“Tenant-Occupancy” Methodology for Establishing Job Creation in EB-5 Cases

One of the most common forms of job creation is tenant occupancy. Tenant occupancy methodology allows a foreign investor to take credit for the employees of the tenant. Until recently, the USCIS has been reluctant to approve a business plan that relied upon tenant occupancy. 

However, on November 14, 2013, the USCIS formally approved a regional center based on tenant occupancy. Examining the USCIS’ decision gives guidance on how one can improve approval of a regional center based on tenant occupancy. Applicants and petitioners must create a plan that will project, by using economically and statistically valid forecasting tools, the number of newly created jobs that would not have been created but for the economic activity of the EB-5 commercial enterprise.  This proposed plan is then evaluated on a case-by-case basis using the preponderance of the evidence standard. The USCIS will generally require an evaluation of the verifiable detail provided and then examine the overall reasonableness of the methodology as presented. The key to get the proposal approved is to show that there is a reasonable causal link between the EB-5 enterprise and the job creation that would allow for the attribution of the tenant jobs to the EB-5 enterprise.

There are some difficulties and concerns with using this methodology that are worth mentioning. In order to successfully present the plan to the USCIS, the investor must establish that the newly projected jobs will be “newly” created and not simply relocated from a different location. It is also important to keep in mind that the USCIS only provided very generic guidelines on how the USCIS evaluates each investor’s proposal, so it is very important to examine prior proposals that have been approved in order to increase the chances of getting an approval.

The investors can also utilize the facilitation-based approach. This alternative method will require the investor to demonstrate that the economic benefits provided by a specific space project will remove a significant market-based constraint. The investor can demonstrative this by showing how a specific commercial space project can correct a market imperfection and create a new labor demand and income that will create specified prospective number of tenant jobs in the invested space. 

B&O Tax Ruling for Banks and Financial Institutions

In Cashmere Valley Bank vs State of Washington Department of Revenue on September 25, 2014 the Washington Supreme Court came down with a new ruling on the scope of the exclusion of B&O tax of income from interest earned on mortgages for banks and financial institutions.  The interest earned on the mortgages is not taxed as income if the mortgages are secured by a first mortgages on residential property.  Cashmere Valley Bank received income from investments it held in Real Estate Mortgage Interest Conduits (REMICs) and Collateralized Mortgage Obligations (CMOs).  The bank argues that the income they received from these investments should be excluded from the B&O tax.   The court held that REMICs and CMOs represent a right to income from mortgages, but that owners of these investments do not themselves hold the mortgages and thus are not qualified to exclude their income from these investments from the B&O Tax.  In light of this ruling, banks and financial institutions may want to review and potentially restructure their investment portfolio.

Dianna Caley 
Partner

Wong Fleming | Washington 

Startup Focus: Business Formation and Choice of Entity

Startup founders should know the advantages and disadvantages of choosing a certain entity type when forming their companies. Choice of entity involves considerations concerning business direction, liability, taxation, and investment. Startups will generally choose to form as a  C corporation, S corporation, or in some cases a limited liability company (LLC). 

C Corporation

• A C corporation is generally the most popular choice for startups. 
• C corporations can issue multiple classes of stock, which venture capitalist investors prefer. 
• C corporation income does not pass-through to the shareholders, avoiding certain distributions issues. 
• Founders can be considered as employees, avoiding self-employment taxes. 
• Taxation involves salaries, shareholder distributions, and the shareholder's income taxes. 
• There is no limit on on the type or number of shareholders. 
• A C corporation does not have to file a tax status election. 
• Shareholders are generally not subject the state income tax.

S Corporation

• An S corporation can only issue one class of stock. 
• An investor will not be taxed on the company 's income. 
• S corporations have limits on the number of shareholders, non-individual shareholders, and foreign shareholders. 
• A corporation that elects tax status as an S corporation must meet and maintain the criteria set by the IRS. 
• Corporation taxation passes through to the shareholder. 
• Shareholders are generally subject to state income tax, depending on where the S corporation conducts business. 
• In some cases, an individual's tax rate may be higher than the corporate tax rate that is assessed for a C corporation. 

