EB-5 Source of Funds Considerations for Chinese Investors

EB-5 Source of Funds Reports are a challenge for some Chinese investors. The Berkeley Regional Center and Behring Companies have been working with EB-5 investors for over 3 years on these matters. We have in depth experience assisting investors and preparing EB-5 source of funds materials. The majority of our investors come from China and it has a special set of considerations for EB-5 investors. Below are some items to consider for Chinese EB-5 investors:

Chinese Currency Restrictions:

Currently, under PRC law, Chinese citizens are restricted to converting only $50,000 per year for self use. Inherently, it would take a single person 10 years to amass the minimum amount needed to invest in a TEA project. If the individual is married it would take the two people as a couple to achieve the minimum capital in half a decade or 5 years which is not much more efficient. One way that investors have derived a “work-around” is known as “smurfing” or the “friends and family” approach. It involves collaborating with 9 or more other individuals to amass a total of $500,000 plus various fees to invest in the EB-5 project. There is risk and increased difficulty in documenting the source of funds for USCIS. When you involve more individuals, more can go wrong. Also trusting almost a dozen people to faithfully accept the equivalent of $50,000 dollars and faithfully send it back probably has created some interesting stories. The process has now been clamped down on by the PBOC in order to discourage capital flight, money laundering and a minor attempt at alleviating downward pressure on the currency.

Is there a quick, convenient and legal solution to currency transfers?

The Shanghai Free Trade Zone legally hosts investment or investment management companies that have the ability to freely facilitate outbound investments as long as the proper documentation is presented to authorities. The transfers can be completed in as little as 5 business days, include a simple wire transfer and is completely legal.

When using the FTZ, there is simply only one incoming and outgoing wire transfer so the time and cost to generate the source of funds report goes down significantly. The FTZ is a clean method of outbound investment and relieves the investor of the stress that comes with coordinating large financial transactions among 9 or more individuals. In the case of preparing EB-5 source of funds reports, the total amount of transfers can exceed over 20 wire receipts among 9 or more people which creates a whole lot of paperwork and hourly charges from your accountants or lawyers who will ultimately prepare your documentation.

If the investor has resources offshore whereas a friend or known party will commit the currency transfer on their behalf, that documentation must be air-tight as well to prove to USCIS where the true source of funds comes from. This method is actually not permitted in China by the PBOC and is a violation of currency controls. The enforceability of the law by Chinese authorities is a different conversation altogether.

Behring Companies has successfully transferred multiple millions of outbound investment dollars in 2015 by legally using the Shanghai Free Trade Zone. Details on how this may be an appropriate channel for Chinese Outbound Investors can be obtained by contacting the Behring Companies at info@behringcompanies.com or Berkeley Regional Center at info@berkeleyeb5.com.

Methods in proving the EB-5 Source of Funds

So now that the investor successfully found a way to amass enough U.S. Dollars to place the EB-5 investment, what are the methods of proving the lawful obtainment of those EB-5 funds? The methods below display multiple alternatives but due to USCIS ever changing position and preference to treatment of source of funds reports, we suggest that anyone pursuing EB-5 investment and preparing an EB-5 source of funds report work with a qualified consultant experienced in these matters. However, here are a few general suggestions:

Home Equity Loans:

Home equity loans are generally acceptable as a source of funds providing an investor can evidence his or 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.

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. The Berkeley Regional Center has been working with investors for over 3 years assisting in the preparation of EB-5 source of funds reports and we can say that this is not our favorite method. 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.

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 him or herself. Board approval and/or company formation documents may be used as evidence in this situation.

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.

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.

Gifts from Parents:

This is a popular method. 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.

 

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.

 

Note: Source of funds can be a tricky issue but it has been solved by top quality consultants on behalf of thousands of investors over the past 25 years. For more information, contact the Behring Companies at info@behringcompanies.com or Berkeley Regional Center at info@berkeleyeb5.com

Reference: This article referenced items noted in a post by Greenberg Traurig authored by Kate Kalmykov and the link shows the article. http://www.eb5insights.com/2013/01/03/top-ten-issues-in-preparing-eb-5-sources-of-funds-for-chinese-investors/