EB-5 Scams, Traps & Pitfalls (How to Protect Against Fraud)

EB-5 Scams, Traps & Pitfalls (How to Protect Against Fraud)

EB-5 Scams, Traps & Pitfalls

Our international tax law specialist team represents taxpayers across the globe on matters involving international tax, reporting, and compliance. When taxpayers approach our team on matters involving EB-5 visas, ancillary issues such as pre-immigration trusts and foreign account disclosure pitfalls are issues that should be handled prior to relocating to the U.S.  Aside from the tax complexities of the EB-5 visa, another increasingly more common issue we see is whether the investment underlying the US visa is proper and legitimate — or is it too good to be true. Especially with the relatively recent indictment and conviction of Dargey (involving a complex EB-5 scam), here are a few things that pre-immigrants can do in preparing to invest in the United States.

EB-5 Knowledge is Important

As with anything in life, before making a significant financial investment, the non-resident alien has to do some deep research and due diligence to determine if the program is right for them and the nuances involving the investment protocols. If a promoter makes the process sound too good to be true, then chances are it is too good to be true. While having the EB-5 visa can lead to permanent residency and ultimately US citizenship if that is the goal, there are pitfalls along the way such as scam investments and other frauds to be cognizant of. It is important that the non-resident alien becomes educated on the tax implications since chances are they will become subject to US tax on their worldwide income and reporting of their global assets.

First, There is No Guarantee of Permanent Residency Status

One of the most important components of the EB-5 visa for many foreign investors is the idea that it will lead to them becoming permanent residents. While some EB-5 visa holders will eventually become permanent residents, there are absolutely no guarantees that a foreign national will get to become a permanent resident in the future. Therefore, if any promoter or other individual tells you that you are guaranteed permanent residency by investing in their fund, this is a major red flag because that is simply not the truth. 

Did You Conduct Due Diligence?

These days, promoters and other investment managers are selling all different types of EB-5 investments. They know how important becoming a permanent resident may be for you and ultimately obtaining US citizenship. Therefore, sometimes investors may have blinders on and become more willing to throw money at an investment believing it puts them on an automatic path to citizenship or permanent residency — without conducting their full diligence. Therefore, it is important that investors conduct extensive due diligence on the potential investment itself to try to affirm its legitimacy.

Regional Center vs Direct Investment

Another component of the EB-5 visa is determining what type of investment the taxpayer wants to make. With direct investments, taxpayers may have the opportunity to make a more lucrative investment, but it tends to come with more risk. That is not to say that the regional center does not come with any risks, but it is handled through a process in which it has already been vetted. Thus, overall while a regional center investment itself may not be as lucrative, chances are the investment itself is legitimate with less chance of it being a scam.

Worldwide Income & EB-5

The first thing that non-residents must be aware of from the US tax perspective is that the United States taxes US persons on their worldwide income. That means that once a person is considered a US person, they are taxed on their income whether it is sourced in the United States or abroad. There are three main categories of US persons: US Citizens; Lawful Permanent Residents, and Foreign Nationals who meet the Substantial Presence Test. The Substantial Presence Test is essentially a counting days test – and many EB-5 investors will become subject to US tax and reporting on their worldwide income by meeting the Substantial Presence Test.

Foreign Trust Ownership 5-Year Rule

When a non-US person becomes a US person and has contributed money or assets to a foreign trust within five years of becoming a US person, they are considered an owner of the trust relative to their percentage of ownership. For example, if an NRA had contributed 30% of the assets to a foreign trust within five years of having a US person, they would become subject to the ownership of that foreign trust to the degree that they invested in that foreign trust. This may result in significant US tax implications as well as reporting requirements on Forms 3520/3520-A.

Mismatch of Tax & Reporting Rules (Funds, Corporations, Real Estate)

One common issue that occurs often is that the EB-5 investor was not made aware of the different tax implications of becoming a US person under the substantial presence test. In addition to the foreign tax and trust rules indicated above, there may be other issues involving items such as PFIC for pooled funds (Mutual Funds, ETFs, etc.) located outside of the United States; real estate-related issues on matters such as Usufructs, and business interest complexities due to CFC and GILTI rules.

Pre-Immigration Planning is Important

In general, applying for and receiving an EB-5 investor is a big step towards obtaining US person status, but unfortunately due to various fraudsters and lack of clarity regarding the tax implications of becoming a US person, there can be significant financial consequences that the investor was not aware of. Potential investors should consider these issues carefully.

International Tax Law Compliance Specialists

Our firm specializes exclusively in international tax, including exit tax and expatriation.

Contact our firm today for assistance with getting compliant.

Partner Profiles

Mr. Sean M. Golding

Partner

Mrs. Jenny K. Golding

Partner

Schedule a Confidential Reduced-Fee Initial Consultation with a Board-Certified Tax Attorney Specialist

Address

930 Roosevelt Avenue, Suite 321, Irvine, CA 92620