Second citizenship alone does not make a person a tax resident of another country. Tax residency status is determined by one’s place of residence and life interests, not by a passport. Therefore, before obtaining a second passport through an investment program, it is important to understand the taxes paid in different countries in order to choose the optimal jurisdiction and reduce expenses.
What is tax residency, and what determines it?
A tax resident is an individual who is considered a full taxpayer by a given country. They pay taxes on all income, even if it is earned abroad. Non-residents pay taxes only on income earned within the country.
Most countries adhere to the Model Tax Convention on Income and Capital of the Organization for Economic Cooperation and Development (OECD) when formulating tax residency rules. According to this document, a tax resident is a person who meets one of the following criteria:
- Principal residence. A person spends more than 183 days per year in the country. These days do not have to be consecutive. For example, they could be in the country in January (31 days), March–April (61 days), and September–November (91 days). In total, they would spend more than 6 months in the country and would therefore be considered tax residents.
- Center of vital interests. Authorities consider a person’s close personal and economic ties to the jurisdiction. For example, they consider the location of a person’s home and where their loved ones (spouse and children) reside.
- Economic ties. Tax authorities consider where a person conducts business or works. Economic interests related to investments or pension receipts are also taken into account.
If tax residency cannot be established based on these 3 criteria, then authorities consider citizenship. For example, this would occur if a person had a primary residence or center of vital interests in both countries.
However, it is important to note that citizenship does not equal tax residency. A person can have multiple passports, but can only reside in one country. In this case, they will be considered a tax resident of the country where they spend the majority of their time.
Tax residency changes when a person moves and transfers their center of vital interests to another country. This applies to countries with economic citizenship programs. You can learn more during a consultation with iWorld specialists.
- We’ll find a program that meets your needs
- Let’s compare the requirements and advantages of different countries
- We’ll help you find the best approach and the lowest tax rates
How to become a tax resident of another country
Tax residency most often arises after a person relocates. The following are common grounds:
- employment: a person is employed by a foreign company;
- business: a foreigner opens their own company abroad or invests in an existing one and becomes its co-founder;
- investments: a person purchases real estate or invests in local businesses, charities, or foundations;
- financial independence: a foreigner has passive income in the country of residence and receives a temporary or permanent residence permit based on this.
Wealthy foreigners often choose citizenship by investment (CBI) programs to immigrate and obtain tax residency. This option is suitable for those who are not ready to live in another country permanently, but who want to obtain a second passport quickly — in 2-6 months. It allows them to choose tax residency in a jurisdiction with more favorable rates.
Citizenship and tax residency: what’s the difference?
Having citizenship does not automatically make a person a tax resident of a country. Rather, it indicates a person’s political, social, and legal connection to the state. A passport entitles a person to free education and healthcare (if provided by law), consular protection abroad, and the right to work and conduct business without additional permits. It also provides access to benefits, subsidies, and social payments.
Tax residency is tied exclusively to paying all mandatory taxes and declaring income. This is especially true in countries with CBI programs. A person can obtain a second citizenship without being obligated to pay taxes in that country. This option is available in the Caribbean, Vanuatu, Sierra Leone, and São Tomé and Príncipe, for example. None of these countries requires permanent residence after citizenship is granted.
iWorld experts compared the legal terms «citizenship» and «tax residency»:
| Criteria | Citizenship | Tax residency |
|---|---|---|
| Basis for obtaining the status | Naturalization, investment, birth, descent, or repatriation | Spending more than 183 days per year in the country, economic ties, or having your center of vital interests there |
| Residence requirement | Depends on the applicable pathway | Yes |
| Tax liability | Not automatic | Yes |
| Can the status be changed? | Yes, by legally obtaining status in another country (where permitted) | Yes, when relocating |
What is citizenship by investment, and how does it work?
Citizenship by investment (CBI) programs offer a simplified way to obtain a second passport by investing in a country’s economy. Depending on the conditions, investors invest a certain amount in the economy, real estate, charity, or another area, and in return, they are granted citizenship.
Key features of CBI programs include:
- remote application: most programs do not require permanent residence in the country, and the process can be completed remotely;
- no residency requirement: you do not need to live in the country before or after receiving citizenship;
- fast citizenship acquisition: a second passport is issued within 2 to 6 months, depending on the country;
- no automatic tax status: an investor only becomes a tax resident if they move to the country and establish their life and interests there.
Due to these advantages, many investors view CBI programs as tools for international mobility and capital protection.
Does an investor automatically become a tax resident?
Second citizenship by investment and taxes are not related. A CBI program participant does not automatically become a tax resident of the country that issued their passport. To obtain this status, they must either relocate to the country or strengthen their economic or social ties with it.
- Programs that actually work
- Complete cost estimate for registration
- Comprehensive legal support
When does one become a tax resident of the country of second citizenship?
