Emigration instead of Immigration*

The United States are a nation of immigrants and over years U.S. citizenship was a desirable commodity. Now the United States faces a new trend: emigration and renouncement of U.S. citizenship. Since 2009, the IRS (Internal Revenue Service) has recorded a rise in citizenship renunciations. In the last few years more and more U.S. citizens gave up their U.S. citizenship — from 200 to 400 cases annually prior to 2009 to 1,780 in 2011 and 1,485 in 2010.

Why would anybody put himself at risk to become stateless and give up U.S. citizenship that allows him to stay in the U.S. unlimited? 

Looking at the case of Eduardo Saverin, Facebook co-founder, U.S. taxation is a good reason to become Ex-Patriot. Saverin is believed to have gained USD 3 billion when Facebook went public in May this year, money, being U.S. citizen, he needs to declare in his U.S. tax returns. Renouncing his U.S. citizenship in 2011 and moving to Singapur, a country without taxes on capital gains, might have saved him USD 100 million in taxes.

The U.S. tax system is based primarily on citizenship. Every U.S. citizen (and Green Card holder) has to file a U.S. income tax return regardless of whether he lives inside or outside of U.S. borders and where he receives his income. Every U.S. citizen needs to declare his world-wide income in the annual tax return (click here for more information).

Over years the IRS rarely verified tax statements, but in 2009 the IRS began a concerted effort to pursue U.S. citizens who fail to disclose assets held in international bank accounts. One way the IRS collects information about hidden assets is to rely on and encourage whistleblowers. In 2009 a Swiss bank, the UBS AG was confronted with amid allegations of aiding and abetting U.S. citizens in tax evasion and consequently had to disclose the names of a number of American clients.

Another way to collect taxes more effectively and make it harder to hide money is to criminalize false tax statements. From this year on, U.S. citizens must file a new Form 8938 with the IRS under the Foreign Account Tax Compliance Act (FATCA, for more information to FATCA please see our blog).

This form requires listing of all foreign financial assets. Failure to file can result in a fine up to USD 50,000. FATCA will also require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Though being interesting for cunning tax birds, renouncing U.S. citizenship is not that easy. Since 2008, a renouncing U.S. citizen must pay a USD 450 filing fee and might face an expatriation or exit tax. The expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their residency. (You are a "long-term resident" if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your residency ends. You are also considered a "long-term resident," if you held a green card for as little as six years and two days).

Furthermore the expatriation tax applies only to those who have an average annual income tax liability in excess of USD 139,000 (inflation adjusted) for the five years preceding expatriation; have a net worth of USD 2 million or more on the date of their expatriation; or have failed to properly file taxes for any of the past five years. Their assets are treated as if liquidated at the time of expatriation, and any net unrealized gain over USD 651,000 is taxed as income. They must also pay a 30 percent withholding tax on any deferred compensation, which includes pension plans and stock options.

*Author:  Sebastian Meis, LL.M. - Partner in the BridgehouseLaw Atlanta Office. 

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