EB-5 – Business Investment Visa

EB-5

What is EB-5 Immigrant Visa?

The 5th Employment-Based Immigrant Visa, more commonly known as EB-5, was originally created by the United States Congress’ Immigration Act of 1990. The Congress established the EB-5 Program to stimulate the U.S. economy through job creation and capital investment by giving foreign entrepreneurs the opportunity to permanently live and work in the United States. Immigrants who invest their capital in job-creating businesses and projects in the United States receive conditional permanent resident status in the United States for a two-year period. After two years, if the immigrants have satisfied the conditions of the EB-5 Program and other criteria of eligibility, the conditions are removed and the immigrants become unconditional lawful permanent residents of the United States. There are 10,000 EB-5 immigrant visas available annually.

 

There are two different pathways for an immigrant investor to obtain Permanent Residency through the EB-5 Program:

 

  1. the Traditional EB-5 Program; and
  2. the Regional Center Pilot Program.

 

EB-5 Requirements

To obtain a Permanent Resident Green Card through the traditional EB-5 Program, the investors must meet each of the following requirements:

 

(1)  the investor must directly invest or be actively in the process of directly investing at least $1 million in the enterprise or $500,000 in a targeted employment areas (“TEAs”);

 

(2)  the immigrant investor must take the form of a contribution of capital that has been placed at risk for the purpose of generating a return on that capital;

 

(3)  the capital invested must have been obtained through lawful means;

 

(4)  the investment must be made in a new commercial enterprise or a troubled business in which jobs will be preserved; and

 

(5)  the enterprise must create full-time employment for not less than 10 U.S. workers (except in the case of investments in “troubled businesses”); and

 

(6)  the investor must be actively engaged in the management of the enterprise, either through day-to-day managerial control or through policy formulation.

 

Targeted Employment Areas (TEAs)

The law gives USCIS flexibility to raise or lower the minimum investment amount. In high employment areas, USCIS can require a minimum investment of up to $3 million. “High employment areas” are defined as parts of metropolitan statistical areas that are not targeted employment areas and have unemployment rates significantly below the national average.

 

In targeted areas, the minimum investment can be lowered to $500,000. “Targeted Employment Areas” (TEAs) are defined to include rural areas (outside of a metropolitan statistical area or outside of a city or town with 20,000 or more people), or areas with an unemployment rate of at least 150% of the national average rate.

 

The immigrant investor may seek to have a geographic or political subdivision designated as a targeted employment area. To do so, the immigrant investor must demonstrate that the targeted employment area meets the statutory and regulatory criteria by submitting one of the following:

 

(1)  evidence that the area is outside of a metropolitan statistical area and outside of a city or town having a population of 20,000 or more;

 

(2)  unemployment data for the relevant metropolitan statistical area or county; or

 

(3)  a letter from the state government designating a geographic or political subdivision located outside a rural area but within its own boundaries as a high unemployment area. (A claim that an area is a high unemployment area is not sufficient if only a portion(s) of a geographic area or political subdivision is claimed to be a high unemployment area unless it is accompanied by a designation from an authorized authority of the state government.)

 

States may specifically designate TEAs provided that these designated areas satisfy USCIS requirements for rural or high unemployment areas. USCIS defers to state determinations of appropriate boundaries of a geographical or political subdivision that constitutes the targeted employment area. However, for all TEA designations, USCIS must ensure compliance with the statutory requirement that the proposed area designated by the state in fact has an unemployment rate at least 150% of the national average.

 

“At Risk” Investment of Capital

The EB-5 Program is intended to attract foreign investors who are willing to put their capital at risk in the U.S., with the hope of return on their investment, to help create jobs. Therefore, the investment must take form of a contribution of capital that has been placed at risk. This is to ensure that applicants are actually making legitimate investments in the U.S. economy, rather than merely creating the appearances of wanting to make an investment. While the law does not specify what the degree of risk must be, the entire amount of capital need only be at risk to some degree. For the capital to be “at risk” there must be a risk of loss and a chance for gain.

 

[Example]

 

  • If there is a redemption clause in a commercial enterprise’s agreement that promises or guarantees the return of a foreign investor’s investment, such assets will not be deemed as at risk.

 

  • A debt financing arrangement between the investor and the new commercial enterprise does not constitute an at-risk capital. While the investor may obtain the capital through a loan from a third party, such as bank, the investor must be personally and primarily liable for the indebtedness.

 

  • If the investor is individually guaranteed the right to eventual ownership or use of a particular asset in consideration of the investor’s contribution of capital into the new U.S. enterprise, such as a home (or other real estate interest) or item of personal property, the expected present value of the guaranteed ownership or use of such asset cannot be considered a qualifying contribution of at risk capital.

