children, including effective asset protection, trust, and estate planning structures

INVESTMENT STATEGY:

◻ They would like access to the top performing portfolio managers outside of China

◻ The Wu’s want to invest in both commercial and residential real estate in premier cities across the globe as well as obtaining competitive mortgage rates/financing

EDUCATION PLANNING:

◻ Fu and Fen would both like to attend prestigious high schools and universities in the U.S.



SPECIFIC NEEDS FOR THE WU FAMILY

29


◻ If the Wu’s invest in a brokerage account, they would be

subject to the U.S. tax system should they immigrate to the

U.S.

◻ The Wu’s would be subject to significant U.S. income, estate, gift, and GST taxes

◻ There would be no creditor/asset protection benefits afforded to the Wu family or their children

◻ Additionally, they would not receive the tax deferred/tax-free

growth of an investment portfolio via a PPVA/PPLI structure

TAX

FEN

CE

A F T E R

◻ If the Wu’s invest in a PPVA/PPLI structure via an off-shore

trust they will have tax-deferred/tax-free growth of a

customized investment portfolio

◻ The Wu’s will not be subject to U.S. income, estate, gift, and

GST taxes with a PPLI policy and will receive deferred income

taxes with a PPVA policy

◻ If the Wu’s choose to ultimately immigrate to the U.S. we will

coordinate with a leading pre-immigration law firm to provide

the most tax-efficient result for their worldwide assets

◻ Through the off-shore trust structure, the Wu’s have asset

protection provisions for themselves and successive

generations

B E F O R E


DO’S AND DON’TS FOR THE WU’S

30


D O D O N ’ T

Money TransferWork with your team to structure transfer of money to an asset protection trust invested in a tax-efficient manner

Transfer money from China into a U.S. brokerage account without proper planning

Tax ReportingIf you are deemed to be a US taxpayer, make sure to coordinate with your CPA to report all worldwide holdings.

Fail to report all of your world-wide holdings and be subject to penalties

EducationWork with an education consultant to prepare comprehensive admissions applications for high school and college.

Only focus on test scores when considering high school and college admissions. Top U.S. high schools and colleges look at an applicant holistically- including academics, standardized test scores, and extracurricular activities

Real Estate

Structure real estate purchases through an IBC (International Business Corp)/ Trust Structure. Work with Coastal Bridge to secure financing at competitive rates.

Purchase real estate in individual name


EB-5 PROGRAM DESCRIPTION

31


◻ Coastal Bridge worked with the Wu’s to provide a best of breed investment portfolio structured in a tax-efficient manner.

◻ Through Coastal Bridge’s network of leading real estate agents, the Wu’s purchased premiere properties in Hollywood Hills, California and NYC with competitive financing.

◻ The Wu’s worked with Mount Sinai’s medical concierge team and received treatment by a leading physician in a top-tier institution, while enjoying the comforts/services of a five star hotel. Typical Timeline: 18 months for initial intake/petition processing followed by 6 months for initial visa issuance

◻ The Wu’s were able to utilize a top-tier admissions consulting firm to coach Fu and Fen and help them gain admission to a number of Ivy League universities and top UC colleges.

32

APPENDIX

33

LLBH Private Wealth Management, LLC (dba “Coastal Bridge Advisors”) (hereinafter “Coastal Bridge” or “the Firm”) is a registered investment adviser with its principal place of business in the State of Connecticut. Registration does not imply a certain level of skill or training. Additional information about Coastal Bridge, including our registration status, fees, and services is available on the SEC’s website at www.adviserinfo.sec.gov.

Coastal Bridge does not make any representations as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether referenced or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

This presentation includes a number of case studies which are included for illustrative purposes only, to provide examples of the firm’s process and methodology. The results portrayed in these case studies are not representative of all of the firm’s clients or the clients’ experiences. The information contained herein is based upon certain assumptions, theories and principles that do not completely or accurately reflect your specific circumstances. Coastal Bridge makes no representation as to whether investment in any security or strategy mentioned herein was profitable or would have been profitable for any person in the past. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Past performance is no guarantee of future results.

Coastal Bridge is neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.

This presentation should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without prior notice.

Thank you for giving us the opportunity to work with you towards achieving your financial goals. If you have any questions regarding any of the above, please do not hesitate to contact us.

