Does Acquiring Multiple Citizenships Protect Assets?
For US taxpayers who are concerned about the potential implications of having US assets in a global economy, oftentimes they will consider implementing a Plan B –– wherein they obtain multiple citizenships from different countries. While on the outside, this may seem like a good idea, at the end of the day it oftentimes does not achieve the intended goal — and actually results in the taxpayer having more headaches and more US tax implications. With the recent surge in Golden Visa Program applications, it is very important that Americans who are considering a Plan B to understand the tax implications of having multiple citizenships.
United States Worldwide Income
One of the most important aspects of a Plan B multiple citizenship scenario is understanding the tax implications. From a baseline perspective, the general proposition is that US persons are taxed on their worldwide income. The basis for the taxation is based on the US person status — and not the country residency. Therefore, just obtaining multiple citizenships and relocating overseas does not actually reduce a person’s tax liability, unless the person formally expatriates.
If You do Not Formally Expatriate
If you are not seeking to formally expatriate—which means to either relinquish your Long-Term Lawful Permanent Resident status or renounce your US citizenship – then there are a few things to consider before obtaining multiple citizenships:
More Taxes Due
By obtaining multiple citizenships, you may incur taxes in various foreign countries in which there is no similar type of taxes in the United States (thus, no foreign tax credits are available). And, in order to obtain a foreign citizenship by investment, taxpayers typically have to purchase assets within the country’s borders, which means a taxpayer may actually have more tax liability.
More IRS Reporting
The US government requires US persons who have foreign assets, accounts, and investments to report them annually on a host of different international information reporting forms such as FBAR & FATCA. Having to report these additional assets may lead to a much more complicated annual tax return –– noting that the failure to report this information can result in significant fines and penalties.
PFIC Tax Implications
A PFIC refers to a Passive Foreign Investment Company. When US persons acquire foreign assets such as mutual funds, equity funds, and other types of companies that produce significant amounts of passive income, they may be subject to the PFIC tax regime. PFIC tax regimes generally require taxpayers to pay tax on their passive income generated at the highest tax rate available under US tax law, and not the typical 15 or 20% tax rate for qualified dividends or long-term capital gains. While certain elections can be made, they can be complicated and not always benefit the tax pair the way they may be presented by the foreign financial institutions selling the investments.
When a person winds down their US business with the intent of recreating the business overseas, it may fall into the corporate inversion category. The IRS does not like the idea of US companies inverting to become foreign companies in order to avoid certain US taxes. Therefore, there are various rules and requirements for taxpayers who attempt this option. Stated another way, simply winding down the US business with a goal of recreating the same business overseas is not a seamless transition.
If you do Expatriate from the US
If you do formally expatriate, you may be considered a covered expatriate and subject to a tax, but not always. It is not solely based on a person’s net worth or annual income tax requirements, but rather on whether there are any mark-to-market gains, specified tax-deferred treatment, or ineligible deferred compensation. Taxpayers considering exiting the US tax system should consult with a Board-Certified Tax Law Specialist before making any representations to the US government.
No Worldwide Income from the United States
Once a person is no longer a US person, they are no longer subject to US tax on their worldwide income. Rather, they are only subject to US tax on their US-sourced income, and foreign tax treaties may be used to reduce and/or eliminate certain tax withholding. One caveat is that if the person is considered a covered expatriate, then there may stil be a continuing tax implication.
You Can Pick your Tax Scheme
When you are no longer a US person, you can plan to reside outside of the United States — and implement more diverse tax planning strategies. And, if you plan properly between the different citizen-by-investment opportunities, residence-by-investment opportunities, and/or digital nomad visas — you may be able to significantly reduce your tax rate.
Foreigners Can Still Invest in the U.S.
Just because you are no longer a US person does not mean you lose the opportunity to invest in the United States. Unlike various other countries, there are not many barriers to investing in US companies, although being a foreign nonresident alien may come with additional tax headaches such as a typical 30% withholding and FIRPTA. Although, oftentimes certain capital gains and interest income that is US-sourced do not have taxes withheld at source in the United States, so depending on the residence of the taxpayer — taxes may be avoided.
Proper Planning and Structuring with a Tax and Legal Specialist Team
In order to properly plan for multiple citizenships and a reduction in tax liability, taxpayers should consult with a Board-Certified Tax Law Specialist. Taxpayers should be aware of various snake oil salesman online selling false strategies that are either outdated — or do not (and never) worked. Just because someone may have expatriated does not mean they are qualified to assist you with your individual exit strategy planning and execution.
About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and expatriation.
Contact our firm today for assistance.