Overview
The Biden administration has reactivated a long-delayed immigration program for early-stage international entrepreneurs. The International Entrepreneur Rule (IER) is intended to benefit the US economy by filling a gap in US immigration options for individuals who are positioned to develop high-growth potential start-up companies. Under the IER, qualified entrepreneurial foreign nationals will be eligible to enter the US for up to five years to work for and assist in the growth of the start-up entity.
This program is available to all nationalities, as it is not tied to country specific agreements. Also, unlike other investment-based US visa options, the start-up company must be funded by qualified US investors, awards, and/or grants, rather than the entrepreneur's personal funds. In light of these novel eligibility requirements, participants will include first-time as well as highly successful entrepreneurs. In all cases, as outlined herein, IER participants need to incorporate US tax planning throughout the lifecycle of their ventures, to protect current and hoped-for wealth.
Background: January 2017 Creation and Delays Until 2021
The IER was created in January 2017, at the end of the Obama administration, with a scheduled effective date in July 2017. We provided an advisory in January 2017, New International Entrepreneur Regulation Facilitates Start-Ups, addressing IER requirements and considerations. However, with the change in administrations, the program became largely dormant. Initially, in early 2018, steps were taken to delay the effective date; in May 2018, a proposed rulemaking was published for the purpose of eliminating the IER entirely. However, the proposed termination was never finalized. Instead, in May 2021, the current administration withdrew the 2018 termination effort and is currently engaging in informational efforts to support and foster the IER program in an effort to help restore some of the jobs lost during the pandemic.
Basics: International Entrepreneur Parole
The IER is based upon existing immigration authority to grant discretionary paroled entry to the US when it is in the public interest to do so. Qualified entrepreneurs can be granted permission to enter the US for a period of 30 months; this period may be extended once for a total maximum of five years. If granted, the entrepreneur is required to work for the start-up company, as set out in the parole application. They are not permitted to engage in other employment or remain in the US if they discontinue the intended work for any reason.
The requirements which limit the sources of investment funding to established investors and/or grants and awards are intended as a screening mechanism designed to identify companies most likely to meet the growth and job creation purpose of the program. The qualified funding must have been received within the 18 months prior to the filing of the parole request.
Minimum Applicant and Company Requirements
As mentioned above, the IER requirements have important distinctions as compared to other entrepreneurial options, which require investment by the foreign national applicant.
The baseline applicant and company requirements are:
- The applicant must have at least 10% ownership in the US start-up company;
- The applicant must have a central and active role in the company and be well-positioned to assist in its growth and success;
- The start-up company must have been created within the five years prior to the parole application;
- The company must be lawfully doing business in the US and must have substantial potential for growth and job creation.
Funding Limited to Qualified Investors, Awards, and Grants
As mentioned above, the limitations on permitted sources of funding and minimum funding levels are intended as a tool for identifying companies which are most likely to grow and create US jobs. Institutional and successful individual investors are generally highly selective in their prospective investment analysis and vetting process. Awards and grants to entrepreneurs from governmental and other sources can be highly competitive, aimed at identifying growth and profit potential.
The investment and funding requirements are:
- The company has received at least $250,000 in investment funding from qualified investors;
- The company has received at least $100,000 in qualified government awards or grants;
- The company has received a lesser amount of qualified investment funding, awards or grants, but can demonstrate compelling evidence of potential for rapid growth and job creation.
Qualified investors must be US citizens, lawful permanent residents, or US entities which are majority owned by such individuals. Qualified individual or organizational investors must have made investments in start-up entities of no less than $600,000 in the preceding five-year period in exchange for convertible debt or other securities convertible into equity. Moreover, the investor must have a track record of identifying successful start-ups, demonstrated by showing that, subsequent to their investments, at least two such entities created at least five jobs or generated at least $500,000 in revenue with an average annualized revenue growth of at least 20%.
Parole Process and Application
Parole is an immigration process which allows a foreign national to be physically present in the US. It is granted at the port of entry, but, in the case of IER, must be proceeded by an application and advance approval by the US Citizenship and Immigration Services (USCIS). It is not a visa or a status and does not provide or directly lead to any permanent immigration benefits. The IER parole can be requested both by individuals who are outside the US, as well as those who are within the US. However, if granted to an individual within the US, they would need to depart the US to request to be paroled into the US based upon the approval.
