(Author: Kate Kalmykov, Greenberg Traurig, LLP)
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
This article was co-written by Bryan Flannery.