 

However, an investor may receive a return on his or her capital (i.e. a distribution of profits) during or after the conditional residency period, so long as prior to or during the two-year conditional residency period, and before the requisite jobs have been created, the return was not a portion of the investor’s principal investment and was not guaranteed to the investor.

 

Lawful Source of Funds

USCIS requires the immigrant investor to demonstrate by preponderance of the evidence that he or she is the legal owner of the capital invested and the invested capital was obtained through lawful means. The EB-5 investors should keep in mind that the USCIS will review not only the documentation showing the source of funds but also the documentation showing the path of funds (i.e. through wire receipts and bank statements) to make sure that the U.S. government is not granting permanent resident status to foreign investors who obtained their money illegally.

 

In many EB-5 cases, documenting the lawful source of funds can be the most time consuming part of the process, which requires extreme attention to detail and knowledge of business documentation. While there is no limit to the sources of funds that USCIS will consider lawful, a good rule of thumb is “the more the better”. USCIS will look at the submitted supporting documents as a whole when determining if the source of the investment capital is lawful.

 

For example, if the source of funds come from the sale of real estate, the documentation of the real estate sale is certainly required. If the real estate was purchased within the last several years, it is highly recommended to document how the investor obtained the money to purchase the real estate that has now been sold. If, however, the real estate was purchased 30 years ago, it may be difficult to provide such documentation. Likewise, for inherited money, if the decedent earned his or her money 50 years ago, USCIS may agree it is not possible to document the earning of those funds at the present time.

 

Let us now go over the most common types of documentation EB-5 investors use to show their source of funds. In documenting lawful source of funds, remember that the ultimate focus is on the person who originally obtained the funds. For example,

  • Evidence required to show an investment of funds from one’s salary such as salary:

o   The investor’s income tax return for the past five years;

o   A capital source statement;

o   Salary reports;

o   An income verification letter from a previous employer;

o   an investor’s job position during employment, and the amount of income earned;

o   An employment contract describing the rights and responsibilities of both parties;

o   Bank statements, showing salary deposits into an account for the past couple of years;

o   Evidence of property ownership if property was purchased with accumulated salary; and/or

o   Evidence of other assets an investor owns (such as CD, bonds, or stocks) should be included if an investor used his or her salary to invest.

  • Evidence required for an investment funds from one’s income generated from the operation of his or her business:

o   The business income tax return for the past five years;

o   A capital source statement;

o   Business registration documents and ownership;

o   Articles of incorporation, share certificates and other similar documentation

o   Business bank statement for the past couple of years.

  • Evidence required for investment funds from an inheritance:

o   Statement of the relationship between the investor and the deceased;

o   A death certificate;

o   Documentation of the investor’s receipt of inherited funds;

o   Certification of payment of inheritance tax, if any;

o   If there is a lack of documentation tracking funds from the deceased estate to the investor, a statement of thorough explanation of the relationship, the amount inherited, and other circumstances concerning the inheritance is required.

  • Evidence required for investment funds from a gift:

o   The gift-giver’s Income tax returns for the past five years;

o   A capital source statement;

o   A gift-giver’s statement, explaining the surrounding circumstances of the gift and why the gift was made; and

o   Other documents demonstrating the lawfulness of gifted funds.

  • Evidence required for investment funds from a loan (in this case, the lawful source of the lender’s funds must be documented, as well as the lawful source of any collateral put up by the investor for the loans):

o   The investor’s income tax return for the past five years;

o   The lender’s business registration record, business income tax returns (if the lender is a business) or personal income tax return (if lender is an individual) for the past five years;

o   The investor’s capital source statement;

o   Terms of the loan agreement and other documentation proving that the loan transferred from the lender to an investor;

o   Bank statement;

o   The lender’s capital source statement;

o   Other documents to prove the lawfulness of lender’s funds

  • Evidence required for investment funds from the sale of real estate:

o   An investor’s income tax return for the past five years proving funds in the purchase of the real estate;

o   A capital source of statement;

o   Bank statements showing earnings from the sale of the property;

o   Real estate purchasing contract and invoice;

o   Real estate ownership certificate;

o   Real estate appraisal report demonstrating the value of the property;

o   Tax certificate demonstrating the payment of taxes on the real estate;

o   Receipt of funds from the buyer to the investor;

o   Title transfer evidence;

o   Other documents showing lawful source of funds used to purchase the property;

o   If invested funds are derived from rental income of real estate, leasing agreement, bank statement showing deposit of rent and accumulation of rental income, your bank statements should be included with the application to demonstrate deposits of the rent into your account.

