Are you an E-2 investor and you don’t know if you must pay taxes? In short, you need to pay taxes as an E-2 visa holder, but this will depend on several factors such as your tax status, income source, nationality, etc.
This is why we’ve created this article, to share with you everything you must know about taxes for E-2 visa holders. Keep reading to be aware of your reporting and tax obligations as an E-2 investor.
What is an E2 Visa?
The E-2 treaty investor visa is a nonimmigrant classification that will allow you to work in the United States by investing in an existing business or by creating a new company in the country. It’s valid for three months to five years, and you can extend it as many times as necessary. There’s no set minimum investment, but it must be substantial. However, the E-2 visa is only available to citizens from certain countries that maintain treaties with the United States.
It’s also important to mention that the E-2 visa is available for employees as well. The only conditions they need to meet are that they must share the same nationality as the E-2 investor, they must work in an executory or s upervisory role, or they must provide highly specialized services and solutions that are critical for the E-2 business.
Are There Taxes for E2 Visa Holders?
Yes, there are taxes for E2 visa holders, and in consequence you need to pay them. How much you will have to pay will depend on the tax status you choose, which is one of the main problems that E2 investors face.
If you meet the substantial presence test, then you will have to fill out different kinds of forms to report on your U.S based income, as well as your international income and assets. From trusts to commercial interests in foreign corporations, you might be subject to paying a wide myriad of taxes as an E-2 investor.
Given the complexity of U.S. tax laws for E-2 visa holders, we recommend you consult with a tax professional specialized on international taxation to make sure that you remain compliant with all the current laws and regulations.
In order to determine the exact types of taxes that you will have to pay as an E-2 investor, first you need to take the substantial presence test. Based on it, you will be able to see what your reporting requirements will be, and hence, what taxes you will have to pay to the IRS.
What Is the Substantial Presence Test for E2 Taxes?
The Substantial Presence Test by the IRS will determine if you are a “Resident Alien” or not, which will directly impact on your assigned tax status. Based on this, you will fall into one of the following categories:
- Non-resident Alien: You will only pay taxes on your U.S based income
- Resident Alien: You will pay taxes in the U.S for all of your income (both US based and global)
How to Easily See If You Meet the IRS Substantial Presence Test
If you want to know if you meet the substantial presence test, you only need to take the following conditions into account:
- You have been in the U.S for 31 days or more during the present year, and
- You have been in the U.S. for 183 days in the preceding three-year period (present year and the two years immediately preceding it).
You also need to consider the following regarding the days that will count into the calculation for the substantial presence test:
- All the days you were in the U.S. in the present year, and
- 1/3 of the days you were in the U.S. in the first year before the present year, and
- 1/6 of the days you were in the U.S. in the second year before the present year.
It might be hard to understand this test if you have never dealt with U.S. tax laws before, and this is why we have created the following example to check if you meet the substantial presence test for 2022.
Let’s suppose you were present in the U.S. in each of the following years: 2020, 2021, and 2022. With the following distribution of days:
- 2020: 90 days (⅙ of days)
- 2021: 150 days (⅓ of days)
- 2022: 100 days (All days)
After making the necessary operations, you would end up with a total of 165 days, making it lower than the requirement of 183 days, which means that you won’t be considered as a resident alien.
Once you know what your tax status is, you will either just need to fill out the Form 1040, or you might have stricter and more complex reporting requirements. The next sections will explain everything you need to know about it.
Reporting Requirements for Non-Resident Alien E-2 Investors
In case you didn’t meet the IRS substantial presence test, then your reporting requirements will be easier to manage. And in consequence, you will only have to pay taxes on your U.S. sourced income by filling out the Form 1040NR.
You will need to fill out the Form 1040NR to report on your Effectively Connected Income (ECI), which covers all the business or trades transactions executed in the United States, and also to report on your Fixed, Determinable, Annual, or Periodical (FDAP) income as well.
From here, you might face two scenarios: Paying 30% tax on FDAP income, or paying a specific tax rate based on your ECI income. The latter will fluctuate and hence you should consult with a tax professional to determine how much you really need to pay, because it could be below 30% or higher than 50%.
However, you also need to consider that certain tax treaties might help you to reduce your taxation as a non-resident alien E-2 investor. You can check our next sections for more information about this.
