Ultra-high Net worth individuals’ Immigration to and Expatriation from the United States
10 September 2012
Posted by: Author: Elizabeth C Fojtu
Ultra-high Net worth individuals’ Immigration to and Expatriation from
the United States
Recently, with the announcement of Facebook co-founder Eduardo Saverin’s high
profile expatriation from the United States, the press has focused on a distinct
trend of the ultra-wealthy leaving the US to free themselves from the grasp of
the long arm of its tax authorities.However, we may be seeing the reverse trend
as well.Wealthy individuals, often from Asia, are seeking a new home in the
west. Although these trends may seem divergent and not easily reconciled, we may
argue that they are two sides of the same coin of taxation and human capital.
First and foremost, we must look at the interests of the ultra-wealthy all
over the world who are immigrating or expatriating.The list may be long or
short depending on the individual, but invariably will include taxation,
business and family as primary motivators.
Confiscatory taxation in the US is a strong motivator for a citizen to consider
expatriating from the US. Whereas most countries tax either due to residence or
source of income, the US is one of the few countries that exercises residence jurisdiction over its citizens and permanent
residents, meaning that no matter where a US citizen or permanent resident
resides, his worldwide income is taxable in the US. Additionally, and not often
discussed, the US imposes an estate tax on worldwide assets of the citizen. US
double tax treaties even contain a savings clause, which allows it the right to
tax its citizens irrespective of treaty benefits. For many ultra-high net
worth individuals, this is reason enough to attempt to disengage from the US,
although it may not be easily accomplished.
New rules were established under the US Heroes Earning Assistance and Relief
Tax Act (HEART), passed in 2008, which expanded already existing expatriation
procedures for US citizens and established more clear guidelines for individuals who wish to give up their
residency status.For this purpose, the facts and circumstances test is used to
determine residency.This act is relevant for US citizens and long-term
permanent residents and seems to have been designed to include green card
holders within the expatriation framework,which was previously limited to US
Terms for US expatriation
Not all long-term residents or citizens are considered ‘covered expatriates’ and
fall within the boundaries of the HEART Act’s definition. The individual wishing
to expatriate will be considered a covered individual if he meets any of the
1. There is a total net worth of $2.0 million or more. If the individual is
a joint owner, the entire value must be included in the calculation of total net
worth, or consideration evidenced.
2. The average net income tax liability for the past five years is greater
than US $151 000. If the individual files a joint tax return, the entire
tax liability is included in this calculation.
3. There is a failure to certify that such expatriation requirements are met
for the past five years before expatriation.
If the resident alien meets one of the three criteria above, a consequence
of giving up residency is an exit tax, a capital gains tax calculated on all
assets held by the covered expatriate, in part, by the mark to market rules.Property interest owned by the covered individual is deemed to be sold the day
before expatriation and this value is used to compute the tax.These
theoretical capital gains on the conjectural sale of the resident alien’s
worldwide property enjoy an exclusion of $651 000 in 2012, thereafter resulting
in an exit tax on the excess.In an unusual interplay between income and estate
tax rules, any property that would be included in the resident alien’s gross estate for
estate tax purposes is considered an asset to be valued for the mark to market
rule,essentially deeming the individual to have passed away upon exiting the
Timing is critical
In the case of Facebook’s Eduardo Saverin, timing meant everything. He
had already transferred his residence, for all intended purposes, to Singapore,
a low tax jurisdiction with no capital gains tax, and filed his expatriation
paper work before the Facebook initial public offering when he expected to
increase his already considerable wealth. By some estimates, his well-timed
expatriation may save him US $39 000 000 in taxes on his roughly 2% share in
However, this constitutes only 1% of his total overall wealth.As a result,
Saverin will still pay a large mark to market exit tax for the right to leave
the US tax jurisdiction, but future growth and resulting sale of Facebook shares
will not result in taxation in Singapore.
"This situation provides insight into a larger trend that has to do with
competitive tax regimes in the United States and a broader debate about
innovation and attracting human capital,” David Friedman, president and
co-founder of Wealth-X,told the Guardian newspaper in a recent interview.
