Tax Planning Considerations for Foreign Scientists and Engineers

Overview

As discussions regarding immigration continue to unfold, one point that is not under discussion or open for debate is the contribution of foreign scientists and engineers to the New Economy. The statistics are pretty startling.

According to a 2012 report  from the Information Technology Industry Council, the Partnership for a New American Economy, and the U.S. Chamber of Commerce, research has found that “every foreign-born student who graduates from a U.S. university with an advanced degree and stays to work in the U.S.  has been shown to create on average 2.62 jobs for American workers—often because they help lead in innovation, research, and development.”

A 2011 report from the Partnership for a New American Economy concluded that immigrants were founders of 18 percent of all Fortune 500 companies, many of which are high-tech giants.

A 2007 study by researchers at Duke University and Harvard University concluded that one-quarter of all engineering and technology-related companies founded in the United States from 1995 to 2005 “had at least one immigrant key founder.”

A 2006 study by the National Venture Capital Association found that, during the previous 15 years, immigrants started one-quarter of the public companies in the United States backed by venture capital. These companies had a market capitalization of more than $500 billion and employed 220,000 workers in the United States in 2006.

One of the aspects that is recently of interest to me is the tax planning of foreign scientists and engineers who emigrate to the U.S. who become part of the New Economy. In many cases, these scientists become naturalized citizens. In other cases, they are green card holders. One thing is for certain though, Uncle Sam taxes these scientists on their worldwide income and assets once they become citizens or obtain a green card.

In many cases, these scientists still have family members living in the the scientist’s home country. When you consider the impact of an IPO on the personal tax planning of these scientists and engineers, the foreign-based parents becomes an important planning fact.

While it is true that Congress enacted legislation in 1996 to make it very difficult for American taxpayers to utilize and exploit foreign trusts to avoid U.S. income taxes, it is not impossible. The foreign scientist who owns one million shares of founder’s stock in his company that is about to undergo an IPO can minimize the impact of U.S. taxes on the value of those proceeds when the stock is sold following the expiration of a restriction period on the sale of the stock.

The ultimate tax goal is the creation of a foreign grantor trust with the scientist’s parents or family member treated as the grantor or the trust. If this planning is respected, the scientist’s shares owned within the foreign grantor trust cvan be sold without U.S. capital gains taxation. For the engineer or scientist in California, the benefit is a 36 percent gain on the sales proceeds. But as the cliche goes, the Devil is in the details. The combination of IRC 679 and the rest of the grantor trust rules and IRC Sec 684 make the planning a minefield. You can make it to the other side without being blown to pieces.

While the foreign parents are still alive, the foreign grantor trust can provide for tax-free accumulation and distributions to the foreign engineer. At the death of the parents, the foreign trust loses its grantor trust status. The taxes and penalities on undistributed net income within the foreign trust are onerous. At this point, it may be wise to to migrate the trust onshore to a jurisdiction without state income taxation on trust income such as Nevada or South Dakota.

The problem is an odd problem but an important one. What is at risk tax-wise is also pretty substantial- millions of dollars in capital gains taxation. The foreign born scientist or engineer may be able to realize the American Dream but avoid taxation on it as a result of their foreign roots. If you or your colleagues have these facts, it may be worth looking a little harder at your tax planning before your company has its IPO.

About gerrynowotny

I am a tax and estate planning attorney with a JD and LL.M in estate planning from the Univesity of Miami School of Law. I have worked in the life insurance industry for twenty three years and the last eleven in private placement life insurance.
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