The EB-5 and LRS combination for Indians

Background

EB-5 is an Immigrant Investor program (employment-based fifth preference visa) created in 1990 that provides a legal path for immigrants to become lawful permanent residents i.e. Green Card holders. Under this program, the individual needs to invest in a commercial enterprise / for-profit activity that also creates or preserves 10 full-time permanent jobs in the US workforce. The amount to be invested should be $1.8 million, or $500,000 if the location of the project is marked a ‘Targeted Employment Area’ (TEA). Investors can either invest directly or through Regional Centres. The program allows Regional Centres to take in EB-5 visa applicants’ investment and use it to fuel the local economy by creating and saving employment. The EB-5 Regional Centre pilot program, however, lapsed on June 30, 2021. Since the RC is a route that most potential investors take, these investors were left stranded and have been waiting ever since for the RC program to be reauthorized so that they can get back on track to getting their green cards.

What’s new

As a part of the Omnibus Spending Bill, the EB-5 Regional Center Program was passed and reauthorized by Congress in the first week of March 2022. It has been entitled the ‘EB-5 Reform and Integrity Act of 2022’. It is expected to bring in a huge wave of valuable foreign capital that can be then deployed to create appropriate jobs throughout the country.

The reauthorization has been done till September 30, 2027. The investment thresholds for investors have increased from $500,000 to $800,000 in TEAs and from $1,000,000 to $1,050,000 in non-TEAs.

Under the new law, TEAs are eligible for a lower-investment level and also a set aside. The reserve of visas set aside for TEAs includes- 20% for investors in rural projects, 10% for investors in DHS-designated high unemployment areas, and 2% for investors in infrastructure projects. Any unused visas from this 32% can be carried over to the following fiscal year.

The children of investors are now safeguarded from “ageing-out” after turning 21 if they remain unmarried and the principal investor is approved as a permanent resident. The principal investor is required to file a petition for the child to remain in the US no later than a year after the child’s conditional status has terminated.

A huge change is that Form I-526 and Form I-485 can be filed at the same time (concurrent filing). Earlier, investors had to wait for the I-526 to be approved.

EB-5 situation for Indians

India is one of the most rapidly growing markets for EB-5 applications. Approximately 90% of all applicants invest via the Regional Centres since it is a very simple and effective route.

Whether as a direct investor or a passive investor (RC route), investors need access to a sizeable amount of capital. This process gets complicated due to the $250k per person cap that the central bank, Reserve Bank of India, imposes on remittances outside India.

The Liberalized Remittance Scheme (LRS) is a part of the Foreign Exchange Management Act (FEMA), 1999, that lays down guidelines for outward remittances from India. It applies to all residents of India (adult and minor). Up to $250,000 can be sent in each financial year and there is no restriction on the number of transactions made. Funds can be remitted for purposes like education, travel and tourism, business trips, maintenance of close family, medical treatments, purchasing property, making foreign investments, opening and maintaining a foreign currency account, etc. Funds cannot be remitted for purposes of buying lottery tickets or banned magazines/books and the LRS is not available to corporates, partnership firms, HUFs, or charitable trusts.

How to remit funds for EB-5

While the $250,000 cap is fairly high, it is still insufficient for those looking to make an investment for the sake of an EB-5 visa. Considering this limit, it would take 4 financial years to get the required remittance from India.

Method 1 – To overcome this hurdle, many Indian investors get family members involved so that they can cross the minimum investment threshold as soon as possible and within the same financial year. The principal investor, along with 3 others, can make a remittance of $250,000 per head so that the total comes up to $1,000,000. This is also termed ‘clubbing’. Banks and agents are split in interpreting the issue of clubbing as it essentially goes against the intent of the LRS. A liberal way of interpreting this is that it benefits the immediate family of the principal investor.

The implications of this are also seen while documenting the ‘Source of Funds’. The US Citizenship and Immigration Services (USCIS) is concerned with knowledge about the legality of the funds and the transfer of the funds thereof. There is no exhaustive list of what is deemed as an acceptable source of funds. They could be land sale proceeds, accumulated salary, owner dividends, inheritances, etc. If the funds are a gift, then it is not sufficient to show the gift deed and the receipt; evidence of where the donor obtained the funds also needs to be shown. A problem here can arise if the funds were obtained by transferring ownership of agricultural lands, as proper documentation for these is not always available. This requires careful planning with a CFO consulting service that understands the requirements of both the Indian and the US laws and making sure the investor has a verifiable paper/electronic trail to make the process easier.

Method 2 – Another way to jump this hurdle is by taking advantage of the financial year dates. In India, the financial year begins on April 1st and ends on March 31st of the following year. The cap on remittances resets every financial year (and not every calendar year). Using this caveat, it is possible to make remittances in March, and then in April of the same year as they fall in different financial years. This way, an individual can remit $500,000 in a short span of time- sometimes as few as days. One need not wait an entire year or try to rope in three other family members. All one needs to do now, is to do the same with one other family/friend member. This would bring the total up to $1,000,000 in a short duration. Note here that only the spouse needs to apply for the EB-5 program and make the investment. The partner and the unmarried children automatically get the benefit extended to them.

For example- Mr. Kapoor can remit $250,000 on March 29th, 2022, and make a second remittance of $250,000 on April 4th, 2022. It would be perfectly legal to do so since March 29th, 2022 falls under FY 2021-22, and April 4th falls under FY 2022-23. This way his total remittance is now $500,000 in less than 10 days. His wife, Mrs. Kapoor can do the exact same transactions. Their total remittance would now stand at $1,000,000. This is convenient as the help of extended family/friends need not be taken here.

Those who are unmarried and/or are recent graduates can use the same March/April time frame with their parents to arrange for the necessary funds.

The taxation aspect of LRS and EB-5

Taxation needs to be considered right when one thinks of applying for an EB-5.

Banks and remittance companies are required to collect 5% tax at source (TCS) once the remittance crosses INR 7 lacs per year ($9190 per year). The 5% is deducted on the amount that is above Rs 7 lacs, and not on the entire amount. So if a remittance of Rs 15 lacs is made, then the tax is applicable only to the excess 8 lacs.

The tax is not an additional cost or tax on the fund transfer. Form 26AS reflects this as a tax credit that can be claimed against tax payable while filing income tax returns.

The EB-5 investments must be reported on the Indian tax returns as well (if the applicant is a resident Indian while making the application). Reporting here does not mean taxation – the amount invested will not be subject to taxation but the authorities must be made aware of the investments made.

Conclusion

If funds can be arranged and remitted to the US, then there are a lot of advantages that an EB-5 will bring to its investor and his family. Since H1B has been coming under increased political pressure and scrutiny, an EB-5 is the best way to secure one’s future and place in the US. It will let you travel and reside anywhere in the country, pay a significantly lower tuition fee in universities and also explore job opportunities without worrying about a work permit!