  • Evidence required for investment funds from the sale of business:

o   Deeds;

o   Closing statements;

o   Bank account statements;

o   Documentation tracing funds from the closing of the transaction to the investor’s individual account;

o   Copy of the business registration before the sale and immediately after the sale;

o   Letter from the accounting firm that represented the investor in the sale, indicating the sale, sale price, and the identity of the buyer;

o   Business financial information such as an evaluation from a certified accountant proving the value of the business.

  • Evidence required for investment funds from the sale of publicly traded stock or other types of securities such as funds, bonds and CDs:

o   Investor’s income tax returns for the past five years;

o   A capital source statement;

o   Bank account statement evidencing rescript of payment for the security;

o   Documents evidencing the account in which the security was held such as stock exchange, fund company, bank or other financial institution;

o   Documents demonstrating that the capital used to purchase the security was derived from a lawful source; and

o   Transactions statement of account where the security was held to demonstrate profits earned through the purchase and sale of the stock, fund, financial product or other security.

  • Evidence required for investment funds from the sale of privately held stock:

o   Investor’s income tax returns for the past five years;

o   A capital source statement;

o   Bank statements showing receipt of payment for the shares of stock;

o   Share transfer agreement from the original stockholder to you;

o   Share purchase agreement from you to the purchaser;

o   Stock transfer tax certificate;

o   Corporate business license;

o   Company’s financial statements;

o   Company’s articles of association;

o   Resolution of company’s shareholders’ meeting;

o   Company’s registration record;

o   If investor provided payment for the stock originally, he or she should include documents demonstrating that the capital he or she used to purchase the stock was derived from a lawful source.

o   lawful source of funds used to purchase the property

 

For-Profit Business Investment

The qualifying investment must be in (1) a new commercial enterprise or (2) a troubled business in which jobs will be preserved.

 

A new commercial enterprise

 

The EB-5 program defines commercial enterprise to include any for-profit activity formed for the ongoing conduct of business, including a sole proprietorship, partnership (limited or general), holding company, joint venture, corporation, business trust, or other entity which is publicly or privately owned.

 

There are four (4) different ways a new commercial enterprise can be established, including:

 

(1)  by creating a new business;

 

The EB-5 program defines a “new” enterprise as one that was established after November 29, 1990. Immigrant investors can invest the required amount of capital in commercial enterprise after November 29, 1990 provided the other eligibility criteria are met.

 

(2)  by buying and reorganizing or restructuring an existing business;

 

The EB-5 investor can restructure an existing business provided that a restructuring and reorganization is sufficient to create a new commercial enterprise. For example, buying an existing hotel and continuing to run after employing a few cosmetic changes to the décor and new marketing strategy for success cannot qualify as restructurings or reorganizations. On the other hand, examples that could qualify as restructurings or reorganizations include a plan that converts a restaurant into a nightclub, or a plan that adds substantial crop production to an existing livestock farm.

 

(3)  by expanding an existing business; or

 

An EB-5 investor can invest in an existing business, regardless of when that business was first created, provided that a substantial change in the net worth or number of employees results from the investment of capital. “Substantial change” is when an investor expands the net worth of an existing business or the number of employees by 40% so that the new net worth or number of employees amounts to at least 140% the pre-expansion net worth or number of employees. This means that if an investor chooses to expand an existing business’s workforce, he or she could be required to create more than 10 jobs.

 

(4)  by pooling

 

The multiple EB-5 investors may combine their amount of capital in one new commercial enterprise, provided that each immigrant investor invests the required amount of capital and creates at least 10 jobs each. All jobs created by a pooling arrangement will be distributed evenly among investors.

 

A Troubled Business

 

A troubled business is defined as a business that has been in existence for at least two years, has incurred a net loss for the 12 to 24 month period prior to the priority date on an EB-5 investor’s form I-526. This loss must be equal to at least 20% of the troubled business’s total net worth prior to such loss.

 

Job Creation

As noted earlier, the EB-5 Program was created to benefit the U.S. economy and help create jobs for U.S. workers. It is not enough that the immigrant invests funds into the U.S. economy but the investment in the new commercial enterprise must result in the creation of not less than 10 qualifying employees.

 

The two-year period of conditional residency in which the applicant must demonstrate job creation begins to run six months after the adjudication of the I-526 and petitioners should ensure that the business plan filed with the Form I-526 measures the number of jobs that will be created by the end of this two-year period.

