Top Ten Issues in Preparing EB-5 Sources of Funds for Chinese Investors

 

(Author: Kate Kalmykov, Greenberg Traurig, LLP)

 

1. Currency Restrictions: Chinese currency laws generally restrict its citizens’ exchanges for U.S. dollars to $50,000 per person per year. This makes it nearly impossible for investors residing in China to legally transfer sufficient funds to make EB-5 investments on their own. Thus Chinese investors commonly take a “friends and family” approach to making the investment. Another popular alternative is using a trusted third party in Hong Kong.
2. Tracing funds: When using the “friends and family” approach: In this approach an investor transfers $50,000 to each of ten friends who convert the funds to U.S. Dollars and then transfer the money to the investor’s U.S. account. Investors have the burden of tracing their investment funds through each of the transfers used to facilitate their investments. Therefore, an investor must trace every transfer from the investor to intermediaries, each transfer from the intermediaries back to the investor, and the transfer from the investor to the new commercial enterprise. Failure to document any step along the way is a red flag that often leads to an RFE.
3. Use of Third Party in Hong Kong: In this method an investor makes a payment to a third party’s mainland China account and the third party transfers his own Hong Kong-based funds to the investor’s account in the U.S. Investors electing this route must provide evidence of each deposit and transfer as well as an affidavit from the third party to fill in the resulting gap in the trace of funds.
4. Home Equity Loans: Home equity loans are generally acceptable as a source of funds providing an investor can evidence her ownership of the property used as collateral and proof that the investor can make payments on the loan from a lawful source. Note that Chinese home ownership is evidenced by several certificates from different government authorities. While one of the certificates may suffice, an individual in China must possess each of them to demonstrate conclusive ownership of her home. An appraisal certificate showing the home’s value is also useful in showing the legitimacy of a loan transaction.
5. Loans from Investor-Held Company: Investors may also use loans from their own closely-held corporations or other business ventures to finance EB-5 investments. An investor choosing this method of financing must document his ownership of company shares, approval by the board of directors and investor payments on the loan. Chinese investors frequently overlook board approval due to differences in China’s corporate governance culture.
6. Retained Earnings From Investor-Owned Business: Similar to loans from investor-controlled/owned businesses, an investor must provide evidence that she had legal access to the funds and the right to distribute those funds to herself. Board approval and/or company formation documents may be used as evidence in this situation.
7. Salary and Bonuses: Chinese companies often structure compensation as a low base salary coupled with large bonuses to minimize tax liability. Hence when obtaining proof of employment the document will sometimes state only the actual salary, with no mention of the bonuses. If salary is used as the source of funds, the USCIS requires investors to show sufficient lawful income to make the investment. Thus investors must be sure to document enough compensation to meet this requirement.
8. Tax Receipts: USCIS often sends RFEs for lack of five years of tax receipts. In China, employers directly deduct taxes for their employees and employees do not file annual tax returns. Tax receipts are typically available from the employer upon request, but employees who have changed employers several times over a five year period may run into issues, especially if an employer no longer exists. Also, in relation to item seven, tax receipts might show a salary much lower than actual total compensation.
9. Gifts from parents: Chinese investors often receive their investment funds as a gift from family members. In such a case, the investor must document the giftor’s source of funds, which will present all of the issues mentioned above. The giftor should also prepare a written affidavit declaring reasons for giving the gift, including whether the gift must be repaid. Note that the USCIS has recently begun to request proof of payment of a gift or transfer tax as well. Currently, however, China does not levy taxes on inheritance or gifts. Including a statement explaining relevant Chinese tax laws may help avoid a RFE on this point.
10. Securitization of Loans:  When using a home equity loan or company loan for EB-5 source of funds, it should be collateralized by the investor’s personal property, otherwise it will be treated as an unsecured loan (which is likely to be treated as a gift and then the gift must be sourced).  Therefore, loans from a company should be secured by the investor’s shares or portion of undistributed profits.  Loans on home equity should include not only a formal loan document, but also a mortgage document listing the investor’s personal property as the collateral.

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This article was co-written by Bryan Flannery.