The pandemic continues to impact Latin America’s economies, given global supply chain disruption and reduced trade and tourism. This uncertain economic state has increased social unrest, including political changes and overall governance issues in nations like Venezuela, Chile, Peru and Argentina.
Against this backdrop, some Latin American investors and companies are showing increased interest in investing in the United States, attracted by its geographical proximity, access to a large consumer base, historically stable economy, and legal system. At GT, we have seen a sharp uptick in the number of inquiries from Latin American investors looking into establishing businesses as a vehicle for migration.
When providing pre-immigration planning advice, it is also important to consider the tax implications in the investors’ foreign income, accounts, assets, investments, etc., given that the United States taxes individuals based on their worldwide income. This blog post reviews common visa options for investors and companies from Latin America, and provides tax precautions to consider when moving to the United States.
Common Visa Options
The E-2 and L-1 visas tend to be the most popular options, but understanding which option works best for the particular investor or company’s set of circumstances is a fundamental step in immigration planning. Both visas provide a source of work authorization; however, it is important to note that they have different eligibility criteria and requirements.
The E-2 visa primarily allows investors and employees of a qualifying business to develop and direct their investment in the United States. This visa is designed for individuals or companies from countries that have a treaty of commerce and navigation with the United States – including Chile, Colombia, Mexico and Argentina, among others in Latin America.
On the other hand, the L-1 visa’s main purpose is to allow multinational companies to transfer employees from their foreign offices to a U.S. office. The L-1 visa is not dependent on a treaty of commerce and navigation, and as such, is available to companies from all countries. The L-1 process facilitates intracompany transfers for managers, executives, and employees with specialized knowledge.
The table below provides an at-a-glance comparison between the main elements of the E-2 and L-1 visas:
Applying for and/or obtaining any of the non-immigrant visas explained above does not, by itself, convert the holder into a tax resident of the United States, just by virtue of having any of those visas. There are two key definitions that will determine when an individual is considered a resident for U.S. income tax purposes and for U.S. transfer tax purposes. These definitions are not the same.
Generally, an individual who is not a U.S. citizen is considered a U.S. income tax resident for U.S. income tax purposes if the individual meets either: (A) the lawful permanent resident test (i.e., he has a green card) (the “green card test”); or (B) the “substantial presence test.” The substantial presence test is met if an individual is present in the United States for 183 days or more during the current calendar year. The substantial presence test is also met if an individual is present in the United States for (i) at least 31 days during the current year, and (ii) at least 183 days for the three-year period ending on the last day of the current year, using a weighted average formula. There are various exceptions to the substantial presence test that are outside of the scope of this blog post.
For U.S. federal transfer tax (i.e., estate, gift, and generation skipping tax) purposes, an individual who is not a U.S. citizen will be a U.S. resident if the individual is a U.S. domiciliary. An individual is deemed to be a U.S. domiciliary if the individual has lived in the United States, for even a brief period of time, and has no present definite intention of removing himself therefrom. While the test for domicile essentially is a question of the individual’s subjective intent, it may be inferred from the individual’s objective actions and circumstances. In determining whether an individual has established U.S. domicile, courts often look to facts and circumstances such as: (i) the amount of time spent in the United States; (ii) the location of the individual’s principal home and the nature of the individual’s living accommodations in the United States; (iii) the residence of the individual’s family and friends; (iv) the location of the individual’s personal effects, automobiles and other tangible personal property; (v) the location of the individual’s religious and club memberships; (vi) the location of the individual’s place of business; (vii) the location of the individual’s bank accounts; (viii) the location of the individual’s voter’s registration; and (ix) the location of the individual’s driver’s license.
U.S. Federal Income Tax Consequences if the Individual Becomes a U.S. Income Tax Resident
There are several pre-immigration planning steps that can be taken prior to the individual’s immigration. In view of this, any individual considering immigration to the United States should seek individualized tax advice on a pre immigration basis in order to determine the effects of the potential change of U.S. tax residency and the options to alleviate the effects of such change.
Below are the main federal income tax consequences:
- The individual will be subject to U.S. federal income tax on the individual’s worldwide income.
- The individual may be able to credit non-U.S. income taxes imposed on the individual’s non-U.S. source income (if any) against the individual’s U.S. federal income tax liability. This is subject to multiple conditions and limitations.
- The U.S. federal income tax on “ordinary income” (basically, all income except the type of income described in the next paragraph) is currently imposed at graduated rates of up to 37%.