A P P E N D I X

DISCLOSURES

A P P E N D I X

CONTACT LIST

34

33 Riverside Avenue, 5th FloorWestport, CT 06880

2121 Avenue of the Stars, Suite 2300Los Angeles, CA 90067

(800) 700-5524www.coastalbridgeadvisors.com

38 Miller Avenue, Suite 20 Mill Valley, CA 94941

W I L L IAM L O F T US Founding Partner (203) 683-1528 [email protected]

K E V IN BU R N S Founding Partner (203) 683-1525 [email protected]

J I M P R A T T-HEANEY, C I M A ® Founding Partner (203) 683-1527 [email protected]

J E F F F U H R MAN President (203) 987-3165 [email protected]

M I K E K A Z AKEWICH, C F P ® C R P C® Partner (203) 683-1529 [email protected]

D A V ID S . J A M E S Managing Director (323) 686- 7130 [email protected]

S A R A H S I M O N, J . D . Advisor (415) 301-3163 [email protected]

K I M BE R LY N E L SO N,CFA® Advisor (323) 686- 7131 [email protected]

E M I L Y C L A R E F E NN Director of Advisory Services (203) 987-6128 [email protected]

L I Z P E R EZ Director of Compliance (203) 683-1531 [email protected]

J E F F K A L APOS, C I M A ® Director of Investment Services (203) 987-6132 [email protected]

M I K E T W O MEY Director of Operations (203) 683-1526 [email protected]

N I K KI L I V O L SI , J . D . Support Advisor (323) 686-7128 [email protected]

N I C HO LAS Z A C C OUR , C R P C ® Support Advisor (203) 742-5956 [email protected]

C H R I STOPHER S C EUSA Support Advisor (203) 683-1534 [email protected]

N I C O LETTE D I M A G GIO Client Service Associate (203) 683-1526 [email protected]

S U S IE K O W ALSKY, C F P® Senior Client Liaison (203) 683-1533 [email protected]

M I C H AEL C A R USO , C h F C® Client Service Associate (203) 742-5959 [email protected]

A L F O NZ O F E R N ANDEZ Portfolio Administrator (203) 742-5958 [email protected]

S T EVEN M O R R I S ON Financial Analyst (203) 987-3201 [email protected]

K I M F O R C IER Business Operations Administrator (203) 987-6131 [email protected]

C H R I ST INE S M I TH Executive Assistant (203) 742-5957 [email protected]

C H R I ST INE P O L L AN DER Personal Assistant (203) 987-6129 [email protected]

Part I. Pre-Immigration planning

•Expect your immigration attorney to understand immigration

law very well.

•Do not expect them to understand everything else.

35


•What types of immigration status can make someone a US

person?

•Does a student who comes on a J-1 Visa have to report and

pay taxes on their worldwide income?

•Can you accidentally become a US person for tax purposes?

36


A “United States person” means:

• A citizen or resident of the United States;

• An entity created or organized in the United States or under

the laws of the United States. The term “entity” includes, but

is not limited to, a corporation, partnership, and limited

liability company;

• A trust formed under the laws of the United States; or

• An estate formed under the laws of the United States.

37


What makes someone a resident? Residency tests in 26 U.S.C §

7701(b):

The residency rules for tax purposes are found in I.R.C. §

7701(b). Although the tax residency rules are based on the

immigration laws concerning immigrants and nonimmigrants,

the rules define residency for tax purposes in a way that is

notably different than immigration laws.

38


United States Resident: A United States resident is an alien

residing in the United States. To determine if the filer is a

resident of the United States, apply the residency tests in 26

U.S.C. § 7701(b). When applying the § 7701(b) residency tests,

use the following definition of United States: United States

includes the full company of States, the District of Columbia, all

United States territories and possessions (e.g., American Samoa,

the Commonwealth of the Northern Mariana Islands, the

Commonwealth of Puerto Rico, Guam, and the United States

Virgin Islands), and the Indian lands as defined in the Indian

Gaming Regulatory Act.

39


United States Resident: A United States resident is an alien

residing in the United States. To determine if the filer is a

resident of the United States, apply the residency tests in 26

U.S.C. § 7701(b). When applying the § 7701(b) residency tests,

use the following definition of United States: United States

includes the full company of States, the District of Columbia, all

United States territories and possessions (e.g., American Samoa,

the Commonwealth of the Northern Mariana Islands, the

Commonwealth of Puerto Rico, Guam, and the United States

Virgin Islands), and the Indian lands as defined in the Indian

Gaming Regulatory Act.

