The People's Republic of China is one country that EB-5
practitioners and related EB5 professionals cannot afford to neglect. The top 5
countries[1] in
2012, for EB-5 alien entrepreneurs are: China, South Korea, Taiwan (region),
Iran and Venezuela. Chinese investors account for an overwhelming 70% of the total EB5 investment, followed by
9% from South Korea, the rest of the top 5 countries each account or less 3%.
Despite the recent
statement from USCIS, at the May, 2012 Stakeholder's meeting in
California, that EB-5 adjudication standards is not country
specific, judging from recently issued Requests for Evidence (RFE), USCIS has
constantly questioned the basis of the capital obtained through lawful means for
the investors from China. The RFEs show that there is insufficient
understanding of Chinese law. The purpose of this article is to provide a few
practical guidelines in the areas of Chinese law that have the
most impact with EB-5 practice.
Who
are you dealing with? - A Brief Introduction to Chinese Immigration Agency
Industry
At the May 2012, USCIS stakeholder meeting, the agency
advised that an estimated 90%-95% of all I-526 petitions are associated with
regional centers. This would means the majority of the direct foreign
investment generated by the EB-5 programs has been utilized for large-scale
projects, with an average benchmark of $15,000,000 for raising capital, or 30
investors with a minimum EB-5 investment amount of $500,000. For a project of
this size, EB-5 practitioners rarely deal directly with the investors. They
work with Immigration Agencies in China.
The immigration agencies have the monopoly in the
immigration industry in China. The investors, who often speak little English,
if at all, approach the agencies for immigration consultation, project
recommendation, document collection, translation and in some cases foreign
currency exchange service. Because of the language barriers, the clients with
immigration needs are easily defrauded. The immigration agencies, or in Chinese
"Zhong Jie" suffers a notorious
reputation.
It is not surprising, therefore, that immigration
agencies are heavily regulated in China. The governing administration is the
Bureau of Entry and Exit Administration under the Ministry of Public
Security. According to the Measures on
the Administration of Intermediary Activities of the Exit and Entry for Private
Purposes[2],
Article 17, the immigration agencies are required to obtain the Immigration
Agencies Service Business License. The license is usually valid for five years
if issued by the provincial level government. The agencies are subject to an
annual evaluation by the local public security bureau.
Some EB-5 practitioners have encountered the practice of
"authentication". Here Chinese immigration agents request proof via certified
documents from the US Attorney of valid US incorporation, an approval letter of
for similar petitions, a specific cooperation agreement and professional
qualifications. Such requests have led to the misconception that the Chinese
agents are conducting their own due diligence background searches on the US law
firms, project companies or regional centers. In fact, the agencies requesting
such documentation from US Attorneys and entities are more likely to utilize
such documentation for the purpose of
renewing their own business license with the public security bureau in
China, rather than due diligence. In order to have license successfully
renewed, the agents are required to prove the genuineness of the immigration
service they provide and that it does have a genuine working relation with
foreign immigration attorneys, capital raising project companies or marketing
consultants. Though for EB-5 projects, working with Chinese immigration agents
is the norm, it is not mandatory that a US entity must go through the agencies
in order to obtain the EB-5 investors.
Do I
have to Show Taxes? - China's Taxation Systems
One of the common complaints from EB-5 practitioners are
that investors from China do not have proof of
tax payments. Though the EB-5 law[3]
requires alien entrepreneurs to show their tax returns for the past five years,
USCIS does not seem to implement the rules rigidly. According to Article 8 of
the People's Republic of China Individual Income Tax Law, the employee' income
tax is withheld and filed by the employers[4].
The tax rate on individual income adopts the progressive tax rate ranging from
5% to 45%.
Due to the high tax rate, it is a well known secret that
Chinese companies and high net worth individuals keep substantial income in
their off-book records. USCIS usually does not require the reported tax payment
reach the sufficient amount under Chinese tax law. In the I-526 petition to
prove lawful source of funds the petitioner is advised to include any type of
tax payment records. Chinese citizens do not file their own tax returns unless
their annual income exceeds RMB 120,000 (USD 18,750)[5].
Chinese nationals can request the "Individual Income Tax Payment Certificates"
or in Chinese "Shui Piao" from the
local tax bureau.
