Part 2: Pre-Immigration Tax Planning
Part 2: Pre-Immigration Disposition of Assets: Options
[IMPORTANT NOTE: The subject of global taxation is immensely complex and varies from jurisdiction to jurisdiction. The scope of this article is broad and does not constitute legal advice. Any individual concerned about global tax implications needs to discuss the subject in detail with qualified tax advisors in both their home country and in the foreign countries in which they are investing and/or considering as a future immigration destination.]
Although there are some isolated exceptions, a person does not become liable for taxation in a given country until they become a “tax resident” of that country. While getting U.S. residency automatically makes someone a tax resident, the U.S. has a “substantial presence” test which mathematically calculates how much time a person can be in the U.S. (and in what visa status) before becoming subject to U.S. taxation. Any individual who travels to the U.S. regularly and has any sort of investments in the U.S. must discuss this with their U.S. tax advisor to insure they fully understand the rules of the game.
For someone planning to immigrate, the simplest way to avoid future global taxation (whether in the U.S. or elsewhere) is to simply eliminate or reduce their taxable asset base abroad BEFORE he/she becomes subject to the new jurisdiction's tax scheme. Let's use the U.S. again as a convenient example:
Mr. X owns a factory with his brother in Vietnam. He also owns several homes which he rents out and raw land. He has applied for an EB-5 visa in the U.S. and knows that in several years, he will be immigrating to the U.S.
If Mr. X does nothing, when he lands in the U.S. in a few years as an EB-5 conditional resident, all of these assets will be declarable and taxable under U.S. law the moment he lands at the airport. That means that the income generated by the factory will be subject to income tax, as will the income generated by the property rentals. Moreover, if he decides after immigrating to sell any of the properties, land, or the factory, whatever profits he generates from any such transaction will be subject to U.S. capital gains taxes.
So what are Mr. X's options? There are many but the essential decision comes down to reducing his asset base before becoming a U.S. tax person. Perhaps he can sell his half of his company to his brother and sell the other properties. If he does so, we will be subject to whatever taxes apply in Vietnam, but the remainder of the profits from the sale of his assets will not be subject to US taxation as it will no longer be an asset but, rather, capital earned from activities which occurred BEFORE he was subject to U.S. law. Remember: a U.S. tax resident with money abroad needs to declare it when he/she brings it to the U.S., but it is NOT subject to U.S. taxation if it was generated before they became a tax resident.
In cases where the asset base is limited and where there is a long-term history u2013 for example, a factory which the family has operated for generations u2013 it may simply be best to plan for future global tax consequences not via liquidation but via informed restructuring. Using the above example, Mr. X could in theory reduce the US $150,000 annual paycheck he gets from the factory he owns with his brother by 1) selling his brother a portion of the business (and turning part of the asset into a CURRENT capital gain, which will not be taxable in the U.S.) and 2) accepting a lower new annual paycheck of $50,000. This would let Mr. X continue to be partner in the business, fully disclose that to the U.S. tax authorities, yet reduce his income tax substantially via the reduction of his annual paycheck (which was effectively “converted” via the non-taxable sale of part of his ownership stake to his brother BEFORE becoming subject to U.S. Taxation.
Accordingly, the most obvious way to avoid future taxation when immigrating is to ensure that the taxable foreign assets are liquidated BEFORE immigrating, but there are creative legal alternatives compatible with U.S. laws which are available to those who plan in advance.
Attorney José E. Latour