cross border planning for inbound clients from china

Rowbotham& c o m p a n y l l p

Brian [email protected]

(415) 433-1177www.rowbotham.com

Los Angeles Chapter

May 8, 2014

CROSS BORDER PLANNING FOR INBOUND CLIENTS FROM CHINA


Table of Contents

Typical “One Stop Shop” Solution 1Foreign Ownership Structures for U.S. Real Property 2Dynasty Trust Structuring 3Solution # 1: Using a “Check-the-Box” Election 4Solution # 2: Thirty Day Liquidation 5U.S. Tax Residence Test 6EB – 5 Program Process 7EB – 5 Investor Profile 8Business & Investment Visas 9Dual Resident Taxpayers: Reg. § 301.7701(b)-7 10Dual Resident Taxpayers: Article 4 on Dual Residence Taxpayer 11Dual Resident Taxpayers: Article 4 on U.S. – China Treaty (1984) 12Dual Resident Taxpayers – Immigration Challenges 13Expatriation: Exit Tax – Section 877A 15Expatriation Act by Mistake 16Expatriation Notification 17Expatriation: IRS Notice 18Offshore Voluntary Disclosure initiative (OVDI) 19OVDI: Amend 1040 to 1040X / 1040NR 20Foreign Reporting 21Pre-Arrival Checklist 22Our Asia Practice Team 24


Typical “One Stop Shop” Solution

FP

BVI* 1

Properties Personal Assets

1

Bonds

BVI* 2 BVI* 4BVI* 3

Stocks

* British Virgin Island company


Top Federal Tax Rates

Operating IncomeBranch / Dividend Withholding Tax

Sale of Property - Capital GainFederal Tax Return Forms:

Estate Tax *

39.6% 43.4% 39.6% 35% 35% 35%- - - - 30% 30%

20% 23.8% 20% 35% 35% 35%1040NR 1041 1040NR 1120 1120F 1120

Yes No No Yes No No

CN

USRP

CN CN

USRPUSRP

U.S. Inc.

BVI Ltd.

U.S. Inc.

CN

USRP

BVI Ltd.

Foreign Ownership Structures for U.S. Real Property

CN

USRP

CN

USRP

IrrevocableU.S. Trust

2

IrrevocableForeignTrust

* Hybrid structures, using a combination of foreign corporations and partnerships like structures may provide single level of tax and estate tax protection.


Dynasty Trust Structuring

3

CN Parent

T1 T2 T3

BVI1 BVI2 BVI3

DT1 DT2 DT3

AssetsFBO

AssetsFBO

AssetsFBO

S1 S2 S3

U.S. U.S. U.S.

S1 S2 S3

U.S.Irrevocable

Trust

Funding

SummerHome

* * *

* Upon death of foreign father:- Corporate entities will liquidate, and assets will step up to FMV- Assets fund U.S. dynasty trusts.


Solution # 1: Using a “Check-the-Box” Election

FP

Foreign Corporation 1

Foreign Assets plus U.S. Securities

USP



.5.5

Election to treat as a disregarded

entity[Form 8832]

At date of death,

USP inherits two foreign corporations

Shares in Foreign Corporations (1) and (2) stepup to their FMV at date of death of FP

USP files Form 8832, elects to treatForeign Corporation 3 as a disregarded entity

USP can now liquidate (1) and (2) and will own allassets at their FMV

Limitation: Strategy does not work with U.S. real property

The election causes Foreign Corporation 3to be treated as being liquidated

Liquidation causes the assets inForeign Corporation 3 to step up to theirFMV as long as neither (1) nor (2) owns80% or more of (3).

