United States tax law is a complex field, especially for those on nonimmigrant status. However, as murky as it may seem, everyone must comply with what applies to their status to avoid violating the law.
The E-2 investor visa is one of the most advantageous nonimmigrant classifications in the U.S., with several benefits for its holders. However, are these foreign investors required to pay taxes? What does the law say about E-2 visa taxation? These and many more frequently asked questions about the E-2 visa are explained in this article.
What is the E-2 Visa?
The E-2 treaty investor visa is a nonimmigrant classification for foreign nationals from countries that maintain treaties with the United States. It is an investment visa for those who are prepared to set up business enterprises here in the U.S.
The E-2 visa has many advantages including:
- Low investment capital
- Derivative visas for dependents and employees
- Unlimited status renewal
- Tax treaty advantages
So, Do I Need to Pay Taxes on an E-2 Visa?
In the United States, whether you are a citizen, immigrant, or nonimmigrant, as long as you earn an income in the country, you are subject to taxation. Therefore, you have to pay taxes as an E-2 visa holder. However, what you pay will depend on your status, country of origin, as well as some other factors.
The United States tax law categorizes nonimmigrant visa holders into two groups. They are, for tax purposes: resident and nonresident aliens. Which one you fall into depends on several factors, particularly the length of your stay in the U.S. The tax requirements and procedures for resident aliens and nonresident aliens differ widely. So, to understand what taxes are required of you, you need to know where you belong between these two groups. The first step is to determine your tax status out of the two.
Resident E-2 Visa Taxation
A resident alien is a non-citizen who meets either the “green card test or substantial stay test.” The green card test is usually for those under an immigrant visa. So, since having a green card means you do not have an E-2 visa, we will focus on the second test, which requires a substantial presence.
As an E-2 investor, you may meet the substantial presence test if, within one calendar year, you are in the United States for at least:
- 131 days in the current year, and;
- 183 days in the preceding three-year period, which includes the current year and the two years immediately before that. This is determined by counting:
- All the days you were in the U.S. in the current year, and
- One-third of the days you were in the U.S. in the first year before the current year, and
- One-sixth of the days you were in the U.S. in the second year before the current year.
There are several nuances and exemptions attached to this requirement. This IRS substantial presence test webpage contains the details about the test.
If you meet the resident alien test, you will generally be taxed as a U.S. citizen or permanent resident. This will require you to report your worldwide income on your U.S. tax return. Worldwide income means all your income, both in the United States and abroad, will be subject to U.S. taxation.
Resident Tax Forms
Being a resident alien means you need to report your foreign and U.S. income using different forms as appropriate. Depending on the types of income, the following are tax forms for resident aliens:
FBAR: If you have financial interest or signature authority over a foreign account that exceeds $10,000 in the aggregate during the financial year, this Foreign Bank Financial Account form will be required.
Form 8938: E-2 investors with foreign financial assets with more than $50,000 aggregate will need a Form 8938 to report their income. Unlike the FBAR, the Form 8938 is not limited to only bank account balance and insurance plans—it covers both foreign assets and accounts.
Forms 3520: If you have a foreign business, distribution, or have received a substantial foreign gift, you will need a Form 3520 to report it. Though there is an exemption to this – while reporting foreign business income is compulsory, you may not be asked to report gifts of amounts less than $100,000.
Form 3520-A: This form is required if you have a foreign trust as an E-2 investor.
Form 8621: This form will be required if you have an interest in a passive foreign investment firm
Form 5471: This is required to report ownership of a foreign corporation.
Form 5472: This is required to report the interest, ownership, or control in any foreign corporation.
Nonresident E-2 Visa Taxation
A non-resident is a person who is not a citizen of the United States and does not meet the “green card test or the substantial test.” Generally, a newly arrived nonimmigrant is considered a non-resident for tax purposes. As a nonresident, you are only required to file a tax return on your U.S. based income. There are two different taxes under this category: Effectively Connected Income (ECI) and Fixed or Determinable, Annual, or Periodic Income (FDAP).