 

Job Creation in Troubled Business

 

However, investments in troubled business do not have to create 10 new jobs, but the investor must show that the number of existing employees is or will be maintained at no less than the pre-investment level for a period of at least two years. Here, 10 jobs must be preserved, created or some combination of the two. For example, an investment in a troubled business that creates 4 qualifying jobs and preserves all six preinvestment jobs would satisfy the statutory and regulatory requirements.

 

For purposes of determining whether or not the troubled business has been in existence for two years, successors in interest to the troubled business will be deemed to have been in existence for the same period of time as the business they succeeded.

 

Definition of Full-Time Employment

 

An “employee” is an individual who provides services or labor in exchange for compensation. “Full time employment” requires a minimum of 35 working hours per week. “The qualifying employees” only include U.S. citizens, U.S. permanent residents, and other immigrants lawfully authorized to be employed in the United States, including conditional residents, temporary residents, asylees, refugees, and persons granted suspension of deportation. Non-immigrants (those with E, H, L, and other temporary worker visas) are “not” considered U.S. workers for this purpose.

 

Also, USCIS has interpreted the full-time employment requirement to exclude jobs that are intermittent, temporary, seasonal or transient in nature such as independent contractor or temporary construction job (unless construction jobs are expected to last at least two years). In addition, while each full-time slot can be filled by more than one person (i.e. two part-time workers with the same job duties may be combined to equal one full-time position), two strictly part-time positions are considered two separate part jobs and do not qualify under the investor preference (i.e. one as a receptionist and the other as a messenger cannot be combined to equal one full-time position).

 

Moreover, the investor and his or her family members are not considered as U.S. workers for the 10 full-time employees requirement. Investors are not required to hire 10 employees at the time of initial investment. They may provide a petition with a comprehensive business plan demonstrating the need for at least 10 employees within the next two years.

 

Creation of Direct Employment

 

It is important to note that while immigrant’s investment must result in the creation of jobs for qualifying employees, it must be the new commercial enterprise that establishes direct employment creation in the non-regional center context rather than indirect employment creation. This means that the new commercial enterprise or its wholly-owned subsidiaries must itself be the employer of the qualified employees who fill the new full-time positions.

 

As noted earlier, for traditional EB-5 cases, the required capital may be deployed into a portfolio of wholly-owned businesses so long as all capital is deployed through a single commercial enterprise and all jobs are created directly within that commercial enterprise or through the portfolio of wholly-owned businesses that received the EB-5 capital through that commercial enterprise.

 

In multiple investor situations, each investor seeking permanent residence must create 10 new positions which are directly created by the new commercial enterprise. For example, let us say that the immigrant investors seek to establish a hotel as their new commercial enterprise. The establishment of the new hotel requires capital to pay financing costs to unrelated third parties, purchasing the land, developing the plans, obtaining the license, building the structure, taking care of the grounds, staffing the hotel, and the many other types of expenses involved in the development and operation of a new hotel. The immigrant’s investments can go to pay part or all of any of these expenses. Each immigrant’s investment of the required amount of capital helps the new commercial enterprise – new hotel – create ten jobs. The ten immigrants’ investments must result in the new hotel’s creation of 100 jobs for qualifying employees (ten jobs resulting per each individual immigrant’s capital investment).

 

Management of the Enterprise

Except in a regional center company case, investors are required to participate in the operational management of the invested enterprise, either (1) through the exercise of day-to-day managerial responsibility or (2) through policy formulation. While it is not enough that the immediate investor maintain a purely passive role in regard to his or her investment, the rules permit the investor to meet this requirement by evidence that the investor is taking a managing position participating in the decision-making process (i.e. a corporate officer or holding a seat on the board of directors) or being a limited partner in an LLP. In some cases, the participation requirement can be waived.

 

In addition, it is important to recognize that the EB-5 program has no requirement for the type of invested enterprise. Corporations, limited liability companies and limited partnerships are all acceptable. However, the choice of business type is very important for tax and management reasons. USCIS excludes corporate and other non-individuals as an investor from the EB-5 category. However, it is perfectly acceptable for multiple investors seeking EB-5 status to join together as long as each investor infuses the requisite amount of capital into an enterprise and each investment creates at least 10 full-time positions.

 

Business Types

 

Businesses can take many different forms under U.S. law. There are many different factors that influence a business’s decision to take on a particular form. The organizational structure of a business can affect its success.