If the election made within 75 days ofdate of death, liquidation of (3) is treated asbeing effective prior to death of foreign owner

4


Solution # 2: Thirty Day Liquidation

FP

Foreign Corporation

USP

At date of death:

USP inherits the foreign corporation with its basis stepped up to itsfair market value

Assets inside corporation will not step up

USP now owns a “controlled foreign corporation” [Section 957]

Sale of assets creates “Subpart F Income” = deemed divided to USP

Exception: There is no Subpart F Income if the CFC exists for lessthan 30 days [Section 951]

Within 30 days of death, liquidate the foreign company

The gain from the liquidation of the CFC is no longer taxableto the USP since basis of FC stock = FMV of stock

Question: Can the documents and liquidation be accomplishedwithin 30 days of the death of the foreign person?

5

Foreign Assets plus U.S. Securities


U.S. Tax Residence Test

6

• Present in the U.S. at least 31 days in the current year; and

• Present in the U.S. for 183 days or more according to a formula:

Year Days Multiplier2014 120 1 1202013 120 1/3 402012 120 1/6 20

180

• Exceptions: (1) Taxpayer has a closer connection to a foreign country

(2) If current year’s days exceed 182:only treaty tie breaker test will override residence

• Visas: H1-B, L-1, and other business or investment visas are generally not afactor for determining tax residence

(1) The substantial presence test met if taxpayer is:

(2) Lawful permanent resident status (green card)


EB – 5 Program Process

7

“Match.com” for Investors and Project Managers

CNInvestors

Independent Investment

and Advisory Firms in China

Sales & Seminar Events in

China

China-based Licensed

Immigration Consulting

Firms

Intermediaries and

Consultants

Regional Centers and

Private Projects

$

$

Beijing

Shanghai

Guangzhou

U.S.New YorkBostonHoustonLos AngelesSan Francisco July 19

Investors - Seminars – Trips to U.S. Projects evaluationsU.S. immigration lawyers Processing EB – 5 with USCIS [50% success rates]Securities law on U.S. & China Immigration lawyers, USCIS qualification of projects

Introductions Projects$

X

X

X

X

X

X

X

X

X


EB – 5 Investor Profile

8

U.S. Investing

GP

Investors Visa

Real Estate DevelopmentDebt or Equity Structures

Ltd P/S

$1 mm or

$500,000 [Regional Centers]

Status

- Green card issued [U.S. Resident]

- Family resides in CA

- Founder/spouse runs businesses in China

- Taxpayers subject to U.S. taxation on worldwide income


Employment byU.S. Company

Green Card

Business & Investment Visas

9

E 2 Investor EB–5

$1m / $500k

Green Card

L–1

U.S. OperatingCompany

X

CNCompany

U.S.Subsidiary

X

ForeignCompany

U.S.Corp

X Angels

IP

H1–B

Foreign Hire in U.S.

• U.S. affiliated company formed• Employee relocation

- 1 year employment in foreign country• Managerial expertise

• Substantial investment into U.S. Corp.- Cash- IP (software, patents)

• Talent• Business plan

• Employees• Quotas• Must not displace U.S. workers

• Investors.- China- S. Korea- India

• Creates U.S. jobs


Dual Resident Taxpayers

10

Reg. § 301.7701(b)-7Coordination with Income Tax TreatiesAbility to compute one’s tax liability as a nonresident

(a) Consistency Requirement. (1) Application. The application of this section shall be limited toan alien individual who is a dual resident taxpayer pursuant to a provision of a treaty that providesfor resolution of conflicting claims of residence by the United States and its treaty partner. A “dualresident taxpayer” is an individual who is considered a resident of the United States pursuant to theinternal laws of the United States and also a resident of a treaty country pursuant to the treatypartner’s internal laws. If the alien individual determines that he or she is a resident of the foreigncountry for treaty purposes, and the alien individual claims a treaty benefit (as a nonresident of theUnited States) so as to reduce the individual’s United States income tax liability with respect to anyitem of income covered by an applicable tax convention during a taxable year in which theindividual was considered a dual resident taxpayer, then that individual shall be treated as anonresident alien of the United States for purposes of computing that individual’s United Statesincome tax liability under the provisions of the Internal Revenue Code and the regulationsthereunder (including the withholding provisions of section 1441 and the regulations under thatsection in cases in which the dual resident taxpayer is the recipient of income subject towithholding) with respect to that portion of the taxable year the individual was considered a dualresident taxpayer.



