Has any country exempted their citizens/residents from the US citizenship-based taxation?

Question

This question is about personal finance as this directly applies to my situation as a US citizen, which I intend to keep for work purposes, and as a citizen of another country, which I am willing to switch if it is tax advantageous. See Why was this question put on hold as off-topic?.

Assume that Bob is a citizen of the US and a citizen of country X. Bob lives in country X. Since the US uses citizenship-based taxation, Bob is subject to taxes in both the US and country X. Is there any country X that fully exempts their citizens/residents from the US citizenship-based taxation?

I read on 20minutes.fr (mirror) that some French politicians are trying to pass a law exempting dual US+French citizens living in France from US taxes:

« Le problème principal, c’est que la fiscalité américaine est basée sur la nationalité, en contradiction avec les règles de l’OCDE, estime l’eurodéputée française Virginie Rozière. L’Erythrée a voulu faire pareil et a été sanctionnée. Il n’y a pas de raisons de traiter les États-Unis différemment. Ils ne se comportent plus comme un grand frère bienveillant mais comme un acteur sans foi ni loi qui cherche le rapport de force. Si on n’est pas capable de répondre, on se fera écraser ».

Translation (based on Google Translate):

"The main problem is that the US tax is based on nationality, in contradiction with OECD rules," said French MEP Virginie Rozière. "Eritrea wanted to do the same and was sanctioned. There is no reason to treat the United States differently. They no longer behave like a benevolent big brother, but as a faithless, lawless actor who pursues relations based on force. If we cannot respond, we will be crushed."

so I wonder if any precedent exists.

This question may be better suited to politics.stackexchange.com. — Chris W. Rea, Jul 04 '18 at 19:21
Eritrea is less powerful than the US. They are apparently still doing it, though, just trying to hide it better. — chirlu, Jul 04 '18 at 20:12
Related at Politics.SE: Why does the US require non-resident citizens to file taxes even for non-US income? (The gist of the answers: because they can.) — Stephan Kolassa, Jul 05 '18 at 07:38
FYI: By whom and how was Eritrea sanctioned for having a citizenship-based taxation? — Franck Dernoncourt, Jul 06 '18 at 21:23
Comments are not for extended discussion; this conversation has been moved to chat. — GS - Apologise to Monica, Jul 06 '18 at 22:08
@GaneshSittampalam Actually, you didn't move my comments: you removed them. — Franck Dernoncourt, Jul 11 '18 at 19:30
@FranckDernoncourt I deleted some first, then moved what was left. It's an auto-comment that gets generated at that point. — GS - Apologise to Monica, Jul 11 '18 at 19:31
@GaneshSittampalam What was the point in removing my comments? I was simply inviting the close voters to explained their votes. — Franck Dernoncourt, Jul 11 '18 at 19:33
@FranckDernoncourt I felt that 5 identical comments just to ping each of them was unnecessary noise. A single comment would probably have been ok, but you have the meta question now in any case. — GS - Apologise to Monica, Jul 11 '18 at 22:03

score 61 · Answer 1 · edited Jul 05 '18 at 21:06

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As that taxation law is an US law, no other country can declare an 'exemption' to it.

If France for example would 'allow' their citizens to ignore it, the US IRS would still consider the taxes due and would act accordingly - up to impounding assets located in the US and arresting the person on the next visit. This would also probably imply that many visas from third countries would become harder or impossible to get, as they look at US 'pending arrests'. France in this example could do nothing to address these consequences directly.

Basically, there is no difference between being a US citizen & hiding abroad & not paying taxes and being a dual citizen & living abroad.

If someone doesn't like the consequences of being a US citizen, he/she can rescind the citizenship (and be rid of the tax issue) or, of course, vote for a representative who will change those laws.

