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How Global Citizens Create Tax Reduction Planning Strategies
Global Citizen Tax Reduction Planning Strategies
Unlike almost every other country across the globe, the United States follows a worldwide income taxation model. That means that US Citizens, Lawful Permanent Residents and other US residents who meet the Substantial Presence Test are subject to US taxation on their worldwide income. This is especially unfair for US persons who reside overseas and may have most — if not all — of their income sourced from foreign countries. Therefore, sometimes a US person may consider moving overseas to try to reduce their tax footprint. Unfortunately, despite some of the misinformation you will find online, just purchasing a citizenship or residence by investment visa and moving overseas does not reduce your US taxes. In fact, it might actually increase a person’s tax liability. Let’s look at a few ways global citizens can plan to reduce their tax strategies.
Are They U.S. Citizens or Not?
One of the biggest barriers to becoming a global citizen and implementing tax reduction strategies is whether a person is a US person or not and if they are a U.S. person – are they a U.S. citizen or resident. If you are a U.S. citizen, you are limited in making any type of treaty election to avoid worldwide income tax — and even dual citizens get stuck in this tax matrix. But, if you are a permanent resident or foreign national who meets the Substantial Presence Test, you may qualify for a treaty election or alternatively the Closer Connection Exception to the Substantial Presence Test.
Relocating vs Expatriation
Becoming a global citizen means different things to different people. If you are a non-US person, then it is much easier to obtain residency and citizenship in foreign countries — most of which do not utilize the worldwide income tax model. If instead you are a US citizen, and you are seeking to become a global citizen but avoid the headache of U.S. tax on worldwide income and then you will have to consider formally expatriating from the United States, but for some taxpayers that may lead to an exit tax.
Citizenship vs Residency
If you are seeking to become a global citizen, you should determine whether you are actually seeking citizenship in foreign countries or just residency rights. Many different countries offer programs called Citizenship-by-Investment and Residence-by-Investment (aka Golden Visa Programs). Both allow the taxpayer to reside in the foreign country, with the residence programs being (typically) easier to apply to since they do not grant citizenship rights or a passport. For some Taxpayers, having one citizenship but multiple residences is a more tax effective method for becoming a global citizen.
Permanent Residence in a Foreign Country
While most foreign countries do not follow the worldwide income tax rule, many foreign countries do provide that residents are taxed on their worldwide income — when they are considered to be a permanent resident or something equivalent under that foreign country’s tax laws. For most countries, that means residing in the foreign country for more than 183 days. Noting that different countries have different tax rules, and proper planning can help to minimize or avoid taxation for non-U.S. Citizens and those who formally expatriate.
Categories of Income Impacts Taxation Rules
When before becoming a global citizen, it is important to determine what type of income is being generated and how much of each category of income. The reason why this is so important, is because different countries have different tax rules depending on the specific category of income. For example, some countries may only tax capital gains and not dividends while other countries do not have any personal income tax at all. Likewise, if you are thinking about forming a foreign trust or foreign corporation, while there may not be any corporate taxes in a particular country, there could be significant licensing fees. Moreover, many foreign countries that have low-income tax rates do have significant wealth tax or equivalent that is levied on the taxpayer on certain wealth that is gained while being a U.S. citizen or resident — even if not residing full-time in that country.
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