- The U.S. federal income tax on “long-term capital gains income” and “qualified dividend income” is imposed at rates of up to 20%. Long-term capital gains income includes gains from the sale or exchange of a capital asset (generally, an asset held for investment) held for more than 12 months, and qualified dividend income includes dividends from U.S. corporations and certain “qualified foreign corporations,” such as foreign corporations that either are publicly traded in the United States or qualify for benefits under an income tax treaty between the corporation’s country of residence and the United States, if certain conditions are met. Note that the United States does not have income tax treaties with most countries in Latin America, except for Venezuela and Mexico (Chile has a treaty pending ratification, so it is presently not in force).
- U.S. individuals are subject to an additional 3.8% Medicare tax on “passive” income above certain minimum income thresholds, such as interest, dividends, annuities, royalties, rents, and capital gains.
- Depending on the State of residence, the individual may be subject to state income taxes in addition to the federal rates discussed above. Some of the state rates can be significant.
- The basis in the assets of the individual will not automatically be increased to fair market value when the individual becomes a U.S. income tax resident. There are certain transactions that would allow the individual to achieve a basis step up.
- There are significant anti-deferral regimes that apply to S. citizens and income tax residents owning shares of non-U.S. corporations that limit and, in certain cases, penalize the possibility of deferral of U.S. tax. In certain cases the individual may be required to recognize income based on the income earned by the non-U.S. corporations owned even when the non-U.S. corporations did not distribute any dividends, or to pay an interest charge for any accumulation of income that was subject to deferral (depends on the applicable regime). These regimes are complex, and this is a brief reference in order to alert those interested in considering immigrating to the United States.
- There are also significant anti-deferral regimes regarding foreign trusts, certain foreign pension plans not qualifying as such for U.S. federal income tax purposes and foreign funds in general.
U.S. Federal Transfer Tax Consequences if the Individual Becomes a U.S. Citizen or Domiciliary
- U.S. citizens and U.S. domiciliaries are subject to U.S. federal estate tax on the fair market value of the worldwide assets they own or are deemed to own at death. Under current law, the U.S. estate tax is imposed at rates of up to 40% of the fair market value of the decedent’s assets. U.S. citizens and domiciliaries are also subject to U.S. federal gift tax on all assets gifted during life on a worldwide basis. The gift tax is imposed at graduated rates of up to 40%.
- Each U.S. citizen and S. domiciliary may exclude gifts to individuals of up to $17,000 per year (indexed annually for inflation) from U.S. federal gift taxation. In addition, each U.S. domiciliary is allowed a credit that may be used to exempt a certain amount of property from U.S. gift and estate tax. This credit allows a U.S. citizen or U.S. domiciliary to transfer up to approximately $12.92 million (adjusted annually for inflation) of property during life or at death without U.S. federal gift or estate tax. Note that in 2026 the exemption amount will be reduced to around half that amount.
- U.S. citizens and domiciliaries also are allowed an unlimited estate and gift tax marital deduction for gifts and property that pass to a surviving spouse, so long as the recipient spouse is a U.S. citizen. If the surviving spouse is not a U.S. citizen, there is a mechanism (a QDOT) that would allow the U.S. federal estate tax to be deferred until the death of the surviving spouse if certain conditions are met.
- The U.S. generation-skipping transfer (GST) tax is an additional transfer tax designed to ensure that property is subject to tax each time it passes from one generation to another. In simplest terms, the GST tax applies each time property passes by gift or at death from a grandparent to a grandchild or more remote descendant (i.e., skipping a generation). If, for example, a grandparent gifts property to a grandchild, the GST tax (in addition to the U.S. gift tax) will apply at the time of the gift. If a grandparent leaves property in trust for a child and the property passes to a grandchild at the child’s death, the GST tax will apply at the time of the child’s death in addition to any U.S. gift or estate tax applicable at the creation of the trust.
- These taxes are onerous; however, with proper planning, prior to becoming a U.S. citizen or S. domiciliary, one’s exposure can potentially be significantly minimized.
- An individual looking to immigrate to the United States who holds valuable assets may significantly reduce their exposure to the U.S. estate tax by transferring assets to irrevocable trusts that are carefully drafted considering the U.S. estate tax rules before becoming a U.S. citizen or S. domiciliary. With careful planning and structuring, the assets held inside the irrevocable trusts should not be subject to the U.S. federal estate tax on the individual’s passing or the passing of the individual’s descendants. This kind of planning is very involved and has a lot of technical considerations to address, so this would require individualized advice to assess its viability and requirements.
- There are other options also to plan more efficiently prior to becoming a U.S. citizen or S. domiciliary including, but not limited to, gifting, using of insurance, among others.