Don't get me wrong - I agree that that tax law is not good as is. There is just nothing another country can effectively do to end it.

edited Jul 05 '18 at 21:06

Rupert Morrish

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answered Jul 04 '18 at 19:13

Aganju

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Thanks. 1) couldn't a tax treaty establish such an exemption? 2) from the quote in the question "Eritrea wanted to do the same and was punished". -> I would be curious to know more about it but somehow it sounds like some kind of solution was found for the case of Eritrea. – Franck Dernoncourt Jul 04 '18 at 19:15
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sure - but that needs the agreement of the US. They do have such treaties with many countries; typically, all tax you already paid in the other country will reduce your taxes for the US. If you live in a country with higher federal tax, you just have to file in the US, but never pay a cent.

Aganju

Jul 04 '18 at 19:21

@Aganju: I thought the credit for foreign taxes paid recently got eliminated or capped? – Vikki Jul 04 '18 at 23:26

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That's new to me, but I'm not up to date. It worked for 2017, though. – Aganju Jul 05 '18 at 02:41

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@Sean: you may be thinking of the TCJA change that starting this year caps the (itemized) deduction for state and local taxes (on income or sales and property, abbreviated SALT) to $10k. TCJA also increases the standard deduction so fewer people will benefit from itemizing at all. This is different from the credit for foreign country taxes on income only. – dave_thompson_085 Jul 05 '18 at 03:15

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@Aganju: good points (cf. Foreign Tax Credit and Foreign Earned Income Exlusion). Note, however, that filing alone can be extremely expensive for nonresidents - good luck finding someone expert in US taxes if you are retired in Honduras but have assets in Europe and Japan. – Stephan Kolassa Jul 05 '18 at 07:42

Also, the US does not formally recognize dual citizenship, and may simply consider a person to be a US citizen. – SnakeDoc Jul 05 '18 at 18:13

"There is just nothing another country can effectively do to end it." – In theory, France could pay back the taxes paid to the US. – Paŭlo Ebermann Jul 05 '18 at 22:52

County X cannot simply say, "Country Z, you must do as we say because we say you must!". Country X is a sovereign nation, but their laws only apply within their own borders. Country Z is under no obligation to bow to the whims of Country X. – Bob Jarvis - Слава Україні Jul 06 '18 at 02:48

I glanced over the the tax treaty with France, and that says taxes paid in France (for certain types of income) are credited. And obviously the US did agree to that bilateral contract: they signed it. So at the very least one could argue that the US tax office should obey with the contracts they signed. – cbeleites unhappy with SX Jul 14 '18 at 10:29

I may be way off, but I don't see the situation with the US all that special: also between countries that base their tax laws on residence (not citizenship), double taxation would be an issue without tax treaties whenever there's a kind of income that is taxed at the source in one country and based on total income in another (and this is rather frequent). Plus residence isn't always that easy to determine. Eritrea is IMHO more special: as I understand the US tax, citizens residing abroad are just subject to the same taxes as an other US citizen. Eritreans are taxed for being abroad, and some.. – cbeleites unhappy with SX Jul 14 '18 at 10:36

... newspaper article I read said that Eritrea does not accept its citizens renouncing Eritrean citizenship. The UN resolution against Eritrea was not even concerned with taxing its citizens that live abroad, but with Eritrea using those taxes to destabilize the region and with Eritrea by "extortion, threats of violence, fraud and other illicit means". – cbeleites unhappy with SX Jul 14 '18 at 10:45

Davislor · Answer 2 · 2018-07-05T18:03:49.117

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Although no other country can change the IRS’s mind that a U.S. citizen living abroad owes it taxes, good luck to them collecting from you in certain parts of the world. (Not that I’d ever give advice on how to evade taxes.)

More seriously, the United States has signed reciprocal tax treaties with many different countries in which they agree that some citizens or residents of other countries owe the IRS fewer taxes. See IRS Publication 901, “U.S. Tax Treaties.”

However:

Tax treaties reduce the U.S. taxes of residents of foreign countries. With certain exceptions, they do not reduce the U.S. taxes of U.S. citizens or residents. U.S. citizens and residents are subject to U.S. income tax on their worldwide income.

