Using Malta Pension Plans as Part of Inbound Tax Planning for EB-5 Visa Petitioners

Overview

The EB-5 Visa program has been widely promoted as a legal basis for foreign business owners to gain conditional residency followed by permanent residency in the United States. The program is a great solution to the proposition “Ï want to live in America.” A very high percentage of EB-5 visa have been allocated to Chinese investors.

The EB-5 program sunsets every three years. The new proposal makes three significant modifications to the program. First, the minimum investment is increased to $1.2 million for non-targeted employment areas and the minimum investment for regional EB-5 program for targeted employment is increased to $800,000 from its current level of $500,000. The wait for Chinese investors who account for almost 85 percent of EB-5 visas is almost two years. 

The decision to become a permanent resident or U.S. citizen has some 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 permanent residency or U.S. citizenship from a tax perspective.

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 investor 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.

EB-5 Visa Overview

Congress established the EB-5 program in 1990 as a way to stimulate the U.S. economy through job creation and capital investment by foreign investors. The program is administered through United States Citizenship and Immigration Services (USCIS).[1] The program sunsets every three years and requires renewal by Congress to continue. In 2014, Chinese applicants accounted for more than 85 percent of the EB-5 applications with 9,128 applicants.[2]

EB-5 visas are for foreign investors who make a direct minimum investment of $1 million in an ongoing business, or who start a new business in the U.S., that preserves or creates 10 or more jobs for U.S. workers.[3] The direct investment requirement is reduced to $500,000 if the investment is made in a targeted employment area.[4] Investment is made through a private or public economic entity, known as an EB-5 Regional Center, devoted to increased domestic capital promotion, job creation, and improved regional productivity.

Upon making an EB-5 investment and upon approval of the application, a foreign investor (and immediate family including children under age 21) will be granted conditional permanent residence.[5] A foreign investor-applicant who can show that the investment satisfies the EB-5 job creation requirements after two years will be granted permanent residence.

Foreign investors are entitled to permanent residency under the EB-5 program only if they  put the minimum-required investment ($1 million under the Investor Program or $500,000 under the Pilot Program) “at risk.” Capital is “at risk” only where there is a chance for a loss or a gain.[6]

Federal Income Taxation Considerations

The U.S. is one of the few countries that require residents and citizens to pay tax on their worldwide income. U.S. nationality exposes an individual to worldwide income taxation by the United States, regardless of other nationality.[7] Dual nationals with U.S. citizenship are subject to U.S. income tax even if unaware of their U.S. citizenship. A dual national who lives outside the United States from birth, and indefinitely thereafter, without taking any action to lose U.S. nationality remains subject to taxation as a U.S. citizen.

The United States taxes the income of permanent residents as defined in Code Section 7701(b) from all sources, domestic or foreign.[8] A resident alien is taxed on his worldwide income regardless of the source. Therefore, a green card holder is subject to worldwide taxation whether he or she lives in the U.S. or abroad. Worldwide taxation also applies to “substantial presence” residents if they fail the mechanical test of substantial presence even where there is an intent to be domiciled abroad.

The federal income tax and federal transfer tax residency classifications are significantly different. The transfer tax sense of the term “resident” centers upon the subjective concept of “domicile” within the United States, whereas the income tax sense of the term “resident alien” centers upon a very objective set of standards.[9]

Under the green card test, the person holding the green card is considered a U.S. resident for income tax purposes. The green card holder continues to be treated as a U.S. taxpayer unless the taxpayer proactively makes an effort to relinquish or revoke green card status.[10] As a result, the EB-5 investor will be treated a s a resident for tax purposes taxable on worldwide income. Additionally, the EB-5 investor will be required to comply with the foreign tax reporting requirements – FBAR, IRS Form 8938 Statement of Foreign Financial Assets,  et al.

The substantial presence test of Section 7701(b)(3) looks at the number of days over a three-year period that the individual is physically present in the U.S. An individual is substantially present if he or she is present for at least 31 days during the current year and a total of at least 183 days for the three-year period ending on the last day of the current year (December 31).[11]

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 a 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 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 the equal to fifty percent of the difference between the distribution and the value of an 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.

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 asset 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.

Summary

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 bottom line is that everyone still wants to live in the United States permanently or at least part of the time. Immigration has become a politically sensitive topic and regardless of the political persuasion, no one objects to the foreigner who comes and starts a business that creates jobs. The EB5 annual cap is currently limited to 10,000 visas per year and Chinese nationals are taking 85-90 percent of those visas. The investment minimum and program requirements are limiting to everyone except the rich and famous.

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. 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 new permanent residents through the EB-5 Plan.