40


Residency tests in 26 U.S.C § 7701(b):

The residency rules for tax purposes are found in I.R.C. § 7701(b). Although the tax residency rules are based on the

immigration laws concerning immigrants and nonimmigrants, the rules define residency for tax purposes in a way that is

notably different than immigration laws. Under the residency rules of the Code, any alien who is not a RESIDENT ALIEN is a

NONRESIDENT ALIEN. An alien will become a RESIDENT ALIEN in one of three ways:

1. By being admitted to the United States as, or changing status to, a Lawful Permanent Resident under the immigration laws

(the Green Card Test);

2. By passing the Substantial Presence Test (which is a numerical formula measuring days of presence in the United States); or

3. By making what is called the "First-Year Choice" (a numerical formula under which an alien may pass the Substantial

Presence Test one year earlier than under the normal rules). Refer to the discussion of "First-Year Choice" in Chapter 1

of Publication 519, U.S. Tax Guide for Aliens.

41


Substantial Presence Test

You will be considered a U.S. resident for tax purposes if you meet the substantial

presence test for the calendar year. To meet this test, you must be physically

present in the United States for at least:

1.31 days during the current year; and

2.183 days during the 3-year period -- which includes the current year and the 2

years immediately before that -- counting:

1.All the days you were present in the current year;

2.1/3 of the days you were present in the first year before the current year;

and

3.1/6 of the days you were present in the second year before the current year.

42


Days of presence in the United States

You are treated as present in the United States on any day you are physically present in the country, at any time during the day.

However, there are exceptions to this rule. Do not count the following as days of presence in the United States for the substantial

presence test:

• Days you commute to work in the United States from a residence in Canada or Mexico, if you regularly commute from Canada or

Mexico.

• Days you are in the United States for less than 24 hours, when you are in transit between two places outside the United States.

• Days you are in the United States as a crew member of a foreign vessel.

• Days you are unable to leave the United States because of a medical condition that develops while you are in the United States.

• Days you are an exempt individual.

43


Exempt Individuals

Do not count days for which you are an exempt individual. The term "exempt individual" does not refer to someone exempt from U.S. tax, but to anyone in the following categories:

• An individual temporarily present in the United States as a individual under an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas.

• A teacher or trainee temporarily present in the United States under a "J" or "Q" visa, who substantially complies with the requirements of their visa.

• A student temporarily present in the United States under an "F," "J," "M," or "Q" visa, who substantially complies with the requirements of their visa. If you have been a "F"

student for more than five consecutive years while living in the US, you are no longer consider "temporarily" present. You need to seek a special exemption. If you do not, you are

likely now a US person for tax purposes and have an FBAR filing requirement.

• A professional athlete temporarily in the United States to compete in a charitable sports event.

• If G-4 visa holder is not a full time employee, then the exemption will not apply.

44


EB-5The EB-5 is a visa program that provides a way for foreign nationals to

obtain a green card by investing their money in U.S. enterprises or

creating jobs for U.S. workers. The program was created in 1990 "to

stimulate the US economy through job creation and capital

investment." Under this program, entrepreneurs (and their spouses

and unmarried children under 21) are eligible to apply for a green card

(permanent residence) if they:

• Make the necessary investment in a new commercial enterprise in

the United States; and

• Plan to create or preserve 10 permanent full-time jobs for qualified

U.S. workers.

45


•In order to qualify for an EB-5 visa, individuals must invest at

least $1 million in a new enterprise (or -- in high

unemployment and rural “targeted employment areas” -- that

number drops down to $500,000). The investment can also be

made to a “troubled business,” which is an enterprise that has

been in existence for at least two years and has incurred a net

loss equal to at least 20% of its net worth prior to the loss.

•There is talk of changing the minimum investment amount to

$1.3 million (or $800k for targeted areas) in the not so

distant future.

46


• In 2007, there were only 700 EB-5 visas issued, showing that

the infancy of the program was not widely popularized.

However, the program quickly gained steam as many

foreigners started to realize that if they had the funds

available, the EB-5 presented a far lower barrier to entry

than trying to find an employer or family member to act as a

sponsor.

47


National origin of 2014 EB-5 recipients:

• India - 96

• Vietnam - 121

• Mexico - 129

• South Korea - 225

• China 9,128

China is responsible for over 90% of EB-5 applicants.

48

The biggest tax mistakes experienced US tax practitioners

make

The pre-jurisdictional basis trap

50


make•Lee is 60 years old. He managed the Lucky Eights factory in Shenzhen

since 1986. In 1990, he was given 1000 shares of Lucky Eights then worth $100,000 USD. Since 2015, the stock has risen and has been worth about $450,000,000 USD.

•Lee and his wife decided to move to the US - their daughter went to college and now has a grandchild. Lee was able to get in investor visa and became a US person in January of 2016.

•Lee, now retired, sells off as much of his stock in Lucky Eights and began diversifying.

•He sold half of it all $450,000,000 - which is what the stock was worth the day he became a US person in 2016.

