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EB-5: First of Four Steps to Certain Economic Devastation for Wealthy Chinese

Well, 2015 was another banner year for the US EB-5 Visa Program. The quota was filled in record time with approximately 90% of the applicants being wealthy Mainland Chinese , aka ‘Golden Geese’. In the last week, there have been high profile articles in the NYTimes and Slate, criticizing the EB-5 program. Both of these articles (and most of the hundreds of comments they attracted) took the position that EB-5 was not good for the US. However, neither of these articles, or any of the dozens of prior ones I could find on the internet, ask the question, “Is the EB-5 program good for the Chinese Golden Geese purchasers?

There is little doubt that the acquisition of a second passport and home is a prudent life strategy for Chinese Golden Geese. I remember one of my first clients telling me that as part of a merchant family in a Chinese port city, previous generations had experienced various dangers from Emperors, British, Taiping, Nationalists, Japanese, Communists and ‘New Capitalist-Communists’.

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The lesson learned was “No matter how good things are, always keep a fast junk in the harbour, fitted out with gold bars, a second set of papers, and a prearranged berth in a safe harbour. Unfortunately it is still ‘interesting times’ in China and this wisdom still rings true. However, the junk has been replaced by the airplane and the gold bars by a Gold Visa Card. The question still remains, which passport and which safe harbour?

The Chinese have long had an idealistic view of immigration to ’Gum Shan’… the ‘Golden Mountain’… the United States.  Given the almost mythical status of the US and the various drivers of Chinese emigration, it is natural that the US is often cited as one of the primary target destinations and passports.

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EB-5 promoters are continuing to sell this idealistic view of the US to thousands of Chinese Golden Geese at large trade events such as “Invest in America”. One has to remember that the sales people at these events are only paid if they sell a unit to a buyer. Therefore there is no incentive for them to investigate whether the product they are selling has any negative consequences for the buyer. In fact, even if they are aware of such downsides, they have a significant incentive NOT to tell the buyer, as they would lose their commission on the sale.

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What is the ‘Elephant in the Room’ that the sales people are not discussing. First worldwide US taxation and then the Americans advising the Chinese government of the individual’s worldwide assets!

How could this be???

Let me walk you through the preordained steps to financial devastation.

Step 1: Acquire US resident Alien Status through the EB-5 program: Never mentioned in the fancy presentations or glossy brochures is the FACT that the MOMENT that the purchaser obtains resident alien status they become as much of a US taxpayer as a native born American. This full US tax liability on a WORLDWIDE basis is applied whether the purchaser plans to move to the US or remains abroad and is simply buying this as a conduit for their children to live in the US. There are some EB-5 purchasers who later become aware of their US tax liability but mistakenly think they can dodge paying because their assets are in China or otherwise outside the US. I have even had one gentleman tell me that since Chinese names are similar they will never be able to pick him out of the crowd. He was a bit shaken when I pointed out that the US would obviously clearly identified him before they ever gave him an EB-5 visa. These Chinese businesspeople are not used to dealing with an effective, efficient and all seeing tax authority like the IRS and are often still in denial about the issue.

This moment in time reminds me of the late 1990’s when the Qualified Intermediary Regime (“QI”) first came into being.  I noted at the time, that this was going to uncover all of the non-reporting overseas Americans. In addition, it was an efficient and effective mechanism for the US to actually collect the tax from these wayward taxpayers. The few journalists that I spoke with ignored the story “because no one else was reporting on it” or “Swiss banking secrecy will never go away”. After the QI regime came into effect, it started a series of events triggered by the UBS tax evasion scandal  where UBS tried to hide US clients from the QI reporting requirements. This episode directly resulted in the introduction of FATCA which is QI on steroids. Then the US forced countries around the world to force their local institutions to implement FATCA.

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Step 2: IRS globally gathers information from every financial institution about the Chinese Golden Geese WORLDWIDE assets and income and assesses US taxes. If the Chinese Golden Geese do not immediately pay their US tax bill, then the US can immediately move to place a tax lien on all assets in the US and all financial assets held internationally by financial institutions through the QI agreements. They can also use mutual collection clauses in their tax treaties to have other taxing agencies seize assets held outside the US. The US is well aware that with the EB-5 program they are getting new Golden Geese to pluck and you will see a major SUCCESSFUL effort to find and collect from these people using FATCA, whistleblowers, life style audits etc. Those Golden Geese who were foolish enough to try and underreport on their US tax returns will see enormous financial and possible criminal penalties.

Step 3: IRS shares all this financial information on worldwide assets and income with China: China signed an agreement that not only has Chinese banks turning over information on American resident aliens and citizens BUT also obligates the US to give information to China about Chinese taxpayers.

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Step 4: China uses this information to criminally charge Chinese Golden Geese with tax evasion and other possible charges. While seizing Chinese assets, the government uses its agreement with the US to collect on assets held outside of China.

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With these four clear steps in mind, now imagine all the Chinese Golden Geese who have undeclared money and are wandering naively around the Invest in America show. I wonder if a single one of them suspects that their purchase of an EB-5 visa will inevitably trigger a cascade of events which will result in the IRS and China picking the bones of the carcass which was their wealth. Sounds too dramatic? Just remember what happened to wealthy Americans who had money hidden in Switzerland who ignored the inevitable sequence of events that started with the QI regime. Only this time, the steamroller will work a great deal faster, as all the information gathering, sharing and collection apparatus are already in place.

One may question why others have not outlined this path to destruction. Simply put, unlike the EB-5 salespeople, I come from the perspective of being an immigration and tax lawyer who has spent the past 25 years helping American Golden Geese leave the US tax system. The number of US Golden Geese who are leaving is growing at an exponential rate (). In fact, the total for the last quarter of 2014 exceeded the total for the entire 8 years of the Bush administration. This skyrocketing trend will continue under whoever becomes the next President in 2016.

I am therefore shocked when I see wealthy Chinese blindly walking into the US tax liability minefield that I just lead my clients out of.

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The strategy of getting a second passport and safe harbour is a sound one, but you need proper experienced legal advice not a self interested sales pitch! The loss of the $500,000 EB-5 investment is the least of a Chinese Golden Geese worries.

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