Chinese investors continue to show unprecedented interest in the EB-5 program, yet they face several country-specific challenges in successfully making their investments. As with all investors, USCIS requires Chinese applicants to document the lawful source of their investment funds and to trace the same. In essence, an investor bears the burden of proving the fund’s lawful origin and then tracing the funds from that source to the final destination as a capital investment. Chinese investors face unique obstacles in meeting this burden that, fortunately, can be readily overcome with careful planning.
Under current laws, Chinese citizens may purchase only $50,000 U.S. dollars annually for international money transfers. As such, it is virtually impossible for a Chinese investor to individually meet the $500,000 threshold for an EB-5 investment. Fortunately, investors have developed several alternatives to enable them to make the investment within the current legal framework. Most investors entrust ten friends or family members to purchase U.S. dollars and then transfer the funds to the investor’s U.S. bank account. Other investors deposit the investment funds in the China-based account of a trusted third party. In turn, the third party transfers funds from their own Hong Kong-based account to the investor’s U.S. account. In either scenario, the investor must document all transactions beginning with transfers from the account in which the funds originally accumulated and ending at the final investment in the new commercial enterprise. Investors should also provide affidavits from intermediaries to account for resulting gaps in the trace of funds.
Issues in Documenting Lawful Sources of Funds:
Tax returns: Regardless of the source of funds, USCIS expects investors to submit five years of tax receipts when filing a Form I-526 petition. Chinese tax laws require employers to deduct taxes on behalf of employees and do not require employees to file annual tax returns. Generally, employees can request tax receipts from employers, but investors run into issues when previous employers fail to cooperate or have gone defunct. Further complicating things, tax receipts do not typically include bonus amounts, which may significantly exceed base compensation.
Salary: For high-income investors, salary and other compensation often provide sufficient funds for an EB-5 investment. Many companies, however, attempt to minimize payroll taxes by paying low base salaries and high bonuses. USCIS absolutely requires that an investor document sufficient lawful income to account and do not reference bonuses paid. To satisfy the USCIS requirements, the investor may also provide account statements showing the accumulation of that income in a bank account.
Retained Company Earnings: An investor using retained company earnings to fund her EB-5 investment must show that she had the right to access and distribute those funds. The investor should submit company formation and/or board approval documents as evidence of that right.
Loan Issues: Many Chinese investors secure loans to fund their EB-5 investments. Regardless of the loan type, an investor must prove that his loan is secured by his personal or real property for it to qualify as a legitimate source of funds. Failure to provide evidence that the loan has been secured may lead the USCIS to view the loan as a gift. Loans most frequently used by Chinese investors include:
Home Equity Loans: Investors must provide both loan origination documents, as well as proof of home ownership. Chinese laws require several certificates from different government authorities to complete the purchase of a home. Failure to obtain any of them may be viewed as a defect in ownership. Thus, an investor should provide all of the certificates to conclusively prove that she owns the property. An appraisal certificate may also help show that the loan is adequately secured.
Loans from Investor-Owned Businesses: Loans from closely-held corporations and other businesses are also acceptable sources of funds. An investor must demonstrate ownership of company shares, board of director approval and payments on the loan.
Gifts: Chinese parents often fund their children’s EB-5 investments as gifts. The giftor must show the lawful source of that gift in the same manner as an investor funding his own investment. The giftor should also make an affidavit explaining the purpose of the gift and whether the funds need to be repaid. Finally, note that China does not currently levy gift or inheritance taxes. A statement to that effect may help avoid a request for evidence from USCIS, which has recently started requiring gift tax receipts.
Thousands of Chinese investors navigate the EB-5 investment process annually, representing the more than 80% of EB-5 investors coming in to the U.S. Unfortunately, failure to understand and account for the abovementioned issues often results in requests for evidence and delays in application adjudication. Therefore, investors and those preparing their petitions should carefully document the lawful source of funds with an understanding of the unique issues they face.
By Kate Kalmykov and Bryan Flannery