•So what is the capital gain? https://www.irs.gov/taxtopics/tc703

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make

A.None or nominal. The basis is equal to the value of the stock

he became a US person.

B. Unknown. We need to index for inflation

C. $449,950,000. $450,000,000 (sale proceeds - $50,000 (the

value the date of acquisition)

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makeC. $449,950,000. $450,000,000 - $50,000 (the value the date of

acquisition)

•There is no real settlement unless it gets down to an ability to pay

•Completely avoidable - wash sale prior to becoming a US person

•Lee’s basis was $450,000,000 meaning if he sold it for $450,000,00

he would have no capital gain to have to pay taxes on.

• It’s not technically a wash-sale as the date of sale is prior to being

subject to the jurisdiction of the US.

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make

Foreign ownership of US real estate

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makePrior to becoming a US person, Ling bought an apartment for

her daughter who was in the US on a J-1 Visa. to live in

Manhattan while she went to school in NYU.

Ling originally had the property in her own name, then a friend

told her to put it in a LLC to protect from lawsuits. She created

Good Student Properties LLC.

When her daughter graduated from NYU and had a job at a law

firm, Ling gave her the apartment.

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makeProblem Number 1: For 5472 is now required for even LLCs owned 25% or more by non-US persons. And tax reform increased the penalty to $25,000 with an additional penalty of $50,000 - for each tax year required.

Worse, tax reform created something called downward attributionwhich could impact other filings of Ling’s. In simple terms - is there any other business anywhere around the world which involves anyone else who may be a US person? Then you must do a downed attribution analysis.

There is a fix to this problem that involves creating an entity outside of the US. But we must be leery that our fixes don’t create more problem.

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make

Problem Number 2: Ling’s daughter is a US person who received

a gift value over $100,000 from her mother who is a non-US

person. That means while no tax is due, a Form 3520 was

required to be filed. A failure to file Form 3520 has a penalty

that is based on the value of the gift.

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make

GILTI & transition tax

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make

• Both created by Tax Reform

• The Transition Tax Section 965 aims to tax built up E&P

• One-time tax to “transition” to territorial taxation.

• Time to file and elect to pay over 8 years has passed.

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makeGlobal Intangible Low Tax Income

• Essentially taxes the ‘active’ non-passive non-Subpart F

income of a US controlled corporation.

• A few different fixes available - but you MUST be on the

look out for this.

• Get it wrong and Form 5471 maybe substantially

incomplete. If so, entire return is open along with threat

of multiple $10,000 penalties.

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make

Foreign Reporting is often a bigger issue than FBAR reporting

• Incorrect FBARs are only consequential in an exam setting. There are no FBAR initiated

exams.

• FBARs have a statute of limitations.

• Missing or substantially incomplete foreign information returns might have none and

keep the entire return open.

• IRS very aggressive. A new client from NYC who has 17 Form 5471 penalties for a total

of $170,000 because his practitioner did not appreciate that foreign reporting is totally

different than domestic exams.

• Examiner competency varies substantially. You need to know enough to know when an

IRS agent is completely making it up.

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The biggest tax mistakes experienced US tax practitioners make - foreign

reporting forms

• Form 5471 look for dormant corporations. Also Form 5471 are the default form

when there is an interest in a foreign entity with limited liability.

• Form 5472 Foreign ownership of US property (which also triggers an estate tax

that is completely separate from the estate and gift tax on US persons).

• Form 926 - A filed Form 5471 can even show a Form 926 is needed.

• Form 3520-A. Pensions and trusts

• Form 3520. Gifts and proceeds from trusts

• Form 8938. The FATCA form with some similarities to the FBAR.

• Form 8865. Foreign partnerships.

• Form 8858. Check the box election

• Form 8621 - PFIC - no penalty?

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Part II. Capital Control Basics

•China attempts to control capital by limiting where it can go.

•A range of new capital controls are designed to prevent Chinese individuals and corporations moving money out of China.

•The measures included restrictions on Chinese investment in foreign companies and overseas real estate.

•Controls already in place included scrutiny of cross-border payments to clamp down on over-invoicing, instructions to banks to ensure that incoming and outgoing payments balance, strict limits on mainland Chinese purchases of Hong Kong insurance policies, and restrictions on so-called “junket trips” to Macau.

•There was also a clampdown on individuals smuggling cash notes out of China.

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•China has a very high savings rate and diminishing investment opportunities — it has built up excess capacity in heavy industry, real estate and infrastructure. This Chinese capital to look for investment opportunities abroad as returns at home decline. The Chinese authorities support this capital outflow, but claim they want it limited to be a net outflow of about $200 billion per year.

