Article By: Gary S. Wolfe, The Wolfe Law Group
International Investors & California: EB-5 Visas, and California Taxes
The Immigrant Investor (EB-5) Program was established in 1990 and is administered by the U.S. Citizenship & Immigration Services (“USCIS”). The EB-5 program encourages foreign investors to invest their way to living in the U.S.A. and allows investors and their families to become permanent residents (Green Card holders) in usually about 2 years. The EB-5 Regional Center Program expires on 9/30/16, but is expected to be extended as it has been numerous times in the past with an increase in the minimum investment from $500,000 to $800,000 plus added restrictions.
There are 10,000 EB-5 green cards available every year, and historically the program has been underutilized. In FY2011 only 3,463 were issued and in FY2012, 6,200 immigrants got their green cards via EB-5. In FY2013, 8,567 visas were issued and 10,692 were issued in FY2014. In May 2015, the State Department announced a backlog because for the first time, EB-5 had reached its quota for Chinese Nationals. The backlog is currently 6+years for the Conditional Green Card for Chinese nationals.
There are two EB-5 programs, i.e. the Direct Investment (Direct) program and the Regional Center program.
The Direct Investment Program and History of EB-5.
In order for an applicant to qualify under the Direct Investment program, the following three basic requirements must be met:
- Investment in a new commercial enterprise;
- Investment of at least $1 million (or $500,000 in certain cases) into the business; and
- Creation of employment for at least 10 full-time U.S. workers.
For the first two years, the program was only set up for those who were willing to invest and create their own business that would produce at least ten jobs. However, in 1993, the government began to designate certain businesses as regional centers: they were primarily businesses that were started or expanded in a Targeted Employment Area (TEA), an area where the unemployment rate exceeded the national average by 150% or a rural area where the population is less than 20,000, fit within the $500,000 investment designation.
The second program within the EB-5 category, i.e. the Regional Center program, is ideal for the retiree or inactive investor due in large part to the “indirect employment” feature of this program. The Regional Center program advantageously removes the 10 full-time employee requirement of the Direct program and substitutes the less-restrictive “indirect employment creation,” which allows the investor to qualify by proving 10 direct and/or indirect employees who are new to the Regional Center. Over 95% of all EB-5 Cases are processed by USCIS under the Regional Center program.
The EB-5 policy management requirement is minimal in that the investor can be a limited partner and still qualify as long as the limited partners have a policy-making role. Thus, for those who are not interested in day-to-day management or running an active business, Regional Center programs offer a more acceptable inactive form of investment, than do most Direct Investment program investments. Another advantage of Regional Center programs that adds to the flexibility of this Green Card category is that the investor is not required to live in the place of investment; rather, he or she can live wherever he/she wishes in the United States.
Each Regional Center program must be pre-approved by USCIS in order to be eligible to qualify for EB-5 Green Cards. The investor must present evidence that documents their lawful source of funds and trace the funds through bank transfers and other documentation, from the investor directly to the EB-5 enterprise. The money can be the investor’s own funds or in the form of a loan or gift, which would allow a parent to gift a son or daughter.
The investor should complete a thorough business and financial due diligence analysis of the viability of the Regional Center business opportunity. Then, the investment is made and an I-526 petition is filed by the foreign investor with USCIS, requiring the agency to approve that the applicant (source of funds) and the investment are eligible for EB-5 status, which currently takes an average of 16.6 months for Direct Investment and Regional Center cases.
If the investor is already in the U.S., generally in valid work status, he or she then applies for a Green Card through USCIS. No interview customarily is required, and approval for most cases is currently taking approximately 6-9 months. If the investor resides abroad, an application for the Green Card is generally made at the U.S. Embassy or Consulate in the investor’s home country, where an interview is necessary. Approval of the Green Card in this case takes on average about 6-9 months. Thus, the entire immigration process generally takes about 24 months, depending on the case . Once USCIS or a U.S. Consulate after entry to U.S. approves the investor’s Green Card, it is conditional for a period of two years. Conditional Green Card status confers the same rights as the permanent Green Card. Between 21-24 months after the conditional Green Card has been approved, the investor must reconfirm that the investment has been made and that the employment requirement has been fulfilled. An I-829 application to remove the conditional Green Card status is then filed with USCIS, which takes an average of 17.5 months for processing. Once the condition has been removed, a full Green Card is granted for permanent resident status. From the filing of the I-526 application until approval of the Removal of Conditions usually takes about 5 years. Thereafter, in an approved EB-5 case, even if the investment is sold, the investor will still maintain the permanent Green Card. These above times are true for all applications except those born in China which as mentioned above are currently subject to a backlog of 6+ years.
