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Dual citizenship and tax cuts: is there a connection?

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1 minute read

Dual citizenship and tax cuts: is there a connection?

There are some misconceptions about dual citizenship when it comes to the issue of lower taxes. Having a second passport opens up more financial opportunities for immigrants. But in which cases will it help reduce the tax burden?

Tax policy in countries with tax residency system

The tax system of a country determines whether it is possible to reduce taxes through dual citizenship. Most of the world's countries use a residence tax system. Tax payment requirements vary, but in order to obtain tax residency in jurisdictions with such a system, a foreigner will need to meet a number of requirements, such as living in the state for a certain period of time.

In order to reduce the amount of fees, a foreigner needs to become a tax nonresident in their home state. To terminate a financial relationship, an individual can create a tax residency in a country with a lower tax rate or without any. There is no need to apply for a second passport, in that case.

Dual citizenship does not guarantee reduction of administrative burden under the established taxation of residents. The situation can be improved by changes in tax policy of the state, allowing the second passport to serve as a kind of insurance. However, developed countries are trying to maintain their tax system, as foreigners and foreign companies are trying to use the privileges of low tax payments. At the same time more and more people are becoming permanent tourists and remote workers from different parts of the world.

Thus, the UK is unlikely to allow its citizens to evade taxes. A second passport comes in handy if the tax rates in the state of residence are low. Saint Kitts and Nevis, for example, is one of them.

Taxation of U.S. Citizens

Residents of the United States will be able to avoid tax payments only if they give up their U.S. passport. The U.S. applies a citizenship-based tax system, under which all Americans are required to pay government fees, even if they have not lived in the States for a long time.

The income of green card holders in the U.S. is also subject to taxes. You can avoid them only if you renounce permanent residency. Non-citizens of America have the opportunity to exit the tax system of the state. In order to do so, green card holders, who have citizenship in another country, need to limit the time they spend in the States. However, immigrants should be prepared to take the substantial presence test, which the IRS (Internal Revenue Service) conducts for those who have been in the country for more than 183 days. An extended stay in the U.S. will be cause for the IRS to require the resident to pay taxes.

When applying for a second citizenship, an American should not establish tax residency in another country, close local bank accounts and sell property, because American citizens always retain their status for tax reasons. A second passport will not allow a U.S. citizen to live in another country and avoid taxation: the IRS does not leave such cases without notice. An important nuance: Americans, in order to get rid of the tax burden, will need to first obtain a second passport, and then renounce U.S. citizenship.

In which countries tax cuts for dual citizenship is possible

Two factors play a key role when it comes to reducing taxes: the tax system and the legislation of the state, which the dual citizen will leave, and the state, in which they are going to reside. Therefore, it is necessary to choose in advance the country that offers lower tax rates. The following states are considered favorable with respect to taxation:

  • Caribbean states (Antigua and Barbuda, St. Kitts and Nevis, and Vanuatu). They provide foreign investors with favorable immigration programs, that exempt the applicant from paying taxes.
  • Armenia and other countries with large diasporas and low tax requirements. As a rule, they do not have a citizenship-based taxation system.

Choosing a tax strategy

A second passport allows one to reduce tax liability, depending on which citizenship the dual citizen holds. United States citizens, who have obtained citizenship in another country, can use this benefit as part of a broad tax strategy. But to get rid of government payments entirely, one would have to give up one's citizenship and move to, for example, one of the Caribbean countries.

In the case of tax nonresidence in the country of second citizenship, the dual citizen is still obliged to fulfill the standard tax obligations in the home country. The renunciation of one of the passports will not affect the situation. Still, a second citizenship provides a number of benefits, such as insurance for those who wish to leave the state of residence. The result is determined by the tax strategy chosen. Tax bills will in many cases be reduced, which is the main goal of dual citizens.

Choosing a tax strategy
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