Expert Back-Up Planning for Security & Peace of Mind

When the US EB-5 Visa Program was introduced in 1990 it was predicted to be a significant development in the Residence by Investment market. However, it was almost 14 years before the program began to reach its annual quota of 10,000 visas. The “game changer” for this program was the 2007-8 fiscal crisis  when suddenly real estate developers no longer had access to “easy money” from financial institutions. Although it took until 2014 for the annual quota of EB-5 visas to be filled, EB-5 financing eventually filled the void left by the collapse of Lehman Brothers et al.

Until recently over 90 percent of those who applied for EB-5 visas came from China. Although other countries’ HNW citizens have also discovered EB-5 visas, China is still a major source country.

There is little doubt that the acquisition of a second passport and home is a prudent life strategy for HNW Chinese families. I remember one of my first clients – a member of a merchant family in a Chinese port city – telling me that previous generations of his family had experienced various dangers from Emperors, British, Taiping, Boxers, Nationalists, Japanese, Communists and ‘New Capitalist-Communists’.  The wisdom they had passed down 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 pre-arranged berth in a safe harbour. 

For many Chinese it is still ‘interesting times’ and this wisdom still rings true…with the junk replaced by an airplane and the gold bars by a gold Visa card. But two questions still remain – which second set of papers (aka a second passport) and which safe harbour (aka country)?

The Chinese have long held an idealistic view of immigration to “Gum Shan”… the “Golden Mountain” …otherwise known as the United States. Given the desirable status of the US and the various drivers of Chinese emigration, it is not surprising that the US is often cited as one of the primary target destinations for HNW Chinese. EB-5 promoters push this idealistic view of the US when selling to thousands of excited HNW Chinese at large trade events such as the EB-5 Expo.

But be careful. It is important to remember that the real estate cum second citizenship sales people at these events are only paid if they sell a unit. Consequently, there is no incentive for them to investigate whether the product they are selling will have any negative consequences for the buyer. Indeed, even if the salesperson was aware of any downsides, they would have a significant incentive to NOT tell prospective buyers in order to protect their juicy commissions.

So what are potential negative consequences for buyers of EB-5 Visas (what we call “Storm Fronts”) that the salespersons aren’t openly discussing with them? 


Storm Front One: EB-5 Visa issuance equals instant WORLDWIDE US taxation

When HNW Chinese applicants and their families are successful in their quest for EB-5 visas, they are actually being granted Resident Alien Status in the US. This status means that each family member also becomes a US Person for Tax Purposes, and subject to WORLDWIDE income, capital gains, gift and estate taxation by the US. What many do not realize is that this creates wide-reaching US tax liability that applies whether the purchaser actually moves to the US, or remains abroad and is simply using the EB-5 as a conduit for their children to live in the US. I can tell you from experience that this tax liability often comes as a complete unwanted surprise! 

Similar to the situations described in my blog post on Canada, there are some EB-5 purchasers who only later became aware of their substantial US tax liability and then mistakenly thought they could dodge paying taxes on the basis that their assets were in China or otherwise outside the US. I even had one gentleman (not a client) tell me that since Chinese names can be similar, the American authorities would never be able to pick him out of the crowd. He was definitely shaken when I pointed out that the US authorities would have firmly identified him before they ever granted him an EB-5 Visa.

Those who chose to under-report or completely avoid reporting their non-US financial interests are living with a false sense of security about the future of their deception. This false sense of security stems from the fact that the US, like Canada and other Western tax regimes, generally relies on “Self Reporting”. Since audits were rare, they believed that their false tax filing would never be challenged.  But as I outline in my blog post “New Immigrant Tax Evasion: It works right up to the moment it stops working!”, those who have indulged in this behaviour will soon find themselves under the unforgiving eye of the Internal Revenue Service.

 

Specifically, the IRS is busy gathering information from every global financial institution that does business in the US about the presence of all US taxpayers (whether natives or new immigrants) who have accounts at their banks, including those undeclared accounts in China  Hong KongSingapore and Dubai and every other major or obscure country which has financial institutions doing business in the US.   