An ECI is an income earned from your employment in the United States and is taxed at graduated rates. FDAP, on the other hand, is passive income such as dividends, rents, or royalties and is taxed at a flat rate.
Nonresident Tax Forms
Form 1040NR, U.S. Nonresident Alien Income Tax Return is the designated document for nonresident aliens. Both the ECI, which is for business or trade in the U.S. and income that is FDAP are to be reported using Form 1040NR. While FDAP is taxed at 30%, as an E-2 investor who is eligible for treaty rates, you may merit a lower rate. No deductions are allowed against FDAP income. ECI is reported on page 1 while FDAP income is reported on page 4 of the form.
E-2 Tax Treaties
One of the most significant advantages of the E-2 visa is the tax benefits for its holders. The U.S. has income tax treaties that allow some foreign nationals to enjoy reduced or eliminated taxes on their income. Put simply, a treaty is an agreement between two countries that allows citizens from both sides to enjoy certain mutual benefits.
Tax treaties vary widely among the participating nations. What you will get as benefits will be determined by the agreement between your country and the United States.
Does E-2 Visa Have a Specified Investment Amount?
Another interesting feature of the E-2 visa is that it does not have any minimum amount. Unlike other investment visas such as the EB-5 green card, where you must invest a minimum of $900,000 in capital, the only requirement for E-2 capital is for it to be substantial. In other words, it must be enough to set up and operate the intended business enterprise.
However, to be on the safe side, it is highly recommended that you invest a minimum of $100,000. While there is no specific capital set for this visa, it will be difficult to argue that anything lower will be considered substantial. The proportionality test will be used to determine if E-2 investment capital is substantial or not. The designated immigration officers will consider the following factors to make their decision:
- Whether the investment capital is sufficient to guarantee your financial commitment to the successful running of the business
- Whether it supports the likelihood that you will successfully grow and run the business.
- Whether it is substantial enough to either buy over an existing enterprise or establish a new one.
E-2 Visa Filing Process
You may file an E-2 visa either in the United States or from your home country. If you are already in the U.S., all you will need is to request for a change of status by filing an I-129, Petition for a Nonimmigrant Worker. If you are currently residing in a foreign country, you will need to apply for a visa at a U.S. embassy or consulate in your home country.
E-2 Visa Eligibility Requirements
To be eligible for an E-2 visa, the following criteria must be met:
- You must be a national of one of the countries with which the United States maintains a treaty of commerce and navigation.
- You must have invested or be actively about to invest a substantial amount of capital in a bona fide enterprise in the U.S.
- You are willing to enter to the United States mainly to build and direct a business enterprise. This must be proven by showing evidence that you own at least 50 percent of the business. The other tenable proof is having the possession of or operational control through a managerial position or other corporate means.
E-2 Visa Period of Stay
The E-2 visa period of stay varies widely among treaty nations. This will be determined by the exact reciprocity agreement between the U.S. and your country of origin. Typically, qualified treaty investors and their employees will be issued an E-2 visa with an initial two-year period of stay upon entering the United States.
You must maintain the intention of leaving the U.S. when your status expires or is terminated. If you travel abroad after the initial two-year stay, you can request for readmission without filing for a new nonimmigrant visa and your current visa will be renewed automatically with a two-year extension. You can also apply for an extension from the U.S. by filing a Form I-539. You can request a status renewal for as many times as possible after the initial stay.
E-2 Treaty Employees
As an E-2 investor, you can come to the United States with your employees. To qualify for a visa, the person must have the same nationality as the principal E-2 investor. He or she must also meet the definition of “employee” and be engaging in a supervisory or managerial role. If employed in a lesser role, he or she must have special qualifications. Qualified employees will be allowed the same two-year initial period of stay that was granted to the principal investor.
Family Members of E-2 Investors and Employees
E2-investors and employees are allowed to bring their spouses and unmarried children with them. However, they will have to go through the visa application process to seek admission into the United States. If their application is granted, they will be issued the same period of stay given to the principal investor or employee.