Limited Liability Company 

• A limited liability company is generally the least popular choice for startups. 
• Many venture capitalists will not invest in a limited liability company unless it converts to another entity type. 
• Equity compensation is more difficult than a C corporation, due to the absence of stock classes. 
• A limited liability company's members are generally subject to self-employment taxes, and taxation is based on the share of the company, not distributions. 
• Any income not distributed can result in a basis step-up for interests in the company. 
• A company's losses, deductions, and other benefits can offset an individual tax payment. 

Ultimately, for a startup, a C corporation is generally the best choice. It is easier and more cost-effective to form a C corporation than a limited liability company or S corporation. C corporations are better choice to facilitate equity distribution, investor interest, and reinvestment of capital into the company. 

Every company's formation situation presents unique factors and we can provide you with options customized for your needs. 

For more information or if you have any questions, please contact our Corporate Practice Group. 

Worker Asbestos Exposure

In Donna Walston vs. The Boeing Company the widow of Gary Walston, a Boeing worker, was suing Boeing in a wrongful death case.  Her husband had died from asbestos exposure.  Normally, workers who are injured on the job are compensated through labor and industries, but have no right to sue their employee individually.  There is an exception however, if the employee can show that the employer intentionally injured them.  Intentional injury can be shown if the employer had “actual knowledge” that the injury would occur.

Boeing had intentionally sent Gary Walston into an area that they knew was contaminated with asbestos and that widow alleged that this constituted an intentional injury.  Boeing countered with the testimony of an expert who gave evidence that while asbestos may cause cancer it is not certain to cause cancer.  On that basis Boeing argued that they did not have “actual knowledge” that the injury would occur.  The Supreme Court looked at previous caselaw which had held that even where the employer had “substantial certainty” that the injury would occur this does not rise to the level of “actual knowledge”.   Based on this the court upheld the dismissal of the suit against Boeing.  This case underlines the difficulty which any employee has in attempting to bring an individual action against their employer.

Dianna Caley 
Partner

Wong Fleming | Washington 

Setting Up a Free Zone Entity

In our previous post, we discussed how a corporation can go about doing business in the Middle East, specifically in the United Arab Emirates. This week we will discuss how a corporation can set up an entity within the Trade Free Zone. The main benefit of a free zone entity is that it can be wholly owned by a foreigner.

Free zone entities are also granted certain ancillary financial benefits. A free zone entity will generally take one of the following three forms: a branch or representative office of a foreign company, a free zone company, or a free zone establishment. There is no minimum capital requirement for a branch or representative office, while in most free zones, a free zone establishment and a free zone company (UAE laws make a distinction between free zone establishment and a free zone company) are typically required to have a minimum capital of around AED 500,000, but the precise requirements vary from free zone to free zone. A free zone establishment may be owned by a single individual or company, whereas a free zone company typically requires two or more owners.

The key limitation of a free zone entity is that it is generally permitted to conduct business
solely within its relevant free zone and is limited to performing solely those activities
specified in its license. A free zone entity must typically hold one of the following
licenses issued by the relevant free zone authority: (i) trading license; (ii) service license;
(iii) manufacturing/industrial license. In order for a free zone entity to engage legally in
sales within the UAE (and outside of the relevant free zone), the entity will generally
have to retain a commercial agent or distributor. However, free zone entities with service
licenses have been known to provide services outside of their free zone.

Procedures
An independent Free Zone Authority governs each free zone and is responsible for issuing FTZ operating licenses and assisting companies with establishing their business in the FTZ. Investors can either register a new company in the form of a Free Zone Establishment (FZE) -- a limited liability company governed by the rules and regulations of the Free Zone in which it is established -- or simply establish a branch or representative office of their existing company based within the UAE or abroad.

The procedures for establishing a business in a Free Trade Zone are usually very straightforward and can be generally completed quickly, especially if there are no environmental issues involved. Individual Free Zones may have specific requirements, but general steps are:

• Questionnaire from the relevant Free Zone Authority which will assist in assessing a company's requirements.
• License application, planning documents, and a consumer request for electricity.
• Provisional approval and lease agreement.
• Meetings with the authority to finalize details of the project.

Licenses
Once a legal presence has been established in the Free Zone, the business will need to lease premises or land and acquire an operating license from the FZA. Different types of licenses apply in the different types of free zone, however, it is important to understand that companies with trade and industrial licenses can only conduct business within the Free Zone or abroad. To sell products in the UAE, a UAE official agent is required, and a joint venture needs to be formed.