The applicant must provide evidence verifying fulfillment of all of the basic requirements outlined above. Additionally, the applicant must provide a detailed statement regarding their role in the operations and how their involvement will advance the organization’s growth and success. This statement will need to be supported by documentation, which could include items such as: proof of applicant’s prior entrepreneurial success; proof of media attention to the start-up company; evidence of applicant’s pertinent skills and/or education; proof of intellectual property created by or through applicant’s efforts; proof of participation in or graduation from a reputable start-up accelerator; and expert or other relevant letters and other pertinent proof, as appropriate.
Each parole application includes only one foreign national entrepreneur. Spouses and minor children can accompany the entrepreneur, but must separately apply for their own advance parole. It is possible to have up to three entrepreneurs approved through a single qualifying start-up entity, but each entrepreneur must separately request and qualify for parole.
Pre-Planning and Tax Residency Considerations
While the IER presents an exciting new opportunity for entrepreneurs to be able to establish and grow businesses in the US, their advance groundwork should incorporate US tax planning. The personal tax considerations may differ for entrepreneurs who have a long history of financial success as compared to those who are looking to the US for their first profitable venture. There are a multitude of different tax issues that are relevant for prospective US entrepreneurs, including: income taxes, estate and gift taxes, as well as tax considerations related to the structure and management of the entrepreneur’s business. However, in light of the IER’s requirement that the foreign national entrepreneur play a central and active role in the company, all prospective entrepreneurs should be aware of the US tax implications arising from spending a significant amount of time physically present in the United States.
For most foreign nationals who spend extended periods of time in the US, one of the most important threshold tax planning considerations is the test for determining whether a foreign national is a US federal income tax resident. For a foreign national who is not a US permanent resident (green card holder), the test for determining US tax residency status for a given year is called the "substantial presence test." This is a calculation which requires a review of the number of days spent in the US over the past three-year period. It is based on the number of days spent physically present in the United States in the current year, plus fractions of the number of days spent in the United States in the preceding two years. Foreign nationals should obtain initial and periodic guidance on these limitations and individualized analysis of the financial implications of US tax residency. Systemized tracking of travel histories is needed to monitor US physical presence for purposes of US tax residency assessment. In the event that a foreign national is a US resident for a year under the substantial presence test, there are potentially applicable exceptions. Timely identification of this issue and analysis of applicable exceptions can help avoid unintended tax consequences.
Determining US tax residency, and the implications of that status, is needed to assure compliance with tax and reporting obligations as they become due. Beyond these basic requirements, it is important to consider for long-term strategic financial planning. For example, an entrepreneur may wish to strategically plan travel to avoid US tax residency status in a year in which a significant amount of company stock is sold. Entrepreneurs will want to utilize trusted tax advisors to help them preserve their hoped-for earnings from their US ventures.
Long Term Considerations
After the completion of the initial parole period, it is possible to request an additional 30-month extension, for a total period of five years. However, the extension eligibility—and even continued validity of the initial parole—is contingent upon the success and growth of the company. In order to extend the parole period, the applicant must continue to have an active role, as the percentage of ownership required decreases to 5% for extensions.
The extension is strictly a one-time option, thus, entrepreneurs who need or want to remain in the US beyond the five year maximum parole period need to engage in planning from the outset of their endeavors. There is no natural pathway to permanent residence through the IER, however, as mentioned in our 2017 alert, there were changes to the National Interest Waiver green card option in the same time frame which were intended to facilitate the use of that self-petitioned option by entrepreneurs.
Ideally, for many entrepreneurs, their endeavors will greatly elevate their financial level and generate newly-created wealth. This anticipated success, in turn, generates tax considerations with which they may be largely unfamiliar. For entrepreneurs whose personal or business needs result in a long term or permanent stay in the US, the tax issues going forward are increasingly likely to include estate planning in consideration of US federal estate and gift taxes, as well as reduction of US income tax burdens, where possible. Further, an entrepreneur who ultimately becomes a US permanent resident or US citizen will have to consider the potential application of US expatriation taxes should they eventually decide to relinquish their US status to pursue other ventures or retire. All of these tax considerations require planning, advice, and careful evaluation both before launching a US venture and throughout the lifecycle of the entrepreneur’s time in the US.
While the IER was created in 2017, given its history, for all practical purposes, it is a new program, which holds promise as a useful option for those entrepreneurs whose ideas and start-up ventures can attract the required investment funding, awards, and grants. While it is new, we would note that there are similarities to existing investor/entrepreneur categories which can be drawn upon for strategic case development and presentation.