 

There are three types of business entities commonly associated with EB-5 petitions:

 

  1. Corporations

 

A corporation exists as its own legal entity apart from the individuals involved in the corporation. A corporation is its own “person” and is responsible for its actions. A corporation is subject to “double taxation,” which means that the profit is first taxed at the corporate level (i.e. the corporation pays taxes on whatever profit remains within the company) and then again at the personal level (i.e. individuals must also pay income taxes on their earnings). Typically under this structure, the corporation is itself responsible for its debts and liabilities and corporate officers and shareholders cannot be held personally liable for the actions of the corporation. Additionally, ownership of corporate stock may be freely transferred by sale or by gift, subject to certain corporate restrictions. An incorporated business may buy, sell, and hold property under the corporation name and enjoy unlimited life, and the business remains unaffected by the death of a director, officer, or shareholder.

 

  1. Limited Liability Companies

 

A limited liability company (LLC) exists as a separate legal entity. LLC combines some of the advantages of both partnerships and corporations. One of the major advantages of an LLC is that LLC does not pay its own taxes and individual members pay taxes on whatever profits they earn. Additionally, while LLC can have only shareholder, there is no limit to the number of shareholders that can exist in a LLC structure. LLCs can exist indefinitely and members of an LLC can leave without jeopardizing its legal status. LLC can be managed either through “member management,” in which all members of the LLC have a say, or through “manager management,” in which members appoint a manager to operate and direct the business. Many states have implemented “franchise taxes” for LLCs which serve as fees to the company for the limited liability and flexibility they enjoy.

 

  1. Limited Partnership

 

A limited partnership is established when two or more individuals join together to form a business by contributing capital, property, labor or skills in exchange for part of the profit or losses of a business. In limited partnership, there is usually only one general partner and one or more limited partners with limited duties and liabilities. In this structure, the general partner(s) have full management responsibilities and control daily business functions. The limited partner is typically a passive investor who cannot make any business deals on behalf of the LP. Since limited partners are not allowed to play active role in the business, their income is not considered “earned.” Therefore, while limited partners can earn profits from their share of the partnership, they get to enjoy the tax benefit of avoiding double taxation on their profit. However, partners are personally liable up to the amount they invested in the business and not all partners share liability equally.

 

To show that the immigrant investor is or will be engaged in the exercise of day-to-day managerial control or in the exercise of policy formulation, the immigrant investor must submit the following:

 

(1)  A statement of the position title that the immigrant investor has or will have in the new enterprise and a complete description of the position’s duties; or

 

(2)  Evidence that the immigrant investor is a corporate officer or a member of the corporate board of directors; or

 

(3)  If the new enterprise is a partnership, either limited or general, evidence that the immigrant investor is engaged in either direct management or policy making activities. If the petitioner is a limited partner and the limited partnership agreement provides the immigrant investor with certain rights, powers, and duties normally granted to limited partners under the Uniform Limited Partnership Act, the immigrant investor will be considered sufficiently engaged in the management of the new commercial enterprise.

 

Regional Center

Creation of the Pilot Program

Congress began noticing the stagnant result of the program which failed to attract many investors in the first few years. In an effort to encourage more foreign investors to apply for EB-5 visa program, Congress originally created the Immigrant Investor Pilot Program (“Pilot Program”) in 1993, which was supposed to end in March 2009. However, that date has been extended several times, most recently until September 30, 2015. The Pilot Program set aside 3,000 “Regional Center” visas per year for aliens who invest in commercial enterprises affiliated with Regional Centers.

 

In practice, the majority of EB-5 investments have been made through the Regional Center program. Approximately 90-95% of EB-5 investors utilize the regional center program. For example, of the 7,641 EB-5 Visas issued to investors (and their family members) in FY 2012, the vast majority (7,318) were issued to persons investing in regional centers located in target (rural/ high unemployment) areas. Also, the number of approved regional centers has increased in recent years. As of April 1, 2014, USCIS has approved approximately 480 regional centers operating throughout the country. (http://www.uscis.gov/eb-5centers).

 

What is Regional Center?

A regional center is an entity that has been approved by the USCIS to pool the investment of multiple EB-5 investors into qualifying job-creating businesses in the U.S. While a Regional Center may include entities run by local governments and state agencies, most of the Regional Centers are privately owned. While the Pilot Program retains all the major requirements of the traditional EB-5 program, an EB-5 investment through a Regional Center may take advantage of less restrictive job creation requirement which includes both direct and indirect jobs.

 

It is important recognize that, while commercial enterprise may create jobs indirectly through multiple investments in corporate affiliates or in unrelated entities, the investor cannot qualify by investing directly in those multiple entities. In other words, the investor’s capital must still be invested in a single commercial enterprise, which can then deploy that capital in multiple ways as long as one or more of the portfolio of business or projects can create the required number of jobs.