Most CBI programs do not require investors to relocate and permanently reside in the country. Accordingly, tax residency is not granted automatically. However, there are situations when such a status is granted:
- relocation: the investor decides to permanently reside in the country after receiving second citizenship;
- business relocation: the entrepreneur decides to completely transfer the company to the country’s jurisdiction;
- asset transfer: the investor transfers all their capital, opens accounts, and keeps savings in local bank accounts;
- relocation of vital interests: the spouse moves to the country, the children enroll in local schools or universities, and the family purchases permanent residence there.
If you plan to relocate physically after obtaining a second passport through investment, it’s important to consider the tax burden and the rules governing the exchange of financial information between your home country and your new country of citizenship. Discuss these details with immigration lawyers, who can provide up-to-date information on the countries you’re interested in.
Do you have any questions?
Ask an immigration lawyer these questions for free
What are the benefits of becoming a tax resident of another country?
While most investors try to avoid unnecessary taxation, there are situations in which tax residency is justified. This depends on the legislation of a particular jurisdiction. Tax residency can be favorable when relocating to a country:
- With a territorial tax system. This means an individual pays mandatory taxes only on income earned in that country. In other words, foreign residents are not taxed on income earned outside that country. For example, this is the practice in Hong Kong.
- With no capital gains tax. Individuals and legal entities are not required to pay taxes on the sale of company shares, businesses, or real estate. This significantly reduces the tax burden. For example, there is no capital gains tax in Dominica, São Tomé and Príncipe, and Vanuatu.
- No income or corporate tax. Investors do not pay tax on investment income or any other profits (from business or employment). For instance, Vanuatu does not have mandatory budget contributions.
- Special tax regime. Some countries have special tax regimes for new residents. Under these rules, foreigners are entitled to pay tax at a special rate. For instance, Malta has such a regime, where residents pay a fixed amount on income remitted to the country.
Vanuatu citizenship by investment:
- Additional jurisdiction for residence
- Tax-Free Zone
- A return on investment of at least 5% per year
- Simplified Visa Application Process for the U.S. and Canada
Leave an application and get a consultation specialist
How to use second citizenship for tax planning?
Many investors use a second citizenship as a financial and tax planning tool. There are several situations in which participation in the CBI program is part of such a strategy.
- «Backup passport» without changing tax status. The investor acquires dual or second citizenship but continues to pay taxes on worldwide income in their home country since they do not become a tax resident in another jurisdiction. They use the passport for travel, opening foreign bank accounts, and concluding contracts with foreign counterparties. Countries that do not require permanent residence, such as those in the Caribbean region and Vanuatu, are suitable in this situation.
- Leaving a high-tax jurisdiction. An investor resides in a country with high tax rates, such as Germany. With a second passport obtained through the CBI program, it’s easier for them to relocate to another country and terminate their tax residency in the previous jurisdiction. Many investors consider Vanuatu, for example, because it has no income, corporate, inheritance, or capital gains taxes.
- Diversification of personal and corporate risks. Many investors spread their assets across several countries. This helps them avoid political and financial risks and protect their capital.
- Simplifying international banking transactions. Most banks conduct strict customer due diligence (Know Your Customer — KYC).
- Alternative jurisdiction. Investors obtain a second passport so they can leave their home country at any time, without having to wait for visa approval. This reduces dependence on one country and, in some cases, simplifies inheritance transfers to loved ones (many CBI countries have no inheritance tax).
Risks: CRS, CFC, and double taxation
A tax resident pays taxes on all income only in the country where they obtained this status. This status is in no way related to obtaining a second citizenship. However, this does not mean that taxation can be completely ignored. When considering obtaining a second citizenship by investment, keep the following in mind:
- Common Reporting Standard (CRS).
This international standard, established by the OECD, facilitates the exchange of financial and tax information between 126 countries. Participating countries include those that offer CBI programs, such as Vanuatu, Turkey, Saint Kitts and Nevis, and Dominica. Each country automatically reports information on investors’ accounts and assets to the OECD annually, and the regulator can redirect this information to the investor’s country of tax residence. However, Vanuatu only exchanges information with 70 countries and does not provide information on certain types of accounts. - Controlled Foreign Company (CFC) rules.
Most countries require tax residents to declare their ownership of foreign companies. This is an attempt by the authorities to prevent tax evasion through tax-free or low-tax jurisdictions. - Tax residency based on the center of vital interests.
Even if an investor spends less than 183 days in the country of their second citizenship, they may be considered a tax resident based on their center of vital interests. In this case, the location of their family, business, and primary residence will be taken into account. - Double taxation agreements.
Treaties are signed between countries to ensure that the same income is not taxed in 2 jurisdictions simultaneously. Before obtaining a second citizenship, check if your country has a signed agreement with the country you’ve chosen.
