Technical Details for Family Members, Their Advisors and Attorneys
East West Path is responsible for ensuring that each family receives the overall results that they seek – US permanent residency. If the desired results are not achieved, our fees are refunded. We create business and immigration strategies. We can either work with a family’s attorneys and business, financial and tax advisors to develop business plans and execute visa strategies or provide the necessary advisors and services directly.
Our deliverable can be thought of as twofold:
1) a visa strategy and business plan crafted to support the family's visa strategy and
2) the provision, supervision and coordination of the additional services necessary to execute the family’s business plan and immigration strategy. This includes all visa filings, legal entity creation, financial statement preparation, tax planning and assistance with the financial arrangements for business operations.
Overall Visa Strategy
Most commonly, the visa strategy that we recommend to a family involves the initial use of a non-immigrant visa that leaves the door open for pursuing permanent residency at a later date. We are mindful of the need to maintain, establish and document a family's qualifying non-immigrant intent and intent to leave the US, as may be required.
Commonly, a qualifying Chinese family member acts as an executive or manager of a US business and uses an L-1A - Intra-Company Transferee visa to enter the US. The family member must have recently worked for the entity that will do or is doing business in the US or for an affiliated entity. Such employment must have been in an executive or managerial capacity for one continuous year, within the past three years prior to entry. Certain additional requirements are imposed upon entities that are starting to do business for the first time in the US (or have done business in the US for less than one year) -- including that the entity must have a physical location in the US. The L-1 visa for a manager or executive working for a new office will not be issued for more than a one year time period. After which it may be renewed.
The visa “petitioner” is the “qualifying organization” doing business and employing the executive or manager in the US. The qualifying organization (entity) must do business in the US and one other country either directly or through an affiliate.
Spouses and children may use L-2 visas to accompany a family member with L-1 status to the US and attend US schools. Accompanying L-2s are eligible for US work authorization and may independently enter and exit the US.
Extensions and Permanent Residency
Prior the expiration of the initial L-1, an extension of the visa will be filed. Extensions may be authorized in increments of two years. The maximum period of stay for an executive or manager on L status is 7 years.
After the extension of the L-1 visa is granted, the Chinese executive or manager’s original non-immigrant intentions may change. At a later date, usually no sooner than several months after their L-1 extension is granted, they may wish to pursue permanent residency. Often, they will qualify for an EB-1 C visa as a Multinational Executive or Manager.
The requirements of the L-1 Intracompany Transferee and the EB-1 C Multinational Executive or Manager are substantially similar. In order to pursue an EB-1 C, a person must demonstrate that they have been employed outside the US for one year (within the preceding three years), in an executive or managerial capacity with the same employer or an affiliate or subsidiary thereof. A petition for a multinational executive or manager must be accompanied by a statement from an authorized official of the petitioning United States business (employer) which demonstrates that the executive or manager worked for the same employer or a subsidiary or affiliate -- overseas for at least one year in a managerial or executive capacity within the three years preceding entry as a non-immigrant. The prospective United States employer must demonstrate that it has been doing business for at least one year.
The filing process for permanent residency tends to be relatively fast because a Labor Certification is not required. In other words, the qualifying organization does not need to show that there are no qualified U.S. workers for the position. Spouses and unmarried children derive permanent residency from the original family member using a mix of F-2, F-2A, and F-2B permanent resident visas.
Additional permanent residency for siblings, and married children can be initiated by qualifying family members after US citizenship is acquired.
Chinese Tax Considerations
Entity Level: An enterprise is resident in China, and subject to tax, if established in China or its place of effective management is in China. If the enterprise is created under foreign law, it will be subject to Chinese tax, if it has an “establishment” in China or alternatively derives income from China. Foreign enterprises subject to tax are taxed on all income effectively connected with the establishment. The standard enterprise income tax rate is 25%. Enterprises with new/high-technology status or formed or located in certain regions are subject to a 15% tax rate.
Credit for Foreign Taxes Paid: Foreign tax paid is creditable against Chinese tax on the same income, but the credit is limited to the amount of tax payable on the foreign income.
Personal Taxation: An individual “domiciled” in China is subject to individual income tax on his/her worldwide income. Taxable income includes income derived from employment, from businesses, leasing, personal services, dividends, and interest. Rates range from 3% to 45% on wages and salaries; from 5% to 35% on business income; up to 40% on personal service income. Leasing, dividends and interest are subject to tax at 20%.
Value Added Tax: VAT applies to the supply of goods, the provision of processing, repair or replacement services and the import of goods. The standard rate is 13%
US Tax Considerations
The designation of resident for tax purposes is completely separate from a person’s immigration status. A family member might qualify as a resident for tax purposes while remaining a nonimmigrant alien for immigration purposes. A nonresident files a special tax form (Form 1040NR), pays tax only on U.S. source income, is subject to special rates, and may qualify for treaty exemptions.
Conversely, a resident for U.S. tax purposes is generally required to follow the same rules and file the same forms as a U.S. citizen.
This requires reporting of worldwide income, rather than just U.S. source income. Once permanent residency is achieved, resident taxation follows.