 

In order to obtain approval for participation in the program, interested Regional Centers must submit proposals using Form I-924 to USCIS with the supporting documentation (i.e. business plan, economic analysis, statement from principal of Regional Center, etc.) that:

 

(1)  describes how the regional center focuses on a geographical region of the U.S., and how it will promote economic growth through increased export sales, improved regional productivity, job creation, and increased domestic capital investment (note: The job-creating businesses must all be located within the geographic limits of the Regional Center, and for this purpose the area of the Regional Center must be clearly defined in a detailed map);

 

(2)  describes, in verifiable detail, how jobs will be created directly or indirectly;

 

(3)  provides a detailed statement regarding the amount and source of capital which has been committed to the regional center, as well as a description of the promotional efforts taken and planned by the sponsors of the regional center;

 

(4)  contains a detailed prediction regarding the manner in which the regional center will have a positive impact on the regional or national economy in general;

 

(5)  is supported by economically or statistically sound valid forecasting tools, including, but not limited to, feasibility studies, analyses of foreign and domestic markets for the goods or services to be exported, and/or multiplier tables.

 

 

 

Investments Capital in Regional Centers

There is a major misconception that the minimum investment amount required for a Regional Center is $500,000. In fact, the investors in regional center are subject to the same minimum investment requirement established for the traditional EB-5 program. For example, the investors in regional center must still meet the minimum investment requirements of $1 million in the enterprise that is not located in TEA or $500,000 for investment in TEA. However, most regional centers have been established in TEA to take advantage of the lower qualifying amounts of investment.

 

While the investors must still invest in a new commercial enterprise, this requirement is automatically satisfied by investing in an approved Regional Center, which will ensure that the new business entity it creates will qualify as a new commercial enterprise.

 

Formation of LLC and LP

The common scenario in the creation of Regional Center is that American business entrepreneurs interested in attracting EB-5 investors will first form a company, typically a Limited Liability Company (LLC). Then the Regional Center will usually form an additional business entity – a Limited Partnership (LP) – in order to begin accepting investments from foreign investors because it helps EB-5 investors satisfy several EB-5 requirements as shown below:

 

First, creating limited partnerships allow EB-5 investors to act as general partners which satisfy the active management requirement, despite relatively minor involvement in the day-to-day management of the business. Therefore, simply making the investment in the Regional Center project is enough to satisfy this active management requirement. Note that most of the foreign EB-5 investor’s two primary goals are to obtain a green card for themselves and for their family members and to make a sound investment that, at the very least, provides a return of their principal investment at the end of the required period. Therefore, those passive investors who are not interested in starting or managing a business in the U.S. for the long term are likely to invest in Regional Center projects.

 

Second, as in a traditional EB-5 program, the investor’s funds must be put “at risk” to show that the EB-5 application is made in good faith. As noted above, the “at risk” requirement prohibits EB-5 investors from loaning the money for project development. However, many Regional Center investment projects are structured as a loan and this is possible because the investor is “not” making a loan directly to the project. In Regional Center context, the investor makes an equity investment in a limited partnership created by the Regional Center, which then in turn makes a loan to the EB-5 project. In other words, since it is Regional Center that pools funds from investors and make loans to finance project and developments and investors do not make loans directly to the Regional Center, the investor is deemed to have made a qualifying at-risk investment simply by transferring one’s funds to a Regional Center.

 

 

Indirect/ Induced Job Creation

While a traditional EB-5 program requires that the new enterprise itself “directly” creates and fill 10 new, full-time employment positions, the Regional Center only requires that the investment “indirectly” create 10 jobs.

 

The main difference between the traditional EB-5 and the Regional Center EB-5 is that while the traditional EB-5 only counts the actual employees hired within the commercial enterprise the EB-5 investors chose to invest in, the Regional Center counts all the jobs that have been created indirectly or induced as a result of capital invested in a commercial enterprise affiliated with a regional center by an EB-5 investor.

 

For example, if an EB-5 project builds a mid-size hotel that is opened after about a year, the front desk, room service, chef, manager, security, waitress, and housekeeping positions would be considered positions directly created by the hotel. On the other hand, indirect jobs are held by people who work for the producers of materials, equipment, and services that are used in a commercial enterprise’s capital investment project, but who are not directly employed by the commercial enterprise – i.e. employees of the cement company that delivers cement for the pilings of a hotel under construction. Induced jobs are those jobs created when direct and indirect employees go out and spend their increased income on consumer goods and services.

