International: How does dual citizenship affect your tax status?
Over the last few months, we have covered numerous options regarding second citizenships from both within Latin America and across the rest of the world. However, irrespective of the number choices you may be presented with and the country in which they are, there is the same important background information to understand in order to establish your motivation for pursuing second citizenship and whether it is entirely necessary. One of the driving factors causing people to investigate citizenship by investment schemes is the tax benefit system that is often in favour of investors, however, the fine line between what is permitted under one programme and what is not under another is not so clear cut, and this will become the focus of today’s article.
If this seems confusing, before going into any details regarding taxes and potential savings due to dual citizenship, we will define citizenship by investment to provide some context. Schemes like this are appearing across the globe, precipitated by events such as the COVID-19 pandemic, in which a majority of us have been working at home and drawn to the possibility of relocating to fresh surroundings overseas. Essentially, those of you with disposable income are able to make an investment into a government project of the country with the scheme that appeals to you most, and in return you will either receive residency with an opportunity for citizenship after a stipulated period, or receive a passport once approved and gain a second citizenship right away.
Typically, the tax benefits associated with such schemes include:
1. No/low taxation on foreign income
2. Exemptions for capital gains tax
3. No wealth or inheritance tax
While it is clear that these are not the only benefits of such schemes, it is worth mentioning them as there are some investors who may well be motivated by them as the reason for obtaining the second citizenship, and this is where some confusion may arise.
One of the key issues that can come up regarding taxation and dual citizenship is that you could end up being taxed twice. Yes, twice. This can occur depending on where you are a citizen of already and the tax system there. Let us take the United States, for example, where any income you gain in the country you become a citizen of could be taxed by your original nation of citizenship, presenting you with a hefty bill. It certainly makes you wonder whether dual citizenship is for you, as if your only motivation is to escape tax, it could well be worth reconsidering in order to avoid a worse situation.
While so far it appears that dual citizenship will only cause you tax problems, there are some saving graces, which come in the form of tax treaties. If we stay with the theme of the United States, there are some special relationships which have been formed between them and other nations where residents of the other countries are able to receive a lower tax rate on different forms of income within the United States, limiting the double taxation that can take place. However, due to the dynamic nature of tax laws across the globe, these treaties in whichever country you hold citizenship cannot be relied on and do not guarantee that your dual citizenship will lower your taxes.
In reality, despite the possibility of reducing your tax by gaining dual citizenship, you are not necessarily going to avoid paying taxes altogether, and that you may become susceptible to additional taxes. Therefore, do not rule out dual citizenship entirely, but instead you may want to initially consider the above information before making any applications in order to make sure the balance remains in favour of the advantages for your own personal circumstances.
So, if you are looking to understand your options in greater detail and or find out more about second citizenships, please get in touch with us today. At Creimerman, we help our clients from across the globe to make their cross-border ventures a success, and we would love you to be the next.