Once discovered, the undeclared accounts of these Chinese EB-5 Visa holders will immediately be emptied and proceeds sent to the US treasury pursuant to the Qualified Intermediary Agreement that the US has forced overseas bank to enter. At the same time the US will place a tax lien on any personal or corporate business assets such as real estate, luxury vehicles, fine art and so forth that are located in the US.  

If the seized accounts and US assets are still not sufficient to pay the assessed tax, interest and penalties, then the IRS can turn to mutual collection clauses in their tax treaties ….including the US treaty with the PRC …. and have the foreign tax agency(ies) seize assets held outside the US.

 

 

Why is the US going to such lengths?  The US was well aware that with the EB-5 program they were are getting a whole new group of HNW taxpayers. And with the US government being over reliant on the wealthy for government revenues, it was very predictable that the IRS would watch this group closely. Even so, some EB-5 visa recipients who were foolish enough to try and under-report on their US tax returns have already been caught up in large investigations in the San Francisco area. This type of IRS sweep is also being reported in other American cities that have experienced high levels of HNW Chinese immigration.  The individuals caught by these investigations now face enormous financial and possible criminal penalties ….and US tax lawyers are already gearing up to service this exploding market of tax audit targets. So getting caught is going to be costly! 

Storm Front Two: US Tax Liability and Money Laundering for the monies taken out of China

Currently the US is finalizing EB-5 applications that were filed by Chinese applicants in September 2014.  It is therefore worth examining what were the most popular pre-2015 ways of circumventing the annual $50,000 US personal limit to get money out of China to fund the $500,000 EB-5 investment. In addition to the $500K for the EB-5, it is only logical to assume that these applicants also took out additional monies to fund their future life in the US.

 

Research shows that some of the most popular ways of circumventing the personal limit were:

  1. Forging transport invoices and shipping contracts;
  2. Forging trade records;
  3. Re-using invoices;
  4. Faking transaction amounts for customs;
  5. Putting money in other people’s accounts and asking them to transfer money in instalments;
  6. Going through underground banks;
  7. Using invalid custom clearance forms;
  8. Creating false reasons to explain to banks the need for transfers

You will note that several of these methods may involve non-Chinese foreign “Dummy Corporations”. If the EB-5 Visa applicant was foolish enough to engage in the relatively common practice of using US companies in moving this money, they may be surprised to find out that the US considers these transactions to be taxable and possibly evidence of criminal money laundering. This could mean that the US is looking to not only assess and penalize the individual for tax evasion which occurred after they became a US taxpayer by getting an EB-5 Visa…but also nailing them for tax evasion and money laundering relating to how they got their money out of China and into the US in the first place! 

 

One may wonder why others – such as the aforementioned Second Passport salespeople, accountants, lawyers – have not mentioned the serious dangers that I am discussing? One reason is that it disclosure would have killed the sale and their commission would disappear. Another is that few of the people involved would have had an overview of all elements of the situation. In short, its wasn’t their job to look at the long-term ramifications.

I come at this situation from the unique perspective of having been an immigration and tax lawyer whose practice over the past 25 years has included helping HNW Americans leave the US tax system.  The number of US Golden Geese who are leaving the US – or planning to leave as part of their back-up plans – is growing at an exponential rate and will continue under whoever becomes the next President in 2020. I am therefore very wary when I see wealthy Chinese blindly walking into the US tax liability minefield from which I just lead my American clients.

To those who have not yet applied for an EB-5 visa, the strategy of getting a second passport and organizing a safe harbour is a sound one, but it needs to be based on qualified and experienced advice ….not a self-serving high commission sales pitch!  

To those early-movers who have already secured their EB-5 visa, I would strongly suggest that they carefully review their financial activities both before and after their visas were issued – as they may have two levels of exposure. If there is even a small possibility that they might have some issues when the IRS inevitably catches up with them, I would encourage them to seek professional assistance before they are discovered and figure out a strategy to “come in from the cold”. 

And to those who are in the line to be granted an EB-5 visa, I strongly suggest that they engage professional assistance to review their long-term goals and determine the best strategy to move forward .

 

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