 

It is important to recognize the main difference between the direct jobs and indirect jobs. In the above scenario where a mid-size hotel has created 50 maximum full-time workers, the maximum number of EB-5 investors who can invest $500,000 is 5 people, allowing the project to raise $2.5 million. On the other hand, where 200 jobs are indirectly created by the entities affiliated with a regional center’s hotel project, not only the total number of 20 jobs can be claimed at $500,000 each, but also the project can raise up to $10 million.

 

EB-5 Filing Process and Timing

STEP 1: Choose a Project or Select Regional Center

In the traditional EB-5 context, the investor will choose business he will be newly creating or purchasing.

In the Regional Center context, once the investor selects the Regional Center program, the investor and the Regional Center will both sign a nondisclosure agreement in order to protect both investor’s and Regional Center’s privacy.

STEP 2: Review Project with Project Analyst

It is critical that for the investor to have his or her project analyst perform a due diligence evaluation of the project.

STEP 3: Prepare EB-5 Supporting Documentation including Source of Funds

An investor will gather documentation showing where his or her investment funds came from which must be clearly traceable to its lawful source. Preparing the Source of Funds will generally take about 1 to 3 months. The investor from a country with currency regulations such as China or India, just the wring the funds may take up to a month or two.

STEP 4: File I-526

Once all the funds have been wired into project or Regional Center’s escrow account and all the Source of Funds documentation is completed, West Themis Law will prepare and file an investor’s I-526 petition with USCIS. These days the processing time for I-526 is at least 12 months before hearing back from the USCIS.

STEP 6: File for Adjustment of Status (I-485) or Apply for Consular Processing (DS-230)

Adjustment of Status (I-485)

If an investor is already in the U.S. and in valid status at the time of I-526 approval, he or she is eligible to apply for a greencard status without leaving the country. Investor may submit his qualified dependent’s I-485 applications at the same time. A qualified dependent is defined as a spouse and unmarried child under the age of 21. Generally, investors are not interviewed for I-485 in EB-5 case.

Consular Processing (DS-230)

If an investor lives outside the U.S., upon approval of the I-526, an investor must process his or her green card application through the National Visa Center (NVC) and then go through an interview process at the U.S. Embassy (or Consulate if there is one). Documents are submitted to the NVC, later sent to the foreign post and then reviewed again before an interview is scheduled, and this consular process will take longer than I-485. Once the investor successfully goes through the interview and his DS-230 is approved, he or she will get a visa stamp on his or her passport with an approval date. Note here that the investor and his or her family must enter the U.S. as permanent residents within 180 days of this approval date, and the date the investor enters the U.S. is the beginning of the conditional greencard.

STEP 7: Receive Conditional Permanent Resident Status

A two-year conditional green card will be issued and mailed to an investor and his or her family member(s). A conditional greencard holder enjoys all the rights, benefits and duties of a permanent resident holders.

STEP 8: File I-829 Removal of Condition and Become a Permanent Resident of the U.S.

The petition to remove condition on permanent resident status will be filed between 21 – 24 months after receipt of the investor’s conditional greencard.

For a traditional EB-5, this is when an investor must show the USCIS that he or she has in fact created 10+ full-time, U.S. jobs by showing payroll and tax records.

The Regional Centers must provide each individual investor who has filed an I-526 petition and invested in a project, all the records that prove to the USCIS that the promises made in the EB-5 economic report and business plan filed with the I-526 have been preserved for two years.

Return of Capital

Exit Strategy

As mentioned above, one of the ultimate goals of these EB-5 investors is to make a sound investment in the properties so that these properties can be converted into cash to repay the loan at the end of the required period. While EB-5 investments are at-risk investments and the return of the investment (ROI) is not a guarantee, most project developers would have an exit strategy in place. The following is the three most common exit strategies employed by the project developers to repay their EB-5 investors:

  1. Outright sale of the project property or asset to EB-5 investors;
  2. Refinancing of the EB-5 loan (in a Regional Center setting) and distribution to investors of the original investment amount and any return of the investment – i.e. 1% interest rate with the loan repaid in 5 years; or
  3. Use project to generate enough revenue to repay the loan.

It is, however, important to note that there is always a possibility of losing all or a part of the capital invested. This is why having an experienced project analyst review the project’s financial models and loan repayment plan is vital for EB-5 investors. By doing due diligence EB-5 investors will decrease the chances of investing in a project that may result in a little or no return of the investment.

Time Frame

Traditional EB-5

In case the individual investor makes an EB-5 investment directly into his or her own project without getting Regina Center involved, after the investor successfully obtains a permanent green card status, the time for exit of their investment will depend on market conditions. For example, if the market for whatever the equity interest is good, an investor should sell the project property or asset, and if the market is not good, an investor should wait. As a result, some investors who invest in a traditional EB-5 might be rewarded with a sizable profit after many years, almost doubling their principal. However, some investors who cannot wait for the market to improve and sell the property so early might end up losing all of their principal and recovering nothing.