11

Article 4: Dual Residence Taxpayers – Typical “Tie-Breaker” Rule

(a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests);

(b) if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;

(c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national;

(d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

Where … an individual is a resident of both Contracting States, then his status shall be determined as follows:



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Article 4: U.S. – China Treaty (1984)

Where … an individual is a resident of both Contracting States, then the competent authorities of the Contracting States shall determine through consultations the Contracting State of which that individual shall be deemed to be a resident for the purposes of this Agreement.


Dual Resident Taxpayers – Immigration Challenges

13

Filing a Nonresident Return

Filing a U.S. nonresident income tax return creates a rebuttable presumption the individual has "relinquished privileges of permanent resident status in the United States." See 8 CFR § 316.5(c)(2), which provides:

Claim of nonresident alien status for income tax purposes after lawful admission as a permanent resident. An applicant who is a lawfully admitted permanent resident of the United States, but who voluntarily claims nonresident alien status to qualify for special exemptions from income tax liability, or fails to file either federal or state income tax returns because he considers himself or herself to be a nonresident alien, raises a rebuttable presumption that the applicant has relinquished the privileges of permanent resident status in the United States.


Dual Resident Taxpayers – Immigration Challenges

14

Example of Legal Opinion Conclusion:

The filing of a nonresident return will not, in and of itself, result in the forfeiture of the green card. That said, U.S. resident status and the green card can be lost through certain conduct. The U.S. Customs and Border Protection agency examines returning U.S. residents to determine if they have abandoned resident status. Failure to return to the U.S. on a regular basis, extended absences from the U.S., employment abroad, and other factors may result in the government challenging the individual’s right to retain his green card.


Expatriation: Exit Tax – Section 877A

15

- U.S. Citizen or U.S. Green Card holder for more than 7 years, and

- Assets fair market value exceeds $2 million or

- Average taxes paid in each of 5 years exceeds $157,000 (2014)

- Exit tax exposure

(1) Indexed for inflation

(2) “Mark to market” approach since June 2008

(3) Expatriation requires filing of IRS Form 8854

Example:Fair market value of assets (worldwide) $10,000,000Tax basis <1,000,000>Exclusion – specific exclusion (2014) <680,000>Taxable 8,320,000

- Gifts/bequests to U.S. beneficiaries taxed at highest estate/gift tax rate.


Expatriation Act by Mistake

16

Filing 1040NR – Section 7701 (b)(6):

An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.


Expatriation Notification

17

• Section 6114 Implications?

• Treaty positions must be disclosed on Form 8833

• Is this notification ?

• If Form 8833 not filed, taxpayer is subject to penalty, but this does not prohibit claiming NR status

• What if U.S. person obtains a re-entry permit for extended absences?


Expatriation: IRS Notice

18

IRS Notice 2009-85

• Cessation of lawful permanent residency. Under section 7701(b)(6), as amended by the Act, a long-term resident ceases to be a lawful permanent resident if (A) the individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or if (B) the individual (1) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, (2) does not waive the benefits of the treaty applicable to residents of the foreign country, and (3) notifies the Secretary of such treatment on Forms 8833 and 8854.

• Notification spelled by IRS: Forms 8833 and 8854

• Risks: regulations issued contrary to this position


Offshore Voluntary Disclosure Initiative (OVDI)

19

Entering Chinese Nationals into OVDI

• Filing amended U.S. returns to report worldwide income

• Tax reporting in China

• Problems with documentation

- Income earned

- Foreign tax paid

• Position that some advisors take:

- China source income reported in China

- China source income excluded from U.S. return due to blockedincome, Rev. Rul. 88


OVDI: Amend 1040 to 1040X / 1040NR

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Reg. § 301.7701(b)-7(b)