You can see which exceptions exist in IRS Publication 901, but you should consult with a tax lawyer if you have any questions. No country has negotiated a blanket exemption for all U.S. expatriates.

In many cases, payments from a foreign government (or its political subdivisions) for services rendered are exempt from U.S. income tax unless the services are performed in the United States by a U.S. resident. However, U.S. citizens who accept positions from a foreign government should make sure that the State Department understands that they do not intend to relinquish their U.S. citizenship.

edited Jul 05 '18 at 18:03

answered Jul 05 '18 at 05:45

Davislor

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Thanks for the pointer to the Publication 901! Also I wasn't aware of the possibility of losing one's citizenship if one accepts certain “policy-level” jobs from a foreign government, this is good to know. – Franck Dernoncourt Jul 05 '18 at 05:54
@FranckDernoncourt the "policy level" distinction is relevant to the presumption of intent; there are many potentially expatriating acts defined by statute where the US has a presumption that the act was undertaken without an intent to lose US citizenship, in which case the act does not cause expatriation. Certain acts do not fall under that presumption, but the person can still seek to establish a lack of intent to lose US citizenship (for example, by stating formally "I didn't intend to lose US citizenship"). It's possible to lose US citizenship, but generally not involuntarily. – phoog Jul 05 '18 at 15:33
@phoog There’s more detail at the link I cited, but it does say that, for example, becoming another country’s foreign minister is generally incompatible with retaining citizenship. But not talking to the State Department about it ahead of time makes you subject to a judgment call. Also (without getting into politics) the USCIS is starting a new Denaturalization Task Force in July 2018 that might interpret the law more punitively. So, my main point is that an expat should be aware of the possibility and get advice appropriate to his or her situation. – Davislor Jul 05 '18 at 16:25
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Speaking of foreign ministers, Boris Johnson was listed in the Federal Register with those whose loss of US nationality was reported to the Treasury department during the last quarter of 2016. That was not long after he became foreign minister. I do not know whether the loss of citizenship resulted from his taking the position (8 USC 1481(a)(4)) or from a formal renunciation (8 USC 1481(a)(5) or (a)(6)). He had been talking for years about giving up his US citizenship, so either is plausible. – phoog Jul 05 '18 at 16:42
A note on denaturalization: this term normally refers not to expatriation (that is, loss of citizenship under 8 USC 1481) but to the cancellation of naturalization of someone who obtained the naturalization illegally (for example, by fraud). News reports confirm that the task force you mention is focused on this issue. It is an entirely different matter from expatriation, which affects all US citizens. – phoog Jul 05 '18 at 16:56
@phoog My intent wasn’t to scaremonger. The point I wanted to make was that I posted the State Department’s current policy, but it might change its interpretation of the law sometime in the future. – Davislor Jul 05 '18 at 17:30
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@Davislor It's fine to link to the policy but you really should clarify the point in your answer: it's not actually a common problem that expats become the head of state or foreign minister of another country. Those are the only jobs listed where the State Dept. won't presume an intent to continue with American citizenship and one would have to assume that, if a US citizen were about to become the head of a foreign power, the State Dept would be even more anxious to talk to that person about its ramifications. – lly Jul 05 '18 at 17:41
@lly Good point. I’ve edited it. – Davislor Jul 05 '18 at 18:04
Note that, in most cases, "making things clear to the State Department" is superfluous because they will ask you whether you wanted to lose your citizenship, and if you say "no," that's generally the end of it. – Kevin Jul 06 '18 at 03:47
@Kevin You might or might not want to take precautions in case that policy changes someday. – Davislor Jul 06 '18 at 04:20
@Davislor: Far be it from me to tell people to be careless, but I would be really surprised if they decided to relitigate Afroyim v. Rusk and Vance v. Terrazas at this point. On the other hand, in the modern political climate, nothing really surprises me anymore, so sure, take those precautions if it makes you feel better. – Kevin Jul 06 '18 at 06:05

Has any country exempted their citizens/residents from the US citizenship-based taxation?

2 Answers2