In China, there are two systems in taxation
administration[6]: the
national tax bureau contributing to central government budget and the local tax
bureaus contributing to the municipal government budget. Each tax administration
collects different types of taxes. The national tax bureaus are often in charge
of sales tax, value added tax, corporate income tax, customs duty, etc. The
local tax bureaus are in charge of individual income tax, business tax, city
and township property usage tax, etc.
Corporate
Law in China
Recent USCIS issued RFE's for I-526 petitions, issues such as registered capital, sole
proprietorship, business bank account versus personal bank account are often
questioned. This trend shows a lack of understanding of the Corporate Law in
China. The People's Republic of China Company Law (or the Corporate Law) was
overhauled in 2005 when the mandatory minimum registered capital amount was
significantly reduced to RMB 30,000 (USD 4,688)[7]
for limited liability companies in order to encourage entrepreneurs in the
start-ups in the market.
The minimum registered capital is a unique concept under
the Company Law in China. Basically, it is the seed money put down to initiate
business operations.. The purpose of the registered capital is to protect the
interest of shareholders and the companies' business partners. Because the
company is a separate legal entity, the principal of the company is not
personally liable for all the debts and losses. To prevent aggressively risky
business activities, the registered capital is reserved to cover the future
losses and debts of the company. In recent I-526 RFEs, USCIS seems to confuse
"registered capital" with the current assets. Registered capital is not shown
on the regular balance sheet or profit and loss statement; instead it is shown
on the Capital Verification Report. The registered capital is not necessarily
cash, it also can be intellectual property, equipment, land use right, property
and labor.
Sole proprietorship, on the other hand is not a separate
legal entity. It does not shield losses and liability from the individual
business owners. According to the newly amended Regulation[8]
of Sole Proprietorship in China, The business owner is entitled to all the
profits and income, and is also is personally liable for all the debts and
losses of the sole proprietorship. If an EB-5 investors' investment capital
derives from the income from a sole proprietorship, the indication is the
business income may well be in the personal bank account of the business owner
instead of a separate business bank account. The requirement for setting up a
sole proprietorship is almost the same with the limited liability company;
however, the registered capital is not mandatory[9]
for sole proprietorship because the business owner is personally and severally
liable for all his business liability and losses.
Banking
Laws in China
China has foreign currency restriction rules. According
to the Regulation[10] of
State Administration of Foreign Currency, each Chinese national can only
exchange maximum of $50,000 dollars for personal consumption purpose. The EB-5
investors would use more than 10 foreign exchange facilitators to overcome the
hurdles of the currency restriction. It is also common that the investors would
utilize an individual or a currency
exchange entity in Hong Kong, the Special Administrative Region (SAR) where the
foreign currency restriction does not apply.
A recent change in banking rules[11]
released by China Banking Regulatory Commission regarding loans for the purpose
of individual investment is that the funds are directly deposited to the
business counterparty's account. For example, if the investors claim to obtain
a bank loan for the purpose of purchasing steel, the loan will be deposited
directly into the steel seller's bank account. In the EB-5 context, some
investors obtained bank loans for the purpose of expanding their business in
China, however, the funds were later invested in the United States for the EB-5
program. In such cases, there are usually convoluted funds transfers through
multiple bank accounts of different business entities. Each transaction needs
to be well documented.
Another issue relating to bank transactions in EB-5
petitions, is where funds transfer among various business accounts. USCIS seems
to question the scenario where the investment capital is transferred back and
forth among different business bank accounts. For example, RMB 3,600,000
(approximately USD 560,000) is a loan issued by the petitioner's company. One
day before the funds were wired out to the petitioner's personal account, the
exact same amount was deposited to the business account. It may seem the
capital is not genuinely derived from the company's business income. The EB-5
practitioners shall be aware of the rules of corporate bank accounts. According
to Administrative Rules on RMB Bank Settlement Accounts[12],
there are different types of bank accounts that a company is required to
associate with its business activities. The regular business account is
utilized only for salary distribution, regular business transactions and cash
withdrawal. The company checking account is more flexible, it can be utilized
for loans, other funds transfer and cash deposit.
In the EB-5 scenario that was mentioned earlier, it is
likely that the company loan is transferred from the regular business account
to the company checking account then subsequently transferred to the
petitioner's personal account. The fact that the funds were transferred
multiple times is not because the source of the investment capital is not
genuine, but the usage of regular business account is so restrictive under
Chinese law.