An alien individual described in paragraph (a) of this section who determines his or her U.S. tax liability as if he or she were a nonresident alien shall make a return on Form 1040NR on or before the date prescribed by law (including extensions) for making an income tax return as a nonresident. The individual shall prepare a return and compute his or her tax liability as a nonresident alien. The individual shall attach a statement (in the form required in paragraph (c) of this section) to the Form 1040NR. The Form 1040NR and the attached statement, shall be filed with the Internal Revenue Service Center, Philadelphia, PA 19255. The filing of a Form 1040NR by an individual described in paragraph (a) of this section may affect the determination by the Immigration and Naturalization Service as to whether the individual qualifies to maintain a residency permit.


Foreign Reporting

21

• Foreign Bank Account Reporting (FBAR)

- FinCEN 114

• Other reporting requirements for U.S. residents and citizens

- Form 926 Transfer of assets to foreign corporations

- Form 3520 Gifts, inheritances and distributions orbenefits from foreign trusts/estates

- Form 3520A Ownership in foreign trusts

- Form 5471 Ownership in foreign corporations

- Form 8858 Ownership in foreign disregarded entity

- Form 8865 Ownership in foreign partnership- FATCA Form 8938 – Foreign financial assets

IRS Notice 2014-33 reporting Foreign FinancialInstitutions [FFIs] and non-FFIs.


Pre-Arrival Checklist

1. Consider establishing a foreign or U.S. trust for estate planning purposes. If assets are located in one’s country of origin, it may be necessary to consult with local counsel to coordinate legal and tax issues. The use of trusts may not work in civil law jurisdictions, e.g. France and Germany.

2. Determine if accelerating gift planning or contemplated sales of assets prior to entering the U.S. will save global tax.

3. Explore tax strategies that will step up the tax basis of assets to their fair market value so only appreciation after becoming a U.S. resident will be taxable in the U.S.

4. Review existing investment structures to determine whether there will be adverse tax impacts under U.S. tax laws.

5. Stock options, when exercised, usually generate ordinary income in the U.S. that is taxable at the top rate of 39.6%. Consider exercising options prior to arrival.

6. Review deferred compensation and retirement benefits, to determine how to efficiently access income minimum tax before and after arrival.

7. Foreign stock plan: Check whether vesting will be taxable after entering the U.S. 83(b) election time may have expired.

8. Plan your timing for arrival. Arriving in the last half of the calendar year will usually result in nonresident status for the full year. Foreign income and capital gains during the year should then be exempt from U.S. tax.

9. If you are being relocated to the U.S., consider whether you should be employed by the U.S. or foreign affiliate and whether you should be covered by social security in the U.S. or in your home country.

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Pre-Arrival Checklist

10. If you are in the U.S. for less than 183 days in the year, you may be exempt from U.S. tax under the relevant income tax treaty.

11. Transfer appreciated assets to a foreign trust or foreign company prior to arrival to avoid triggering tax will on the appreciation.

12. Expatriation: If after 7 years of residence as a green card holder, you relinquish your green card and leave the US, you may be subject to an exit tax on appreciated assets. To minimize this risk, you may wish to defer obtaining your green card if your stay in the US is not permanent.

13. Reporting bank balances and foreign investments is required under federal and state rules. The following IRS forms need to be filed:

- FinCEN 114 Foreign Bank Account Report – For balances in excess of $10,000- Form 3520 Receipt of any distributions or benefits from a foreign trust- Form 3520 Receipt of gifts or bequests over $100,000 from a foreign person- Form 3520A Annual return for a foreign trust- Form 5471 Return of U.S. person in certain foreign corporations- Form 8865 Return of U.S. person in certain foreign partnerships- Form 8621 Investment in a passive foreign investment company (e.g. foreign mutual fund)- Form 8938 New in 2011 – Statement of foreign financial assets

Caution: Many foreign holding structures may fall within these reporting requirements.Significant penalties will be assessed if appropriate reporting is not done.

