En Español  |  In Chinese Cross border investment in the United States (“private equity”) can provide a means for your family to live safely in the United States.  In this article, Mario Garcia, CPA, a Senior Manager in MFR's Tax practice, explores private equity investments as a means for finding security in the U.S.  Mario can be reached via email at mgarcia@mfrpc.com or by telephone at 713.622.1120.

Cross border investment in the United States (“private equity”) can provide a means for your family to live safely in the United States.  Private equity funds have been, and continue to be, a highly coveted vehicle for wealthy families, as well as for institutional and sophisticated investors to pool their funds in search of diversification, value, and high returns.  Because of U.S. immigration rules, they may offer an opportunity to get a coveted “green cards” for you and your family. 

South of the border, a particular investor class is emerging because of Mexico’s insecurity and unending horror stories related to drug-related violence. . In January 2011, the Mexican government unveiled a new database giving a total of 34,612 people killed over the past four years.  The movers and shakers and entrepreneurs from Mexico who have built their wealth and businesses in Mexico, across Latin America and in North America are ready to immigrate.  While drug violence can randomly affect the citizenry generally, kidnappings target the more affluent.

The violence that we are seeing in Mexico is bad for business, and prudent business owners want to hedge their options and build their businesses.  This is a secondary factor affecting immigration.  The Mexican economy suffered, and its currency declined against the U.S. dollar by 24% compared to 2006 average quarterly amounts.   According to The World Bank, GDP in Mexico has been growing more slowly since 2006, and it registered a 6.5% decline in 2009 or 92% of what the GDP was in 2006.

As you read this article, a new Mexican investor is on the phone talking from his office in Monterrey, Nuevo Leon with his U.S. immigration attorney about the alternatives available for him and his family to obtain a permanent residence in the United States.  In fact, many of his neighbors have already committed at least $500,000 in capital to find the security they need in Monterrey.  

Please note: MFR, P.C. strongly advocates that serious, costly tax traps exist for those that come to the United States without pre-immigration tax planning. Once you get to the United States, it is imperative that you seek qualified professional guidance to protect your investment and assure that your long-term residence applications are approved.

Even with legal family in the United States willing to sponsor a relative, many Mexicans seeking U.S. visas find it practically impossible to immigrate to the United States. Under the EB-5 program, wealthy investors have options, and Texas with its strong economy offers a continued source of opportunities for them to continue to put their money to work while operating in a safe and secure environment. 

New Mexico, Arizona and Texas have strong connections to Mexico – in each state over 60-percent of persons not born in the United States are from Mexico.  This can create a target market for some investment options, as well as a supportive community.  Texas offers a large, diverse population base and has several major cities.

Private Equity Option

This wave of insecurity has brought an additional source of "stimulus funds" to the U.S. economy through the EB-5 program available under the U.S. immigration laws. The EB-5 investment visa program has permitted almost 1,400 families immigrate to the United States in 2010, beginning the road to permanent residence.  Historically, many of the investors were from China, South Korea and other Asian countries.  Mexican and Russian visa seekers are now on the rise.  For Mexicans, the EB-5 visa has become more valuable since other business-related visas are becoming more difficult to acquire. Even with relatives in the United States, visa seekers born in Mexico (as well as India, China and the Philippines) have a fewer number of visas available to them under the Department of State quota system.

Under immigration law, 10,000 visas per year are available to investors who can create jobs in the United States and are willing to invest $ 1 million in capital or a combination of capital and assets.   (Spouses & children under 21 are also granted visas.)   If the job creating venture is in an area with high unemployment or a rural area (“Targeted Employment Area), the investment requirement falls to $ 500,000. 

To qualify, the foreign investor must submit a proposal to U.S. Citizenship & Immigration Service (“USCIS”) using Form I-526. A foreign visa seeker can submit a plan to begin an active business that will create at least 10 jobs.  (Financial information also needs to be submitted to establish the integrity of funds.) 

After approval, the investor can adjust their status and they will receive a “conditional “permanent residence for two years.  Before the expiration of the 2 year residence visa, Form 829 needs to be submitted to USCIS to gain permanent resident status.

Acceptance Rates:

An alternative to the traditional investment is to invest in a Regional Center (RC), organized by private groups or local jurisdictions that want to attract foreign investment or by local governments that want to create local jobs.  See here for more information.  RC are approved by the USCIS and they have an advantage that indirect jobs (i.e., the economic impact) can be considered.  Most RCs are structured as limited partnership, and the foreign investor is not responsible for day-to-day management.  On average the administrative fees of RC run average $35,000 to $55,000 a year.

U.S. Tax Issues

As this wave of new taxpayers enters the United States, we must share some of the intricacies they may find relevant as they become a U.S. taxpayer.

1. Pre-Immigration Planning
   
   Estate and income tax planning is best accomplished before an individual becomes taxable in the United States.  A coordinated effort among your Mexican tax advisor, U.S. immigration attorney and U.S. tax advisor is recommended.  Generally, the Mexican investor would be advised to analyze their income and estate tax situation on worldwide earnings and  assets applying U.S. tax rules.  Strategies are available to ameliorate U.S. taxes. 

2. Federal and State Income Tax Issues
   
   In a nutshell, the individuals whether resident or non-residents of the United States, may have both federal and state reporting obligations on any income earned in and outside the United States.  Most importantly, their U.S. business will face a plethora of new federal and state tax rules and regulations that have evolved by analyzing the substance over the form, a concept which in Mexico works in the inverse.  With it, continuous tax planning will be required to continue to minimize the effects of U.S. taxation the new businesses and individuals will face. 
   
   Through careful planning, a Mexican national may still avoid being classified as U.S. taxpayer through a mechanical day count rule or through the US-Mexico treaty. Again, planning is required.   
3. International Tax Issues
   
   Depending on the manner in which the U.S. business operation is set up, the Mexican operation may continue to be managed from the United States,. bringing in play transfer pricing regimes to understand where profits should be taxed and the source and ownership of intellectual property rights, careful application of tax treaties, and continued coordination with the management teams located in Mexico.  In addition, all foreign businesses need to be analyzed under U.S. anti-deferral tax rules. 
   
   Additionally, the U.S. business may face new reporting requirements for financial reporting purposes in consolidating and reporting respective investments in Mexico and elsewhere. 

Expanded EB-5 Opportunities -- Maybe

For several years, members of Congress have been suggesting ways to use immigration rules to expand American’s competitiveness.  Most recently, Senators John Kerry (D-Mass), Richard Lugar (R-Ind), along with Mark Udall (D-Colo) re-introduced legislation (S. 565) to expand the EB-5 program.  (Congress-Member Carolyn Maloney (D-NY) introduced a similar measure in the House (HR 1114).)  The genesis of this proposed law was the brain-child of a venture capital group -- www.startupVisa.com   It would offer several economical ways for owners of moderately successful offshore businesses and entrepreneurs to qualify for U.S. residence and establish business roots here.