Tax Reporting Requirements for Resident Alien E2 Investors
If you have determined that you are a resident alien after meeting the Substantial Presence Test, then you need to know more about your tax reporting requirements as an E-2 investor. Here you have the main filling requirements to take into account:
- Form 1040: As an E-2 investor under the resident alien category, you will have to use the Form 1040 to file your annual income tax return. If you are 65 years old or older, then you will have to fill out the Form 1040-SR.
- Form 8621: If you are an E-2 investor and you possess an interest in a passive foreign investment firm, then you will have to fill out the Form 8621 to bring the IRS all the information they need about it.
- Form 5471: If you own a foreign corporation, then you will have to fill out this Form to provide the mandatory informations return to the IRS.
- Form 5472: If you own a foreign corporation, or you have a financial interest or control in any, then you will have to fill out the Form 5472 to bring the IRS the necessary information about it.
- Form 8865: You will have to fill out the Form 8865 if you are involved in a controlled foreign partnership with a participation to or greater than 10%.
- Form 8938: If you’re an E-2 investor and you have foreign financial assets totaling more than $50,000, there’s a requirement for you to fill out a Form 8938 to report your income. You need to consider that this Form includes both foreign assets and accounts.
- Forms 3520: If you own a foreign business, distribution, or have received a significant gift from a foreign source, you will have to fill out a Form 3520 to report it. Nonetheless, there is an exception to this rule: Reporting foreign business income is mandatory, you may not be required to report gifts below $100,000.
- Form 3520-A: If you are an E-2 investor and you have a foreign trust, then you will need to use the Form 3520-A to report it. Otherwise, failing to report it on this informations return will lead to severe penalties
- FBAR (Foreign Bank Financial Account): If you possess a financial interest or hold signature authority over a foreign account that is equal or greater than $10,000 within the financial year, it is obligatory for you to complete and submit the Foreign Bank Financial Account form (FBAR). It is crucial to comply with the reporting obligations outlined by the United States Department of the Treasury, because otherwise you might face fines as high as $10,000 per violation.
Filling out these forms might result excessively hard if you are not used to the U.S tax laws, and hence we recommend you to work alongside a tax professional. This way you will fill them out with all the right info to avoid potential problems with the IRS.
About Tax Treaties for E-2 Investors: How You Can Legally Reduce or Eliminate Taxes
As an E-2 investor, you can take advantage of tax treaties between your country and the United States to reduce the amount you have to pay to the IRS. For example, you might be exempt from paying taxes if you provide personal services and you’re a citizen of Australia, Austria, Belgium, Canada, Denmark, amongst many other countries.
The same goes for wages or pensions paid by a foreign entity. Therefore, the best way to determine how these tax treaties could benefit you is by talking with a tax professional today.
What Will Happen If You Don’t Pay the Taxes for E2 Visa Holders?
Evidently, not paying E2 taxes will lead to serious problems, and here you have a list of the possible consequences:
Penalties for Not Reporting and Paying Taxes as an E2 Visa Holder
The penalties that you might have to pay will depend on your tax status and your reporting requirements, here you have a list of all the possible penalties that might apply to you as an E2 visa holder if you fail to report your income correctly:
- FBAR Penalties: $10,000 per violation
- Form 3520 Penalties: $10,000 or 35% of the gross reportable amount that you failed to report on the return
- Form 3520-A Penalties: $10,000 or 5% of the gross value of trust assets
- Form 8621 Penalties: To be determined by the IRS based on each specific case
- Form 8938 Penalties: $10,000 to $50,000 per each return you fail to file
- Form 5471 Penalties: $10,000 to $50,000 per each return you fail to file
- Form 8865 Penalties: $10,000 to $50,000 per each return you fail to file
As you can see, the penalties for failing to file these information returns will have severe consequences for your finances, and they might end up damaging your E-2 business irreparably. This is why you need to work with a tax professional from the beginning to protect your investment.
Possible Criminal Charges
Did you know that you might face criminal charges if you avoid paying, underreport or commit fraud related to E2 taxes? You can expect a prison term of up to 10 years and penalties up to $500,000. This is why it’s key to work with a tax professional since you start your E-2 business operations in the US, to avoid problems with the judicial system.
You should not take this matter lightly, because even as a non-resident, you can still face criminal charges and you will be obliged to pay obnoxious fines. This is why it’s key to be compliant from the beginning.
Get Professional Help with Taxes for E2 Visa Holders with Quilca CPA Group
If you want to ensure that you remain compliant with the IRS to avoid fines, penalties and even criminal charges, then we invite you to contact us at (786) 310-5582 or send us a message at [email protected]. We will be happy to help you and even assist you in potentially reducing your E2 taxes.