With the latest announcement by President Trump, the Indian EB5 market seems to be on fire. Amongst several confusions to sort, the burning issue for Indian families is the lack of liquidity of funds. The inability to generate traceable funds is the biggest deterrent for Indians to effectively pursue EB5. History has witnessed intense RFEs (Request for Evidences) issued on sources of funds from India, & one of the prime reasons to this is the ineffective presentation of the sources of funds in the petition, along with several limitations on the feasibility to conduct a thorough exercise on the sources of funds.
This article aims to share insights on a few options to generate liquidity, legally, & with some planning:
1. Hindu Undivided Family (HUF) – Many Indians have adopted HUF structures in their accounting ecosystem. This is mainly done to facilitate tax planning. For the purposes of documenting the SOF, the incomes & assets of HUF can very well be used. HUF is widely used as a platform to book rental incomes, on assets of HUF, and also frequently used to account for agricultural income. Some joint families use HUF as a vehicle to build their investments. Whatever the reason be, most incomes and asset classes of HUF would qualify as a valid SOF.
The channelization of funds from HUF to the individual who is filing for EB5 is critical here. This should be worked out keeping in mind the extant tax regulations. Generally, if the HUF made a distribution of funds to Karta, there would be zero tax liability. This makes the distributions from HUF an effective tool to generate whatever liquidity one can. It is important to hire a Chartered Accountant to prepare a cash flow statement for incomes of the HUF, so that they can be properly presented considering the USCIS requirements for it.
2. Loans from Friends & Relatives – USCIS does not prohibit a loan per se; doesn’t matter whether it came from a friend or family. However, RBI has a restriction on remittance of the borrowed funds outside India. The extant RBI regulations permits a non-resident Indian to borrow from a resident individual, but mandates (not optional) the amount to be credited to the NRO (non-resident ordinary) account of NRI. In other words, the objective of the borrower, NRI, ought to be using those borrowed funds in India, and not for remitting them overseas for any purpose, be it an EB5 investment or otherwise.
The moot question here is of RBI regulation, it is not material whether the loan is secured or unsecured. EB5 investors often tend to get in the loop of secured vs unsecured, but that has no relevance from an Indian view point because loan is a loan from an RBI stand-point. The typical requirement of USCIS to demonstrate source of fund of the lender will still hold true, but even if one were to demonstrate the trail thoroughly, i.e. 100%, the result would still be a violation of RBI regulation. One may be successful in bringing those funds out to USA, through one or the other way, in terms of navigating with the bank representative, but that does not legalize what is illegal. The law in India is very clear that funds borrowed by an NRI should not be remitted outside India. You can obviously work with your EB5 consultant in India to identify legal solutions to fix issues.
3. Sale of Stocks & Mutual Funds – Systematic Investment Plans (SIPs), MF holdings, Stocks, Bonds, Liquid Funds, are few of the investment classes that can generate immediate liquidity. Long term capital gains tax, as of the date of publication of this article, is 12.5%. which is applicable on sale of listed stocks held for more than a year, whereas short term capital gains tax is 20.0%, which is applicable on listed stocks held up to a year. The good thing for any Indian EB5 applicant is that the capital gain tax liabilities, LTCG or STCG, arising on remittance, can be off-set against TCS levied on foreign remittances. In other words, the requirement to pay quarterly tax / advance tax, would get off-set with TCS. This is seldom known to applicants.
4. Immoveable Properties – Given the huge amount of investment of US$ 800,000 in EB5, naturally, sale of an immoveable property would be the prime source to fund the investment. Needless to mention, even after some initiatives by the Government to increase valuation, as benchmarked for stamp duty, the parallel economy in real estate transaction is prevalent. This compels an EB5 investor, or his family in India, to opt for a loan by mortgaging the asset. The catch here is that borrowed funds would not be permitted by RBI for deploying overseas. This makes the situation tricky on both ends. Your Chartered Accountant, who understands FEMA & the overseas regulatory requirements, may be able to guide on what can be done legally. It is extremely important to note that violating any law in India is not even the last thing to do.
5. Rental Incomes – Rental incomes are a good source of fund for an EB5 investment. Your CA can attest your rental incomes, and prepare a cash flow statement across the tenure of yield. The property need not be owned by the EB5 petitioner only, it can be owned by any of the family members who is willing to make a gift to the EB5 petitioner. Do note that unlike USA, where an individual can take tax-free gifts from their friends & family, in India, only gifts from specified relatives are tax-free. So, the question of acceptability is not just from the USCIS standpoint, but also apropos tax.
6. Partnership firms – Majority of the businesses in India, small or medium sized, irrespective of the type of business, is conducted under a partnership. It does not matter whether the partners are family members, or outsiders. For legal purpose, a partnership firm partakes a common nature with same underlying modalities. For USCIS purpose, in terms of accounting the fund, a partnership firm within the family would be beneficial as the potential of substantiating the liquidity to fund is wider.
