Comparing Second Citizenship vs Second Residency Tax Implications

Comparing Second Citizenship vs Second Residency Tax Implications

Comparing Second Citizenship vs Second Residency Tax Implications

Oftentimes, when taxpayers research issues involving relinquishing or renouncing their US person status, they will come across terms such as second citizenship, second residency, and the golden visa programs. In general, when a person wants to seek out second citizenship or second residence, the quickest path is by applying to one of the golden-visa investment programs.  There are two types of golden visa programs — and they both may have different tax implications. The citizenship-by-investment program allows a person to invest in another country, pay a sum of money — and become a citizen of that country so that they will be a dual-citizen and now have a second passport. Alternatively — especially for taxpayers who are non-citizens — they may consider obtaining a second residency by way of a residence-by-investment program. A person does not obtain citizenship by way of a residence-by-investment program –– although ultimately it may become available after meeting the residence requirements –– but they do obtain the ability to travel, for example, if they want to seek various 90-day stays within different countries in the Schengen area (depending on which RBI program they select).  Let’s take a look at the basics of Second Citizenship vs Residency Tax Treatment.

Worldwide Income (US Citizen or Permanent Resident)

If a person remains a US Citizen or Lawful Permanent Resident – or otherwise meets the Substantial Presence Test –– they become subject to US tax on their worldwide income as well as global reporting such as FBAR and FATCA. And, just obtaining a second citizenship or second residency does not eliminate these requirements. But, if a Taxpayer obtains citizenship and formally expatriates, then they will no longer be subject to US tax on their worldwide income. Also, just obtaining a second residency does not reduce US Tax, unless the taxpayer already has second citizenship in another country and then renounces their US citizenship as well.

Obtain Second Citizenship & Relinquish

If a person obtains second citizenship and then renounces or relinquishes their US status — then they are no longer subject to US tax on their worldwide income. Once a person has second citizenship they are able to renounce their US citizenship. The reason being is that a person must have dual-citizenship at the time they formally expatriate — which is typically not an issue for lawful permanent residents as they already have citizenship in another country.

Obtain Second Citizenship & Do Not Relinquish

If a person obtains second citizenship as a form of Plan B or a backup plan — this does not reduce their US tax liability. If they are still a US person then they are still subject to US tax on their worldwide income — even if they have a second citizenship and reside overseas. In fact, depending on how many assets are maintained in that foreign country, along with the different types of taxes levied by the foreign country’s tax authorities – they may actually increase the tax liability if there are not sufficient foreign tax credits comparable to offset the income.

Second Residency Does Not Impact US Tax

The main benefit for someone to obtain a second residency is for travel rights — such as seeking to travel in areas such as the Schengen area in which their current passport is not sufficient to allow them to travel freely to the countries they prefer without first obtaining a visa. With a Residence-by-Investment Golden Visa, Taxpayers obtain travel rights. But, just obtaining a second residency does not reduce US Taxes — and again (very important) — that based on the type and value of assets being maintained in a residence-by-investment country may increase the overall increase tax liability of the US citizen.

Exit Tax/Covered Expatriate

Before renouncing US citizenship and giving up their status, taxpayers must be aware that if they are considered a covered expatriate that they may become subject to US exit tax. Depending on any potential mark-to-market gain or ineligible deferred compensation/specific tax-deferred treatment implications at the time of exit, it may result in significant tax liabilities — so Taxpayers should first consult with a Board-Certified Tax  Law Specialist before making any proactive representation to the US government.

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

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