Ex) An investor invests in a project with a promise to give an investor back his or her investment plus any additional profits when the project is successful.

Regional Center EB-5

Most EB-5 investments today are invested through Regional Center whereby the investments are structured as loan products and equity products with a maturity date just like other regular loans. Most EB-5 investments are 5 to 6 year term loans.

Ex) An investor invests in a project which takes an investor’s money to make loans to the project with a promise to pay an investor back in 5 years with some interest.

EB-5 Tax Issues

Worldwide Income Tax

Once EB-5 investors become a conditional permanent resident in the U.S. either through consular processing of their immigrant visa abroad or through adjustment of status to a conditional permanent resident (if in the U.S. in another lawful nonimmigrant status), investors will be subject to U.S. taxes on worldwide income. This includes income earned in the United States and income earned outside the United States. Additionally, investors will be subject to U.S. gift, estate, and generation-skipping transfer taxes.

The EB-5 investor who becomes a conditional permanent resident is subject to the U.S. Income Tax compliance annually, which includes filing the following:

  • Form 1040, report worldwide income;
  • Report of Foreign Bank and Financial Accounts (“FBAR”): If an EB-5 investor had a financial interest in or signature authority over at least one financial account located outside of the U.S. and the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year, an EB-5 investor is required to file Form TDF 90-22.1;
  • Foreign Account Tax Compliance Act (“FATCA”): If an EB-5 investor has financial assets valued in excess of $50,000, an investor must file Form 8938, “Specified Foreign Financial Assets” attached to Form 1040.

Foreign Tax Credit

However, there may be foreign tax credits on income that is taxed outside the U.S. if the U.S. has double income tax treaties with the investor’s home country. In other words, the application of foreign tax credit may prevent the same income from being taxed twice by both the foreign country and the U.S., and the taxpayers generally end up paying the higher tax rate of the two countries. The U.S. has an extensive network of bilateral income tax treaties, covering more than 65 countries. Note, however, that not all countries have income tax treaties with the U.S. Also, taxpayers are still required to report their worldwide income on their U.S. income tax returns.

[Example]

  • U.S. Federal Income Tax: If a U.S. tax resident paid a 40% tax in China on the rental income, and the U.S. tax rate was 35%, he would have sufficient foreign tax credit to offset his U.S. federal income tax.

 

  • U.S. State Income Tax: Every state has its own state income tax rules, and the most states including California do not allow foreign tax credits to offset state income tax (i.e. if an EB-5 investor moves to California, the foreign tax credit is not available to offset the California income tax, and he or she must pay California taxes regardless of how much income tax he or she paid in foreign country). If, however, an EB-5 investor moves to a state with no state income tax (i.e. Florida, Nevada, Texas, South Dakota, or Washington), he or she does not need to worry about state income tax.

 

 

 

 

 

 

 

 

 

 

Traditional EB-5 (vs) Regional Center EB-5

Traditional EB-5 Regional Center EB-5
Pros

  • Good for investors who wish to set up and run their own business (i.e. investors have more control over day-to-day operations).

 

  • No additional requirement to file I-924 petition to get USCIS approval of RC status.

 

 

Cons

  • The principals of the project have to prepare to bear all the costs associated with EB-5 project and petition.

 

  • Investors must submit all of the evidence by themselves, with the help of their immigration lawyer.

 

  • If business fails within two year period, investor could lose all invested capital.

 

  • The investor must show 10 direct jobs or possibly more than 10 jobs if expanding an existing business.

 

  • Investors must usually live in the same location as the enterprise.
Pros

  • Indirect and induced jobs are counted towards the jobs creation requirement. May utilize a formula to identify job creation, and the number of jobs created is usually almost three times greater than those created by traditional EB-5 investments.

 

  • RC will cover the costs to the project portion of the I-526 petition.

 

  • Investors will be provided with most of the EB-5 supporting documents prepared by the RC, certifying that the investor and RC meet all of the criteria set by USCIS.

 

  • Does not require the investor’s day-to-day management, nor does it require investors to live in the place of investment. Ideal for inactive investors or retirees who wish to live and/or work in the U.S.

Cons

  • If business fails within the two year period, investor could lose all invested capital.

 

  • Investor usually has no control over day-to-day operation, so bad for investors who are interested in running their own business.

 

  • Takes additional 9-12 months of USCIS processing time (in case investor files his or her own RC application I-924).

 

 

 

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