Investment Visa have Hidden US Tax Implications
When a non-resident wants to travel to the United States and live for an extended period of time, one of the more common types of visas they may seek to acquire is an investment visa. There are various different types of investment visas, with some of the more common visas including the EB-5 and the E-2. Even though a person who travels to the United States on an investment visa is not considered a US Citizen or Lawful Permanent Resident, they may still have several IRS tax requirements depending on different factors and how long they reside in the United States over an extended period of time –– along with whether or not any exceptions or exclusions apply. Let’s look at five (5)important tax facts about non-residents traveling to the United States on an Investment Visa.
Substantial Presence Test
There are three categories of individuals who are typically subject to US tax on their worldwide income. The first category is US citizens; the second category is Lawful Permanent Residents, and the third category is residents who may not be permanent residents of the United States — but who meet the Substantial Presence Test. The Substantial Presence Test is essentially a counting-days test based on the number of days the taxpayer in the United States in the current year, as well as the two prior years using a specific ratio. If the taxpayer meets the Substantial Presence Test, it means they are taxed on their worldwide income, including certain foreign income that was never repatriated to the United States.
Foreign Income (Even if Exempt)
One important tax aspect for foreign nationals who meet the Substantial Presence Test is that even if their income is considered exempt in the foreign country that is sourced, it is generally still taxable in the United States. For example, if a person is a resident in the United States on an investment visa and generates $100,000 a year in interest income in a foreign country and that foreign country does not tax that category of income, it is still taxable in the United States – unless an exception or exclusion applies. Moreover, since that income was not taxable in the foreign country there are presumably no foreign tax credits to offset the US tax implications.
Foreign Account Reporting
When a person is considered to be a US person for tax purposes under the Substantial Presence Test, they are also required to prepare and file various international information forms, such as FBAR and FATCA Form 8938 — in order to report the maximum account and asset values of their global investments.
PFIC refers to Passive Foreign Investment Companies. There are certain types of foreign investments, such as foreign mutual funds or ETFs that are categorized as PFICs specifically for US tax purposes. When a foreign investment is considered a PFIC, there is a negative tax implication, which generally culminates with passive income that would otherwise be taxed in the 15 or 20% tax bracket being taxed at the highest tax available (37%) – in addition to interest charges. Foreign Residents who meet the Substantial Presence Test will want to consider re-working their foreign investments and/or determining whether an election such as a QEF or MTM may benefit them.
Closer Connection Exception
Even if the Taxpayer meets the Substantial Presence Test, they may be able to avoid these harsh taxation and reporting implications if they can show that they have a closer connection to a foreign country or countries. If the taxpayer is able to establish the Closer Connection Exception, then they will be taxed as a non-resident and then only taxed on their US-sourced income.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the income tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
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