Property
Law in China
The relevancy of Chinese property law in the EB-5 context
is the land use right. First and foremost, the individual in China does not
have right to the land[13]
except for certain land collectively owned by village and township, the
individual has the right to use the land. The land use right can be
transferred, sold, gifted subject to certain land purpose restriction. In some
I-526 petitions, the investors utilize the land use right as collateral for the
bank loan or the investors utilized the land use right as registered capital.
In both cases, the land use right shall be appraised and evaluated by certified
appraisal entities.
Marriage
Law in China
The Marriage Law in China comes into play, if the EB-5
investment jointly owned by the investor and the spouse. According to the
Marriage Law[14] of
People's Republic of China, marital property is property acquired by a couple
or by either spouse during their marriage. Marital property is jointly owned by
the husband and wife. Utilization of the property is only effective upon mutual
consent of the couple. All income earned by one spouse during the time of the
marriage is considered marital property. To utilize the jointly owned property
as EB-5 investment usually a declaration signed by the investor and the spouse
bears sufficient evidentiary value.
Conclusion
Given the fact that majority of EB-5 investors are from
China, EB-5 practitioners should be familiar with the basic Chinese legal
regime in order to better represent the investors' case in front of the USCIS
adjudicating officers. As much as USCIS would like to avoid adjudicating based
on country specific standards, it is inevitable that the investors from each
foreign country present a certain pattern in the case scenarios. Due diligence
research and background information about the investors' lawful source of funds
proved to be effective to strengthen the EB-5 petitions.
Yi
Song,
Esq. is an associate attorney at Mona Shah & Associates in New York City.
She is also licensed to practice law in People's Republic of China. She has
practiced tax law in Beijing, China with a leading tax firm. She clerked in
Beijing, the nation's capital at the Supreme Court of People's Republic of
China. At Mona Shah & Associates, Yi practices EB-5 law and works on many
successful EB-5 capital raising projects. She obtained her LL.B. degree from
Beijing Foreign Studies University and she is a graduate from Georgetown
University Law Center in Washington, DC. Yi is a native speaker of mandarin
Chinese. She speaks fluent English and basic French.
Mona
Shah & Associates reserves and holds for its own use, all rights provided
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rights reserved by Mona Shah & Associates©
[1]
Statistics report published by IIUSA dated March 2012.
[2]
Measures on the Administration of Intermediary Activities of the Exit and Entry
for Private Purposes, issued by The Ministry of Public Security and the State
Administration of Industry and Commerce, June 6, 2001.
[3]
8 C.F.R.
§ 204.6(j)(3)(ii) personal tax returns including income, franchise, property
(whether real, personal, or intangible),or any other tax returns of any kind
filed within five years, with any taxing jurisdiction in or outside the United
States by or on behalf of the petitioner;
[4]
People's Republic of China Individual Income Tax Law, Article 8, Enacted by The
Tenth National People's Congress Standing Committee, XXXI Session (March 1,
2008).
[5]
Measures on Self-Declaration Rules for Individual Income Taxation, Article 2,
State Administration of Taxation (November 6, 2006)
[6]
Information from the official website of State Administration of Taxation: http://www.chinatax.gov.cn/n8136506/n8136593/n9947392/10525325.html
(Last retrieved May 26, 2012 materials in Chinese)
[7]
People's Republic of China Company Law, Article 26, Enacted by The Tenth
National People's Congress Standing Committee, XVIII Session (October 27, 2005)
[8]
Regulation of Sole Proprietorship in China, Article 2, State Council Executive Meeting 149th (November 1,
2011).
[9]
Regulation of Sole Proprietorship in China, Article 9, State Council Executive Meeting 149th (November 1,
2011).
[10]
Information from the official website of State Administration of Foreign Exchange:
http://fj.safe.gov.cn/110000/110000f0263005.htm
(Last retrieved on May 26, 2012 materials in Chinese)
[11]
Temporary Measures regarding Individual Loan released by China Banking
Regulatory Commission (February 20, 2010).
[12]
Administrative Rules on RMB Bank Settlement Accounts, Article 11 released by
People's Bank of China (April 10, 2003).
[13]
People's Republic of China Property Law, Article 4, the Tenth National People's
Congress Standing Committee, the V Session, (March 16, 2007).
[14]
Marriage Law of People's Republic of China, Amended in April 2001 the IX
National People's Congress Standing Committee, the XXI Conference, Chapter 3,
Article 17.