When not to choose a Free Zone
There are a few scenarios in which a prospective company might not want to choose to do business in a Free Zone, and should instead opt for a regular joint partnership. These are if a company:

• Practices a regulated profession.
• Requires a lot of visas or warehouse/office space.
• Plans a long presence in the UAE and wants to reach a wider portion of the UAE market.
• Has a particular UAE company or individual with which to go into partnership.

Shahzad Qadri

Partner

Wong Fleming | Washington 

Washington State Condominium Owners May Have Less Restrictions

Division One of the Washington Appellate courts may have just increased the number of rental units on the market in the Seattle/Bellevue area.  The division came down with a decision of interest to both condo owners and condo associations.  The case was Centre Pointe Condo Association vs. Fillmore and it may have a big impact on whether or not condominium association rules restricting the use of the unit are valid.  In this case the condominium association had passed an amendment with multiple restrictions on the “use” of the condominiums including a prohibition on renting the units.  The court held that under the Washington Condominium Act this type of prohibition requires a vote of 90% of the current owners in favor of the restriction.  Condominium associations should be reviewing any amendments to the rules and covenants they have made that impact on the use of the unit.  Condominium owners who have been restricted from renting their unit should review the rules of the association and if the use restriction was a later amendment or addition to the original covenants then check to make sure 90% of the owners voted for it.  If they didn’t then you may be able to rent that unit.

Dianna Caley 
Partner

Wong Fleming | Washington 

EB-5 Investment - China Suspension: An Unnecessary Fear

The EB5 Market was inundated with unnecessary fear that the United States State Department was shutting down EB-5 Visas for Chinese Investors when it announced on Saturday, August 23, 2014, the unavailability of EB-5 Visas for Chinese Nationals for the remainder of the fiscal year.   While the announcement at first glance appears to be extremely dramatic and with dire consequences, in reality it has little, if any, impact at all for the immediate future.  First and foremost, investors must understand that  this announcement does not affect any I-526 or I-829  processing, nor does it delay immigrant processing for those investors not born on mainland China, and it only delays the processing for those born on mainland China by one month, as normal processing will resume on October 1st, 2014.  The announcement reflects that for the first time ever, the full annual allotment of 10,000 EB5 Visas will have been exhausted by the end of the fiscal year.

However, it must be noted that the U.S. Citizenship & Immigration Services (USCIS) will continue to accept EB5 Petitions submitted by Chinese born investors, however, instead of being acted upon immediately, those cases will be held in the Visa Office’s “Pending Demand” file until October 1, 2014.  At that time, all eligible cases will be automatically authorized from the “Pending Demand” file under the FY 2015 annual numerical limitations.

As such, Chinese born investors looking to utilize the EB5 program should continue to timely file their Petitions to ensure that their petitions are timely adjudicated under FY 2015 quota.

Shahzad Qadri
Partner

Wong Fleming | Washington 

Canada's Termination of Investment Based Immigration Program to Result in Opportunity for EB-5 Investment Program in the U.S.

Canada recently terminated its’ decades-old investor program that had allowed scores of wealthy Chinese to immigrate over the years. The program allowed rich foreign investors to apply for permanent residency in Canada if they had a minimum net worth of 1.6 million Canadian dollars ($1.5 million) and invested 800,000 Canadian dollars in the form of a multi-year, interest-free loan to the government. Approximately 65,000 pending applications -- which the Canadian government estimated would have taken six years to process -- will be returned and paid fees refunded. About 70% of the backlog came from Chinese applicants.

The termination of the Canadian program has left wealthy individuals from China and other countries scrambling for investment based immigration opportunities. This has opened the doors to tremendous opportunities for the EB-5 Investment Program in the United States. The EB-5 Investment Program requires a minimum of $500,000 investment in exchange for permanent residency. With no limitations as to industry or type of project that can utilize the program, EB-5 Investment Program provides a source of “cheap” capital for entrepreneurs.

Traditionally, the EB-5 Investment Program has been utilized by the real estate developers. However, the flexibility and scope of the program makes the program an invaluable source of capital for all industries from biotech, green energy to education. Furthermore, recent changes to the program has made the EB-5 Investment Program far more attractive and easier to utilize. With traditional capital markets still at a premium, foreign investment is an attractive option for all entrepreneurs.