Another reason to expatriate now, before a possible re-election of
President Barack Obama and the 2013 sunset of the Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRRA), more commonly known as the ‘Bush
tax cuts’, when many commentators speculate that US taxes will be raised, may
be the historically low capital gains tax rate of 15%.This cap on capital gains
tax may make the mark to market exit tax amenable for many ultra-high net
worth individuals.Conversely, the low capital gains tax and a lack of capital
gains taxon US stock for non-resident investors may make the country more
attractive to foreign wealthy immigrants.Furthermore, the already low long-term
capital gains of 15% in the US may be lowered even more through a double tax
Tax haven US
If the foreign national carefully plans to minimise US taxation, including
the use of foreign trusts created and funded before they enter the US tax
jurisdiction, and the creation of a corporate structure located in one of the
state tax havens (Delaware, Wyoming and Nevada being among the favourites), tax
efficiency may be maximised.A very handy tool available for domestic and
foreign use is the US limited liability corporation (LLC).As a result of
the check-the-box rules for corporations, an LLC or partnership may be treated as
a pass-through entity or corporation depending on the election made.
Furthermore, by utilising a triangular structure, an individual seeking the
shelter of the US for more than tax reasons,may be able to legally disengage
certain transactions from US taxation.There seems to be a trend in Chinese
deals,specifically with reverse mergers, whereby the buyer is a holding company
based in Delaware, the British Virgin Islands, or other tax haven, which in turn
controls the actual operations on mainland China.However, this structure complicates the ability of
US regulators to dig into the accounts of the resulting companies.
A new report by the UK Tax Justice Network on offshore activity cites the US as having garnered 21% of the offshore market, which has led one Chinese publication to call for more scrutiny of America as a tax haven. Irrespective of increasing international cries for more regulation, the Canadian Tax Court has determined that a Delaware LLC may be disregarded for tax purposes in the US, but still be a resident of a contracting state for treaty purposes.This led to branch tax relief in a hallmark Canadian case, making the Delaware LLC possibly one of the best international tax havens.
Due to a confluence of events, including an increase in personal wealth, a penchant for saving,and an appetite for a western lifestyle, the Asian and primarily Chinese, newly wealthy are prime candidates for immigration to the west, and particularly to the US.
The single-largest increase in individual wealth in the last two decades has arisen from the east,most notably, China. Its rate of savings far outpaces the western world due, in part, to the lack of social safety nets like unemployment and health and life insurance.
Wealthy Chinese may find it desirable to make such a move westward motivated by the social stigma in China against the newly rich.Other strong motivators for those who have fought their way through the communist system to accumulate real wealth include less pollution, better education and political stability in the west with the United States being the pinnacle.Getting a foreign passport is like taking out an insurance policy that allows one easy access in and out of China.For some Chinese nationals, the dream to leave for western countries, in spite of the economic downturn in much of the western world, is still alive and heightened by economic and social pressures.
Passports for sale
Many wealthy individuals from China are attempting to obtain permanent residency abroad to provide security in a stable political climate. Although their wealth was made in China, they seek benefits for their families outside of China.Most western countries have developed a system whereby a foreign national can ‘purchase’ residency by importing a certain amount of assets into the country and, typically, fulfilling certain other obligations.The US and Canada have well-established systems that are increasing in popularity among thesuper wealthy from Asia.
To participate in the immigrant investor programme, a wealthy foreigner needs to invest $1 000 000 ($500 000 in an economically depressed area) in an existing American business.Although this provides a fast track to green card status, the immigrant must still pass a background check and demonstrate that 10 jobs were either directly or indirectly created in the US venture.This may provide a perfect solution for a lack of domestic investment and the desire of wealthy foreigners to find stability and security in the United States.The Migration Policy Institute, a US think tank on immigration issues, identified that this programme is predominantly used by wealthy Chinese looking for that insurance policy.
America’s neighbour, the Province of Quebecin Canada, maintains a similar investor visa programme. In Quebec, the minimum investment of 800 000 Canadian Dollars into the province, which is returned after five years,guarantees the wealthy foreign immigrant a Canadian visa and the ability to apply for citizenship when applicable.The wealthy of Asia are responding, particularly the Chinese.In 2010 alone, China accounted for half of all immigrants entering Canada through the investor visa programme.
The reason this programme is so popular may be due to an additional trust strategy for foreign assets of the immigrant investors,allowing a five-year tax exemption.Whereas income sourced in Canada will be taxed in Canada, all trust investment income earned outside of Canada will not.After the five-year hiatus from domestic tax, the new Canadian citizen may move out of Canada and not face Canadian taxes as the liability to tax is based on residency.
Even though 10 000 US immigrant investor visas are available on an annual basis, only half are issued (a 2010 figure, which may have increased) resulting in an injection of US$2.5 billion to fuel the economy.The US may do well to step up its appeal to foreign investors through tax incentives, business opportunities and continued social and educational freedoms.This may serve to balance the flow of capital out of the US through expatriation by increasing the immigration of wealthy foreigners to jump-start a domestic economy sorely in need of help.
Source: By Elizabeth C Fojtu (TaxTALK)