Dateline: Kuala Lumpur, Malaysia
In a recent radio show, I discussed some of the new economic citizenship programs out there for those interested in a second citizenship.
Economic citizenship programs, also known as “citizenship by investment”, are what the media commonly refers to as “buying a passport”. And, in a way, that’s true. You agree to make an investment into the coffers of some government, and they agree to give you citizenship after conducting a background check.
For those looking to get a second passport on the fly — for example, to open an offshore financial account in a specific period of time or to expatriate in a given tax year — economic citizenship can make some sense.
As a general rule, however, those reasons typically make sense for someone who has a relatively high net worth. After all, most economic second passport programs run (well) into the six figures. Sometimes even seven figures.
(A far cry from the $10,000 and three-week delivery promised by sellers of scammy diplomatic second passports.)
So how do you know if it is worth it for you?
When economic citizenship is the right choice
I recently had an individual approach me who had come into a quarter million dollars and wanted to spend half of that money to buy a second citizenship. I advised him not to and explained that, even though it seemed like a nice idea to divorce himself from the US government as quickly as he could, it wasn’t the best route to take.
If you’re a US citizen and you simply don’t feel any allegiance to the country and want to bolt, the lowest price you can pay to get an automatic out in a matter of months is $150,000 (although that price will soon be going up).
Is that a year’s worth of taxes for you? If not, is that still a price you’re willing to pay to just be done with the USA? If it is, go for it. If not, there are other options.
There are, however, situations in which pursuing economic citizenship is potentially worth the investment. From my experience, there are three such situations:
1. You’re too wealthy to qualify for the FEIE
The truth of the matter is, you can’t make millions and millions of dollars and qualify for the Foreign Earned Income Exclusion.
Mark Zuckerberg, for example, cannot simply move to Switzerland and state that he is paying himself a salary of $100,000 and then claim the FEIE. The IRS may be irritating, but they’re not foolish. They are going to realize rather quickly that someone like Mark Zuckerberg cannot be replaced or hired for an amount of $100,000.
If you have reached a certain level of income, the FEIE will not help you, which means you will have a tax problem that may make it worth considering a second citizenship that will allow you to sever ties with the US tax system.
2. Your business is too successful to qualify for the exit tax exemption
If you’re running a company that is growing quickly and will be worth more than the two million exit tax exemption limit before the next tax season, it may be worth it to look at getting another citizenship within a short timeframe. This is also true if you are running a business that you expect to be worth more and more over time.
3. You’re wealthy enough that the cost is minimal relative to your net worth
Buying a passport is one of the simplest, hassle-free ways to get a second citizenship. As such, if your level of wealth is such that the cost of a second passport is a small enough portion of your net worth, it may be a good option for you to just bypass the requirements that come with other second citizenship programs.
In my books, the qualifying point would be a married, accredited investor who has had a $300,000 annual household income for the previous two years and expects to make the same or more this year.
The other option would be that you have a liquid net worth of one million. In either situation, that would be the point where I’d suggest you start looking at economic citizenship programs because of your tax situation.
I’m not saying it’s a slam dunk by any means, but you should start looking at economic citizenship as an option. You may find that it’s not necessary for you, but you will probably start running into some of these tax issues once your financial situation reaches at least one of these points.
Your risk premium and cost-benefit analysis
Once you decide to consider economic citizenship programs, it is best to conduct a cost-benefit analysis. Here is how I suggest you weigh your options:
If you qualify for citizenship by descent, pursue that option first. It is often the fastest and most affordable route toward citizenship for anyone who qualifies. If you do not meet the requirements for any of the available ancestral passports, however, you will need to examen the pros and cons of buying a citizenship versus residency.
For example, many residency programs in Europe require you to wait five years before you can apply to become a naturalized citizen. Even with the general government fees, naturalization is very affordable. On the other hand, economic citizenship programs can take as little as six months and cost anywhere from $150,000 to over $3 million.
In the end, your biggest cost-benefit analysis will come down to a time versus money risk premium.
If you settle on a residency program, you might pay someone like me $30,000 to get a citizenship in Europe. Your passport will probably be much more powerful than one you could buy in the Caribbean, but there’s still a risk premium there.
The risk, of course, is that there is always the possibility that the government in your European country of choice will change their citizenship laws within the five year waiting period and, thereby, nullify your years of residency in pursuit of citizenship.