A non-resident for immigration purposes may acquire resident tax status by meeting the substantial presence test. To meet the substantial presence test, a person must be physically present in the U.S. during a period of at least:
31 days during the current year, and
183 days during the 3-year period that includes the current year and the previous two years, counting:
- all of the days present in the current year, and
- 1/3 of the days present in the first preceding year, and
- 1/6 of the days present in the second preceding year.
A dual-status alien is both a nonresident alien and a resident alien in the same year.
Reporting under the Foreign Account Tax Compliance Act (FATCA), generally requires the reporting of all foreign bank accounts. Additional IRS international reporting including FBAR, Form 8938, 3520 (receipt of foreign gifts), 3520-A (foreign trusts), 5471 (ownership of foreign corporations), 5472 (US corporate ownership of foreign corporations), 8621 (ownership of passive foreign investment company interests), and 8865 (ownership of foreign partnership interests).
New US 2017 Tax Law Highlights:
Corporate tax rate permanently reduced to 21 percent from 35 percent, as of Jan. 1, 2018.
A 20 percent deduction for the first $315,000 of qualified business income for joint filers of pass-through businesses such as partnerships and sole proprietorships. For income above that threshold, the legislation phases in limits, producing an effective marginal tax rate of no more than 29.6 percent.
Exempts U.S. corporations from U.S. taxes on most future foreign profits, ending the present worldwide system of taxing profits of all U.S.-based corporations, no matter where they are earned. This aligns the U.S. tax code with most other industrialized nations.
The Chinese government maintains strict currency exchange and transfer controls. Limitations on the export of capital must be planned. We maintain banking relationships and can often assist families with non-traditional payment and financing arrangements, if called upon.
Cash Flow Considerations
Central to the visa strategy is that US business must support the position of manager or executive after one year. Therefore employment for subordinates must be created and in place at the one-year mark. The size of projected revenues, number of employees, their qualification, salaries etc are idiosyncratic to each plan. There are no hard and fast rules. The organizational plan must, however, demonstrate sufficient direct and indirect subordinates to make the business appear reasonably viable for a period of several years.
Normally a Chinese family member sits at the top (serves as the president, CEO, managing partner etc) of the US business’ organizational structure. The actual legal entity which conducts the business may either a new or existing entity. Foreign or US. The entity, however, but must be doing business in more than one country - directly or through an affiliated entity. Global tax, licensing, repatriation, cash flow and transparency considerations will often influence the final structure of the legal entities that is used.
The US business must pursue the regular, systematic, and continuous provision of goods and/or services. The goods and service be provided to any market in the world. The type of the US business matters less than its organizational structure (for purposes of our program). Experience suggests that the business will either be: A) a branch of an existing Chinese business, B) a US start-up (new/de novo business line) or C) a portfolio management company.
Cash flow must be carefully planned, along with the creation of pro-forma financial statements. The balance between payroll costs and net revenue generation will determine the size of the family’s investment that is necessary to support the business plan. Estimating the amount and timing of capital necessary to obtain the family's objectives is a key component to overall success. We normally counsel families to be prepared to invest at least $300,000 or RMD $1,950,000 for a period of 18 to 24 months. The actual amount of investment, however, can vary widely depending on the family’s financial goals, risk tolerance, period of investment etc.
Staffing and Payroll Modeling
Once EWP is engaged, we begin financial modeling with the family and its advisors in earnest. One of the first steps is to model what the US business’ staffing and payroll will look like during the first year and at the conclusion of the first year. This is important because the business must support a manager or executive position at the end of one year. Demonstrating this is critical to obtain an L-1 extension and leave the door open for permanent residency.
Staffing Plan and Payroll Estimate
Cash Flow and Investment Capital Needs
In conjunction with staffing and payroll modeling, we begin modeling the cash flow that is necessary to support the entity's staffing plan. Cash flows can normally be broken down into three types of activities:
· Operating activities. These constitute the revenue-generating activities of the underlying business. Operating activities include cash received and spent to produce operating income. Operating income can be derived from sales, fees charged customers, rents, commissions etc. Operating expenses include the cost of raw materials, payroll, utilities, etc. We use the term net income to refer to the difference between operating income and expenses.
· Investing activities. These constitute payments made to acquire long-term assets, as well as cash received from their sale. Examples of investing activities are the purchase of machinery and equipment, long-term assets, rental property, plant and equipment etc. For purposes of our model we include program costs (cost of visas, legal costs to incorporate, tax and financial preparation fees etc.) in this category. We usually suggest a budget of $70,000 for these costs.
· Financing activities. These constitute activities that may increase or decrease the businesses operating capital. Activities increasing operating capital may be owner capital contributions, borrowings. Activities decreasing include the repayment of debt, payment of dividends or repayment of borrowings Examples are the sale of company shares, the repurchase of shares, and dividend payments.
What we are particularly interested in is determining how much capital that the family’s business expected to need to do business in the US, under various scenarios. In this example, before consideration of gross income expected to be generated, we would counsel the family to budget for a $310,000 capital contribution to the US business. The actual amount of capital contribution or investment needed, however, can vary widely depending on the family’s revenue estimates (and timing thereof), financial goals, risk tolerance, period of investment etc.