7. Private Limited Company – From a third-party view point, a private limited company structure (akin to the word corporation as widely used in the States) sounds to be a plausible option. It sounds like the best bet when attorneys talk to their clients having funds in India, but actually it is not. From USCIS view point, a corporation sounds great, because the legal record is well maintained. Unlike partnership firms, and proprietorships, corporations have a way more streamlined regulatory system in India. So, more documents are available, and from a presentation perspective also, it is easy for the person drafting the sources of funds. However, the challenge lies in the underlying tax effect. The profits of a private limited company in India are already taxed, in the hands of that company. When, the company distributes it to the shareholders, dividend, then that is again taxable. This makes distributions of profit from a private limited company totally impractical for EB5. One can attempt to structure the cash flow and aim to utilize it which is lawful & compliant.
8. Public Provident Fund Account (PPF A/c) – Most Indian nationals have funds accumulated in PPF schemes. For those who are not from India, & not aware about PPF, the closest match of explanation is 401K. Both are retirement saving instruments, but widely differ in modalities. The good thing is that withdrawals from PPF are not linked to retirement, unlike a 401K where withdrawal is contemplated at the point of retirement to save on penalties; & moreover, withdrawal from PPF is not taxable. Parents of Indian nationals residing in the States, be they students or working professionals, generally have accumulated funds in their PPF. This can be easily used for sponsoring an EB5 investment. The process of establishing the trail for a PPF balance is generally easy, practical, & assured.
The aforementioned paragraphs cover incomes and assets in India, let’s now review the other end, where an Indian in India, has incomes and assets overseas. This paper was not meant to cover them but I would like to touch upon a few aspects before closing:
a) ESOPs & RSUs
Post RIA, a sizeable portion of our filings have had tradeable RSUs as the primary source of fund. From USCIS stand point, it can’t get better. RSUs are easily traceable, the only thing that you need to account for is the purchase price paid (known as strike price). This is typically a small value, and often adjusted against the salary per se. There is nothing to really account for, because it is straightforward. The employment gets established with the help of an appointment / employment contract, and the bank statements would reflect the purchases. Moreover, the credibility of the company whose stocks or options are being sold is determinable. The challenge however comes at the point of sale. Generally, facilitators like Vanguard, Fidelity, etc. would enable your sale and either get the redemption proceeds credited to a bank account in US, or in India. Often, these investments are not shown by the employees in their ITR. It is critical to note that there is a special schedule to report these investments. Generally, the tax department is not going to identify your purchases; however, when you sell them, the initial oversight of the individual to not reflect them on their ITR at the time of purchase, and all throughout the years (as they have to be reported every year, and not just in the year of purchase), will lead to an eventuality of facing a scrutiny from the tax department in India. The probability of tax department not being able to identify your initial disclosure is very less, but the probability of the tax department being able to identify the defect at the point of sale is high. Obviously, if you have defaulted does not automatically mean you will face a proceeding, and that is why the probabilities are very clearly specified for each of the instances. It is best to stay compliant because there is no downside at all to comply; it is not like some additional reporting tax is payable. As long as you are aware of the law, compliance generally helps more. It is critical to note that if you are gifting these funds to your children (who are studying or working in USA), then the law does not permit you to directly get them credited to their account, offshore. In other words, the sale proceeds have to be first brought in to India, & only then can the funds be given out. This leads to forex charges twice, along with the hassle of dealing with LRS and TCS, but this is the law. It is strictly not advisable to directly wire out the funds because diverting the funds of a person residing in India, without reporting those funds to India, would lead to ‘hawala’, aka money laundering. This may be easy to do but is clearly not worth taking the risk. Do remember that there is a periodic exchange of information on cross-border investments.
b) Trading and Business Banks Accounts outside the Indian borders
Some residents in India have established companies overseas with corporate bank accounts to facilitate their businesses in India, which are typically into imports or exports. Also, some individuals have been maintaining bank accounts in UAE, Hong Kong, Singapore, etc. It is important to first find out the source of that fund, & its acceptance level apropos the requirements laid out by USCIS. If the funds are in free zones like RAK, or jurisdictions like HK, the onus to prove their legitimacy is even larger. One of the reasons to this is that these are tax havens, and the requirement to file tax returns does not primarily exist. Moreover, the concept of auditing books of accounts is seldom seen in these jurisdictions. Lastly, whether such overseas incomes were reported in India or not also needs to be identified. From USCIS stand point, the company cannot be wiring funds on your behalf. The ideal way is for the petitioner to withdraw them first, & then wire. Consequential tax issues have to be considered before doing withdrawals. For an Indian having overseas incomes & assets, the considerations range from income tax in the host country, in the country of residence, FEMA regulations, & above all, USCIS compliances. A professional having a 360o perspective should be able to help.
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Author: Utsav R. Doshi is a licensed Chartered Accountant with a focus on preparing statements that are useful for compiling the source of funds. His areas of work include FEMA & RBI compliances on remittances from India to USA, guidance on TCS, path of fund charts, accounting cash flows as well as various incomes/assets in India, so as to reconcile them & make them adaptive to USCIS requirements.
Disclaimer: The information given above is meant for educational use only. For professional guidance, you should talk to your appointed Chartered Accountant or EB5 professional.
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