Shahzad Qadri
Partner
Wong Fleming | Washington 

Doing Business in the Middle East – Free Trade Zones

The Middle East, specifically the United Arab Emirates (UAE) continues to attract U.S. companies. In an effort to attract foreign, the U.A.E has established 21 Free Trade Zones (FTZ’s). These 21 Free Trade Zones house approximately 20,000 companies. Establishing a business entity in one of the numerous UAE Free Trade Zones  can be an attractive option for foreign investors and businesses as it moves away from the traditional requirement of mandating that all foreign companies have a local sponsor that is the majority shareholder of the company. All seven Emirates already have, established such economic zones.

The key benefits of establishing and operating in a free trade zone are:    

• 100 per cent foreign ownership of the enterprise
• 100 per cent import and export tax exemptions
• 100 per cent repatriation of capital and profits
• No corporate taxes for 15 years, renewable for an additional 15 years
• No personal income taxes
• Less documentation, mostly in English
• Assistance with labor recruitment, and additional support services such as sponsorship and housing

Shahzad Qadri
Partner
Wong Fleming | Washington 

Setting Up Business in the U.A.E. Free Trade Zone

The EB-5 Market was inundated with unnecessary fear that the United States State Department was shutting down EB-5 Visas for Chinese Investors when it announced on Saturday, August 23, 2014, the unavailability of EB-5 Visas for Chinese Nationals for the remainder of the fiscal year.   While the announcement at first glance appears to be extremely dramatic and with dire consequences, in reality it has little, if any, impact at all for the immediate future.  First and foremost, investors must understand that  this announcement does not affect any I-526 or I-829  processing, nor does it delay immigrant processing for those investors not born on mainland China, and it only delays the processing for those born on mainland China by one month, as normal processing will resume on October 1st, 2014.  The announcement reflects that for the first time ever, the full annual allotment of 10,000 EB-5 Visas will have been exhausted by the end of the fiscal year.

However, it must be noted that the U.S. Citizenship & Immigration Services (USCIS) will continue to accept EB-5 Petitions submitted by Chinese born investors, however, instead of being acted upon immediately, those cases will be held in the Visa Office’s “Pending Demand” file until October 1, 2014.  At that time, all eligible cases will be automatically authorized from the “Pending Demand” file under the FY 2015 annual numerical limitations.

As such, Chinese born investors looking to utilize the EB-5 program should continue to timely file their Petitions to ensure that their petitions are timely adjudicated under FY 2015 quota.

Shahzad Qadri
Partner
Wong Fleming | Washington 

Got Independent Contractors? The IRS Wants to Audit You

The IRS has warned business owners who are using independent contractors as labor or service providers of the potential for a tax evasion audit. Employers have long held the incentive to classify their employees as self-employed independent contractors because they avoid paying employer FICA, federal and state unemployment, worker compensation, medical insurance, holiday pay, and other fringe benefits. However, any sort of misclassification can lead to serious consequences under the law.

Here’s what you need to know if you are or are considering hiring independent contractors for your business:

Reporting Of Expenditures 

You must report all expenditures to independent contractors that exceed over $600 in a calendar year on a 1099 form. This is not limited to corporations, which is a popular misconception.

Misclassification Risks 

While it is often difficult to identify who is an independent contractor versus who is an employee, the IRS believes that misclassification of employees as contractors should be prosecuted aggressively. The Department of Labor, the IRS and its cohorts state that even businesses who have a good faith belief that they are lawfully conducting their business still run the risk of audit due to widespread abuse of tax evasion attempts. Each state as well as the IRS has guidelines and tools that can help employers in classifying their employees.

You Are A Target 

All taxing authorities, including the IRS, the State and the Department of Labor are targeting all businesses with independent contractors. The reason for this scrutiny is that these authorities have determined that many businesses who use independent contractors also attempt to avoid paying taxes on such persons. Should you be caught, the government will asses heavy penalties. Economic loss arguments are not a defense against prosecution.

Assess Risks 

The financial burden that inevitably follows improper classification far exceeds the benefits gained short term. Thus prior to implementing any independent contractors in your business, you should conduct a thorough analysis with your legal and financial counselors to assess whether you are putting your business at risk or not.

Ramina Dekhoda-Steele
Partner In-Charge
Wong Fleming | Washington