To calculate your risk premium, let’s say the probability of something like that happening is 50/50 and then compare that to the $150,000 you could pay for an economic citizenship. The difference is a risk premium of $120,000.
Is $120,000 an amount you are willing to pay to avoid the 50% risk of losing a residential citizenship and guarantee an economic citizenship in a matter of months? For most people, the answer is no. While the answer will be different for everyone, most will be more comfortable with the risk.
Further Risk Reduction
If you’re not comfortable with the risk — but you’re not interested in paying the difference of $120,000 either — here’s a second way to approach the situation that a friend of mine likes to call the “belt and suspenders” option.
Get two second residencies.
In this case, you would spend roughly $50,000 on two residency programs, meaning there’s just a 25% chance that both countries will change their citizenship laws within a five year period and diminishing your risk premium to $100,000.
In other words, your risk formula for a 25% chance that you won’t get a residency-based citizenship is $100,000. You also have a 75% chance of getting at least one residency-based citizenship, if not both, at the end of your five year waiting period.
Best of all, the citizenship(s) you get at the end of your residency will be better than the one you can buy for that price.
If, however, you determine that it’s not worth it to wait in your case, the following are some of the most common economic citizenship programs:
Available economic citizenship programs
As part of a cheap apology to Russian depositors who got cleaned out in Cyprus banks, the Cypriot government decided to give anyone who lost enough money a Cyprus passport. After that, they figured, why not open that up to anyone ELSE who has three million euros to spend.
Like Cyprus, Malta offers up an economic citizenship program that is quick, but very expensive. Malta is nowhere near as expensive as Cyprus, however, and will hand over your new citizenship to the tune of one million euros.
Obviously, these type of citizenship programs are entirely different ballgames in comparison to the $150,000 program we’ve been discussing. Both countries have strong passports, so if you have $100,000,000 then you should just buy one of these passports and forget about everything else we’ve discussed. No need to worry about timelines and risk premiums in that situation.
If you don’t feel like handing over three million euros to a European government just to get a fast citizenship, you do have other options. Over the years, we have discussed many other types of economic citizenship programs. Here are just a few of them and where they can be found:
- The world’s cheapest second passports (that are still valuable): Dominica, Antigua and Barbuda, St. Kitts and Nevis, and Russia
- The best economic citizenship programs in Central and South America: Uruguay, Brazil, Nicaragua, Paraguay, Panama, and Colombia
- The best passports for residents of emerging markets: Malta, Latvia, United Kingdom, Portugal, Bulgaria, Dominica, and Mauritius
- Economic citizenship programs for real estate investors in Europe: Portugal, Ireland, Latvia, Spain, Greece
- Countries where the price of economic citizenship has gone up: Dominica, Malta, Hungary, Latvia, Belgium, Austria, Singapore, Uruguay, and the Dominican Republic
- The fastest economic citizenship programs available: Comoros, Dominica, Grenada, Antigua and Barbuda, St. Kitts and Nevis, Cyprus, and Malta.
What can you get from economic citizenship programs besides citizenship?
While nations like St. Kitts and Nevis are members of CARICOM — a union of sorts, composed of about fifteen Caribbean nations — the benefits of easy travel to, say, the Bahamas really aren’t much to talk about if you’ve already got a valuable Western passport.
However, access to twenty-eight other countries in Europe — with work privileges included — IS something that makes the Malta or Cyprus passports more valuable.
When you weight a $1 million investment in Malta against $300,000+ for a donation to the St. Kitts and Nevis Sugar Fund or $500,000+ to buy overpriced real estate on the tropical island, you’d say the former is a better value.
Like I said earlier, however, I don’t believe any of these economic citizenship programs are that attractive for the average person unless you’ve got some unique immediate need for a second passport.
Since I don’t recommend dropping your existing citizenship like a hot potato the second you get a new passport anyway, I fail to see the point of playing the game of escalating prices with aloof government officials who want to cash your check and make demands of you.
There are a lot of ways to get a second passport besides writing a big check. And while quick and cheap options like the Dominica passport exist, you have to consider that there’s a reason why their passport is in the very low six figures. It’s perhaps the least valuable of them all.
Weigh your options and try the other avenues to obtain a second citizenship before you pay.
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