Planting Global Citizenship & Residence Flags and U.S. Taxes

Planting Global Citizenship/Residence Flags May Lead to More Taxes

Should You Plan Global Citizenship/Residence Flags?

When a person is considered a U.S. person for tax purposes, whether they have multiple citizenships, passports, or residencies in foreign countries does not change the fact that they are still considered a US person for tax purposes. The reason why this is so important is because, unlike almost every other country across the globe, the United States follows a worldwide income taxation model for any taxpayer who is considered a U.S. person for tax purposes (including non-residents). Therefore, not only will planting global citizenship or residency flags fail to reduce your U.S. tax liability, but it may result in an increase in tax liability based on the different taxes/fees that some foreign countries levy against non-residents — which are not recognized by the United States for foreign tax credit purposes. Let’s look at four (4) common issues we see often.

Beware of Online Shysters and Tax ‘Gurus’

These days, anyone can jump on the Internet and claim to be a specialist. Just because someone may have moved overseas does not mean they have any experience in helping high-net-worth taxpayers with complex tax restructuring — or that you should follow their ‘advice.’ (read: remember what your Grandma taught you about jumping off cliffs just because your friends are doing it). 

Moving overseas does not make a person qualified in complex tax and offshore planning.

 For example:

• • • Did they have a high net worth when they moved overseas?

    • Were the tax rules the same then as they are now?

    • Are they based in the United States so that you can confirm their licensing?

    • Are they even operating under their own name?

    • Can they clearly explain to you the tax and legal ramifications to their offshore planning methods, so that you, a high net worth American, can safely transition your assets abroad?

Attorneys and other financial professionals spend years honing their craft, learning the interplay between tax rules, and applying the rules and laws in order to assist taxpayers with planning to go offshore. Just creating a website and claiming to develop mythical tax strategies that cost you six figures to ‘implement’ can very significantly injure your net worth and divest you of your assets.

You have worked hard to get where you are, so please be careful before taking any proactive steps with an unlicensed ‘professional.’

Non-Treaty Country

If a person plants a flag in a non-treaty country, it is important to note that they do not qualify for any potential treaty benefits that may minimize the taxation headache of having citizenship in the second country. This is especially true for U.S. persons who are only U.S. persons because they are permanent residents and not U.S. citizens. That is because permanent residents who reside in a foreign treaty country may qualify to be treated as foreign persons for tax purposes and not have to pay taxes on their worldwide income.

Licensing Fees vs Taxes

While some foreign countries may advertise that they do not have personal income tax, that does not mean that they don’t have other taxes or what they may refer to as licensing fees. These types of ‘non-income’ taxes and fees are common in low-tax jurisdictions and typically do not qualify for any foreign tax credit in the United States. These fees are typically entwined with the acquisition of a foreign business or trust or even the purchase of foreign real estate in that country.

Estate Taxes Not Recognized by U.S.

Even if a person plants a flag in a country which there is a tax treaty with for income tax purposes, that foreign country may have significant estate taxes which does not qualify for a credit in the United States. The United States has entered into about 16 gift and estate tax treaties although not all the treaties include both gifts and estates so taxpayers have to be very cognizant of any potential estate tax implications by planting a flag in a foreign country.

General ‘Wealth’ Taxes

Many countries have wealth and wealth-related taxes, which the United States does not have. More specifically, some countries will tax a person simply because they have a significant amount of wealth. While in the United States, there are progressive tax rates so that taxpayers who earn more income have a higher tax rate, it is not the same as simply being taxed because you have wealth. These types of taxes are not eligible for the application of a foreign tax credit in the United States so simply planting a flag in a low-tax jurisdiction when the person is considered a citizen of that foreign country may result in even more taxes than the taxpayer would be subject to if they had not planted flags in the hopes of reducing their U.S. tax liability.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who may have to file an FBAR or any of the other international information-related reporting forms but did not do so, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.