For those international investors who receive an EB-5 Green Card, once received they are classified as US income tax residents and are taxed on their world-wide income. Whether they are also taxed as California income tax residents is determined under a different tax classification test. For those investors who reside in California the following tax rules apply:
Definition of Residence for California Income Tax Purposes
A. Taxation of California Residents and Nonresidents
1. California residents are subject to California income taxation on their worldwide business and non-business income. The California tax on taxable income is a graduated tax ranging from 0% to 13.3% (imposed on income in excess of $1 million).
2. Nonresidents are only subject to California income taxation on their California source business and non-business income.
a. The California income tax for each nonresident is computed by multiplying (i) the California income tax which would be owed if the nonresident were a California resident by (ii) a fraction the numerator of which is the nonresident’s adjusted gross income from California sources and the denominator of which is the nonresident’s worldwide adjusted gross income.
B. Determination of Residence for California Income Tax Purposes
1. California has not adopted the federal income tax rules (IRC § 7701(b)) for determining resident status for California income tax purposes.
2. Under the California Revenue and Taxation Code (“R&T”) and the regulations thereunder, an individual is a resident of California for California income tax purposes if such individual is:
a. present in California for other than a “transitory or temporary purpose”; or
b. domiciled in California and leaves California for a “temporary or transitory purpose.” See R&T Code § 17014(a); and Reg. 17014(a).
3. Temporary or transitory purpose test is satisfied if an individual is present in California:
a. For a brief rest or vacation (i.e. definite short stay). See R&T Reg. § 17014(a);
i. Not a California resident if (i) here not more than six months and while here, a person is only on vacation to rest, or as a guest, but does not conduct any business and (ii) maintains a permanent abode at place of domicile. See R&T Reg. 17014(b);
ii. Presumption. Individual is a resident if here more than nine months. See R&T Reg. 17016;
b. Or, to perform a contract or engagement (i.e., complete a particular transaction or engagement with a short duration). See R&T Reg. § 17014(a).
4. Temporary or transitory purpose is not satisfied if an individual is present in California:
a. To improve such person’s health and the person has an illness which requires long recuperation;
b. To retire; or
c. For business purpose which will last for a long or indefinite period.
C. Factors which are relevant in determining residence: (close connection or contacts)
1. Length of physical presence in California.
a. Physical presence in California is the most persuasive indicator of residence. The longer the taxpayer remains in California, the more likely that the taxpayer will be found to be a California resident for tax purposes.
b. A taxpayer is presumed to be California resident if the taxpayer is present in California for at least nine months. The presumption is a statutory presumption which is rebutted by satisfactory evidence that the taxpayer is present in California for temporary or transitory purposes.
2. Employment in California.
a. Employment in California is a very important determining residency in California. A presence in California to complete a particular transaction, complete a particular contract or fulfill a particular engagement constitutes presence for a temporary or transitory purpose. On the other hand, indefinite employment in California, or employment for a long period of time constitutes presence which is not for a temporary or transitory purpose.
3. Contacts with California.
a. A taxpayer’s contacts with California are very important in determining residency. A taxpayer with significant contacts in California is considered a California resident. Under these circumstances, the magnitude of the taxpayer’s contacts indicates that the taxpayer’s presence in California is not temporary or transitory.
b. The taxpayer’s contacts in California are compared with the taxpayer’s contacts in other states or countries to determine which place the taxpayer has the closest connections to.
c. Factors which indicate that the taxpayer is a California resident are:
i. The person actively seeks and acquires a business in California;
ii. The person is present in California for a business project requiring a long period to complete; or
iii. The person incorporates a business in California even though the business is transacted outside of California;
iv. Maintenance of home in California;
v. Banking and checking accounts in California;
vi. Social clubs and other activities in California;
vii. Business in California;
viii. Family relationships in California including spouse and children.
d. Place where person votes, files tax returns or donates to charity are relevant for determining domicile not residence.
D. Proof of Nonresidence. R&T Reg. § 17014(d).
Proof of Nonresidence can be established through testimony or affidavits from individual, friends, employer, etc. that individual is in California for a permissive purpose and for short duration.
About the Authors:
Mark A. Ivener
Attorney at Law
Ivener & Fullmer
11601 Wilshire Boulevard, Suite 2280 • Los Angeles, California 90025
(310) 477-3000 • (310) 477-2652 fax • firstname.lastname@example.org
Gary S. Wolfe, Esq.
International Tax Counsel
The Wolfe Law Group represent U.S. Taxpayers for IRS Tax Audits, U.S. Investors who have International Investments, and Foreign Persons who invest in the United States. We have over 30 years of experience, specializing in IRS Tax Audits and International Tax Matters including: International Tax Planning/Tax Compliance, and International Asset Protection.