EB5 Investor Visa Lawyer – Russian EB5 Applicants special issues

Last week I attended the EB5 Investor Visa conference for Immigration Lawyers held in San Antonio Texas. Top lawyers from across the nation gathered to discuss the latest developments and updates in this exciting area of law. In the next few weeks, we will share some info obtained on this Blog in a series of articles.

EB5 Investors come from select few countries, mainly China, Iran, Korea, Brazil and Russia. In this article we will cover specific issues relating to Russian Investors. The following article is based on an AILA report by Mr. Kenneth White.

What is EB5 Investor Visa?

Congress created the fifth employment-based preference (EB-5) immigrant visa category in 1990 for immigrants seeking to enter to engage in a commercial enterprise that will benefit the U.S. economy and create at least 10 full-time jobs. The basic amount required to invest is $1 million, although that amount may be $500,000 if the investment is made in a “targeted employment area.”
Of the approximately 10,000 numbers available for this preference each year, 3,000 are reserved for entrepreneurs who invest in targeted employment areas. A separate allocation of 3,000 visas is set aside for entrepreneurs who immigrate through a regional center pilot program.

Compared to emigration from China, India, and Korea, Russian immigration to the United States is negligible. This is also reflected in the EB-5 program. For fiscal years (FYs) 2008 and 2009 combined, less than 100 Russians have obtained permanent resident status through EB-5.

Besides the greatly improved economic situation in Russia since the early 1990s and the overall political stability, specific reasons cited by potential EB-5 investors for a reluctance to participate include: (1) U.S. worldwide taxation on permanent residents; (2) the perceived riskiness of EB-5 investments and the two-year conditional status; (3) low return on investments (Russian entrepreneurs are accustomed to 15–30 percent annual return); and (4) an inability to collateralize existing assets to finance an investment due to high Russian interest rates (14–17 percent).

Other factors contributing to these spartan EB-5 statistics include a short-term mentality; little EB-5 marketing in Russia; widespread gray and corrupt sources of funds; and the existence of other residency and passport alternatives (e.g., UK, Canada, St. Kitts, and Bulgaria).

For the EB-5 program, this is unfortunate because Russians represent a truly large pool of potential participants. In the 1990s, Russians were able to privatize their apartments for a nominal fee, and employees and management of large factories received free privatization vouchers. Virtually overnight, millions of Russians became owners of apartments—mortgage free—and shareholders in factories.

Show me the Money

Source of funds is a key factor in EB5 cases and was discussed in detail at our conference. Russian law does not require the filing of tax declarations for most individuals. Usually, employers will issue W-2-like forms to employees and shareholders reflecting the payment of salaries and dividends. The employers withhold the relevant taxes and file the necessary reports with the Russian Tax Inspectorate. For those individuals who do file declarations, they must file for the previous calendar year by April 30th and pay the tax owed by July 15th. In the EB-5 context, this issue may be particularly acute for investors whose source of income for the investment was earned in the most recent tax year, and who have yet to file tax declarations or pay taxes on that income. In such instances, it would be appropriate to point out these tax deadlines to USCIS and have the client provide counsel with copies of the declaration and receipt of tax payment once these obligations have been met.

Conflict of interest questions sometimes arise. Resumes and business promotional materials are foreign concepts among many Russian entrepreneurs over the age of 45. Technical and logistical issues that frequently arise relate to the constantly fluctuating exchange rate (33 percent depreciation of the ruble over the past year); bank statements which often do not reflect daily balances or even the names of the owners of the account; delays in transferring of funds to the EB-5 entity or escrow account because some banks have little experience with international transactions or require the translation of all investment-related documentation; and a general lack of automation and public accessibility to personal and corporate records, hindering due diligence efforts.

Russian tax law is very liberal and has been relatively effective in ensuring greater tax compliance. This is not to say that all Russians diligently pay their taxes. High pension and social fund taxes have the effect of discouraging employers from reporting full salaries or any salaries at all. Offshore companies continue to be commonplace, acting as invoicing mechanisms for business transactions, “piggy banks” for accumulating funds, and investment structures.

Other pertinent Russian law provisions that arise in the EB-5 context include corporate governance laws, which cover certain conflict-of-interest situations. For example, it is not unusual for antiquated Soviet-era factories to have unused premises. An executive for the successor organization may also own an outside company, and acting in the name of the organization, lease out the unused premises to his own company, which in turn subleases the premises to another company.

As long as the Board of Directors of the successor organization approves the transaction, it is permissible under Russian law. In contrast, Russian anti-corruption legislation is unequivocal in prohibiting government officials from profiting from their positions. While not having the desired effect of curbing widespread corruption, these provisions, along with U.S. source-of-funds requirements, seem to have deterred EB-5 petitions by such individuals.

The Russian proclivity to operate in cash and not adhere to the letter of Russian legislation certainly poses challenges to lawyers in preparing EB-5 petitions. Nevertheless, the overall trend is towards the gradual “civilizing” of Russian business, including increased transparency and tax compliance. While this positive trend and the underlying wealth of asset-rich Russians would seem to augur well for Russian participation in the EB-5 program, the Russians, have remained an enigma. Now that they are free to emigrate and have the financial ability to do so, they have generally chosen—at least for now—not to pursue immigration opportunities for themselves or their children in the United States.

We feel that changes in the US economy, the surplus of cheap real estate and business opportunities will increase Russian interest in the US Investor Visa program. These changes mark a major leap forward in the usage of the EB-5 visa category but many more Russians than ever before.

If you are interested in this program and would like to discuss it, feel free to drop us a note.