•It’s working (or detection has become more difficult) Chinese investors acquired a total of $15.7 billion worth of overseas real estate in 2018, down 63 percent from 2017, according to data from Real Capital Analytics cited by Cushman & Wakefield.

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New scrutiny affects much smaller transactions. The State

Administration of Foreign Exchange (SAFE) has informed 20

foreign and domestic banks of a new “window guidance” on

outbound transfers. Under the new rule, SAFE approval will be

required for all outbound remittances exceeding $5m, down

from a previous limit of $50m. This measure will affect foreign

companies trying to:

• repatriate profits

• pay dividends

• repay loans

• remit proceeds from assets sold in China

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•China attempts to control capital by limiting where it can go.

•The US effectively does the same thing with its tax code.

•The US method is far more stealthy. Is Title 26 is loaded with

protectionist measures far too dense for most of the world to

understand?

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Part III. Investment & migration into China

•Chinese Pensions

•The US-China tax treaty

•183/90 day rule

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Chinese pension and retirement plans

A little analysis is needed…

1.Determine when and how the plan was opened. Was the plan opened by the employer or the employee? Was the plan open incidentally to employment or was it independently opened by the Taxpayer?

2.Determine when and how the plan was funded. Determine the percentage of contributions that were made by the employee and the percentage that were made by the employer.

3.Determine how the plan distributes and how the amount distributed is determined.

4.Determine if contributions to the plan are pre-tax or post-tax in the foreign jurisdiction.

5.Determine if distributions from the plan are taxable or non-taxable in the foreign jurisdiction.

6.Gather information regarding plan participation by other employees, including: is the plan government mandated for all employees? Is the plan available to all employees? Is the plan only available to executives or highly compensated employees?

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Chinese pension analysis

I. Information Reporting for Foreign Pensions and Trusts

a. Classification of foreign pensions, annuities, and “social security”

b. Forms 3520, 3520A, 8938, and FBAR

II. Differentiation between foreign plans and “US Qualified Plans”

III. Section 402(b) provisions and treatment

IV. Grantor trust treatment

V. Tax Treaty Applicability

VI. Identifying and remedying misreporting

a. Disclosure program options

b. The reasonable cause standard

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US-China Tax TreatyThe Article 5 benefit: What the US-China Tax Treaty allows US

persons to do is some amount of business in China and not

have to pay taxes to China.

For example, US Co sends a sales representative to Beijing for

a week to negotiate, but not conclude contracts with PRC

customers, US Co might be able to avoid having a “permanent

establishment” in China and thus avoid the PRC tax. Compare

to non-treaty states of HK and Taiwan. No treaty means it is

difficult not to source some income out of the US.

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US-China Tax TreatySourcing rules: US practitioners should be cognizant of the US

income sourcing rules to find additional foreign source income to

allow for a potentially larger FTC.

•Sales of purchased inventory are sourced to where title passes,

IRS 861(a)(6) and 862(a)(6) create a likely planning opportunities.

You may want to pass title in PRC as opposed to the US to create

the foreign source income to maximize an available FTC. (FTC is

limited by ratio of domestic income v. foreign)

•Sale of manufactured inventory can be sourced partially to US and

partially to PRC under the 50/50 method (IRC 863(b))

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Updated 183/90 day rule

•Effective date 1 January 2019

•The new IIT (Individual Income Tax) Law introduces the

definitions of “resident” and “non-resident”. Under the new

Law, individuals who are domiciled in mainland China, or

non-domiciled and have resided in mainland China for 183

days or more within a calendar year, are considered as China

tax residents and are subject to the IIT on their worldwide

income.

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Updated 183/90 day rules

•Can impact the US persons who typically reside in Hong

Kong, Macau, Taiwan or elsewhere but tend to do business

in PRC. These individuals have a concern whether they will

trigger China tax filing obligations on their worldwide

income if their physical presence in mainland China reaches

or exceeds 183 days in a calendar year.

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•US person who are considered PRC tax residents but have not

been so for more than more than the last five full consecutive

years, they may still be exempt from tax in China on their non-

China sourced income. However, this is yet to be clarified by the

new implementation rule.

•Must stay for less than 183 days in mainland China during one of

five calendar years. Harder than prior rule. (i.e. stay outside of

mainland China for more than 30 days in a single trip or more

than 90 cumulative days in one of five calendar years).

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More questions?

US-China Tax Treaty: Robert V. Hanson [email protected]

Foreign Pensions: Sean J. O’Connor [email protected]

General tax preparation questions: Lisa Zhai (Mandarin-

speaking) [email protected]

For any other issues, email me at [email protected]

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