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Our Asia Practice Team

Rowbotham & Company is a firm of accountants and international tax consultants with extensive experience serving individuals and businesses, globally in the high tech and cross border area. While based in San Francisco and the Silicon Valley, our clients are global companies and families with significant wealth accumulation and entrepreneurs and executives of private and publicly traded companies. We have been active with India-U.S. related cross-border business and family planning for over two decades. With clients in Mumbai, Bangalore and Delhi, and close personal relationships with the top law firms and financial institutions in India, our engagements involve both planning and compliance. Our practice includes extensive domestic and international income, gift, and estate planning services for business executives, entrepreneurs and investors from the Asia Pacific region, Europe and the Middle East. Our firm has given presentations and written extensively regarding EB-5 investor. Our services in this area include pre arrival income and estate planning the tax compliance services. Our corporate services include financial audits, due diligence for M&A, valuations and cross border tax planning. See additional information at www.rowbotham.com.

Phillip Lau, Esq.: ([email protected])Mr. Phillip Lau is a Tax Manager at Rowbotham & Company. His practice focuses on advising corporate and partnership clients with U.S. inbound and outbound transactions, multi-state sales and income tax planning, and federal tax issues. Prior to joining Rowbotham & Company, Mr. Lau worked in a public accounting firm, as well as served as head of U.S. tax operations for a multi-national energy supply and trading company. He is a licensed attorney in the State of California. Mr. Lau graduated from the University of California Berkeley with Highest Honors earning a Bachelor of Arts in Business Administration. He also received a Doctor of Jurisprudence from the University of California Los Angeles

HARRIET LEUNG, CPA: ([email protected])Ms. Harriet Leung, Partner of Advisory Services at Rowbotham & Company, heads the firm’s substantial Asia practice of high net worth individuals and works with many technology startup companies in multi-media gaming and social media. Ms. Leung has spoken at various tax and financial conferences in China, Hong Kong, Thailand and the U.S. Ms. Leung serves on the Board of Directors for the Hong Kong Association of Northern California where she recently organized and chaired a highly successful event on tax and immigration planning.Ms. Leung is originally from Hong Kong, and moved to the U.S. in 1991. She has a Bachelor’s degree in Accounting and an MBA in Finance with honors from Golden Gate University, and is a Certified Public Accountant in California

Peter Trieu, Esq., LL.M: ([email protected])Mr. Peter Trieu is a Partner at Rowbotham & Company. His practice focuses on advising clients regarding domestic and international tax planning and compliance. He also assists clients with their estate plans. His clients include entrepreneurs, multi-national families, high net-worth individuals and businesses. Prior to joining the firm, Mr. Trieu worked for several years as a Trusts and Estates attorney.Mr. Trieu is an attorney licensed to practice law in the State of California. He earned a Bachelor of Arts in Business-Economics with a minor in Accounting from University of California, Los Angeles. He graduated cum laude from University of California, Hastings College of Law, where he had a concentration in taxation, and earned a Master of Laws (LL.M.) in Taxation, with honors, at Golden Gate University.

BRIAN ROWBOTHAM, CPA: ([email protected])Mr. Brian Rowbotham, Managing Partner at Rowbotham & Company in San Francisco, advises executives and high net worth families on global tax planning. With over 35 years experience, he provides consulting services to real estate and investment funds, U.S. and foreign technology companies. Mr. Rowbotham is a frequent speaker to international tax associations and is a guest lecturer at the Haas Business School at the University of California, Berkeley. He was recently featured on the cover of the California CPA magazine for tax and business planning for U.S. companies expanding into Asia.Mr. Rowbotham has a Bachelor’s degree and MBA (with Honors) from the University of California, Berkeley, and is a Certified Public Accountant in California.

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cross border planning for inbound clients from china

Business

foreign assets

foreign reporting

death of foreign father

foreign ownership structures

foreign corporations

chinarowbotham c o

tax section

treatforeign corporation