Dateline: Tbilisi, Georgia
A couple of months ago, I sat down with an Australian man named Jake to discuss his interest in dual citizenship.
He seemed very eager to get a second passport, so I asked him why he wanted one so badly.
“I’m tired of paying Australian tax – it’s suffocating me!” he blurted.
I then asked him why he thought he needed dual citizenship to get out of Australia’s tax net.
Australia uses a residential tax system, so in order to stop paying Australian taxes, you only need to become a tax non-resident.
You don’t necessarily need dual citizenship to leave Australia’s tax system, and you certainly don’t need to renounce your Australian citizenship, either.
I can see why Jake was confused, however.
He probably spent hours perusing the internet for questionably accurate information, and he came to the wrong conclusion.
Now, imagine if Jake and I hadn’t spoken, and he went out, got a second passport, and renounced his Australian citizenship.
Unfortunately, Jake isn’t alone in his misconceptions. There’s a lot of misinformation floating around about dual citizenship – especially in the realm of taxes.
So, does being a dual citizen actually lower your taxes?
As always, the answer is “It depends.”
While a second passport does open up your options, it doesn’t necessarily guarantee tax savings.
Dual Citizens and Taxes for Residential Tax Countries
Whether or not dual citizenship has the potential to lower your taxes depends on the tax system in your country of citizenship.
If you’re a US citizen, then keep scrolling. We’ll get to you next.
Outside of the US, the majority of countries around the world use what is known as a residential tax system.
In a residential tax country, you must meet certain requirements to be considered a tax resident, such as spending a certain number of days in the country.
If you’re a citizen of that country, then your tax residency requirements may be more complex. However, you can still cut those ties and become a tax non-resident of your home country.
Each country’s tax requirements are different, and if you’re a resident of somewhere like Canada, the UK, or Australia, then you may need some expert assistance to get out successfully.
In some cases, you may need to establish tax residency somewhere else – preferably somewhere with low or no taxes – but you don’t necessarily need second citizenship to establish tax residency elsewhere.
While becoming a tax non-resident of your country of citizenship may not be easy, it’s certainly doable – no dual citizenship necessary.
If you’re a citizen of a residential tax country, then, dual citizenship doesn’t necessarily reduce your taxes.
As more people become digital nomads, perpetual travelers, and remote workers, there’s a chance that the EU or other high-tax areas might make their tax systems more difficult to escape.
As global citizens and companies take advantage of lower tax rates abroad, developed countries have sought various ways to preserve their tax base. The US, for example, implemented a provision called GILTI that forces US businesses to pay a minimum percentage of their income in taxes no matter where they are incorporated.
More aggressive high-tax countries like the UK, then, might implement some provision that prevents citizens from living tax-free in a country with no income tax.
While nothing is set in stone yet, a second passport from somewhere with a less-aggressive tax system can come in handy if your country of citizenship’s tax system becomes unwieldy.
For citizens of residential tax countries, dual citizenship in a low-tax country like St. Kitts is a good Plan B if they become dual citizens.
It won’t immediately fix your tax woes – you have to become a tax non-resident first – but it may come in handy in the future.
Dual Citizenship and Taxes for US Persons
Unlike the rest of the developed world, US citizens have no way of fully escaping the U.S. tax net – unless they renounce their citizenship.
Additionally, while the name “citizenship-based taxation” implies that the US only taxes its citizens and not any foreign national, that’s simply not true.
US permanent residents – known as green card holders – are US persons for tax reasons until they relinquish their green cards, and other non-US citizens can become US persons by failing the Substantial Presence Test.
If you’re a US person, then your global income is deemed taxable by the US government. If you live in a foreign country where you need to pay taxes, then you are subject to double taxation in two countries: both the United States and your country of residence.
Even if you ease the amount of taxes with Foreign Tax Credit and Foreign Earned Income Exclusion, you still have to be filing taxes and tax returns. Expats who are taking advantage of the foreign earned income exclusion can also claim the Foreign Housing Exclusion.
The US has a tax treaty with some provisions and relief for individuals paying double the taxes. The income tax treaties exempt US citizens from their double tax obligation when they file taxes.
Non-US citizens can get out of the US tax net somewhat easily. Most green card holders have citizenship elsewhere, and anyone who qualifies under the Substantial Presence Test only needs to limit the time that they spend in the US.
US citizens, however, must obtain dual citizenship and then renounce their US passport to escape the U.S. taxes net.
There are some advantages and disadvantages to this.
On the one hand, there are some unexpected benefits to this system.
Since US citizens are always US persons for tax reasons, you don’t need to establish tax residency elsewhere to qualify for the Foreign Earned Income Exclusion, and you don’t have to completely sever ties like bank accounts and property holdings as you would in a residential tax country.
However, if you want to lower your tax bill more substantially, it becomes more complicated.
One of the more common misconceptions about dual citizenship and taxes for US citizens is that you can get a second passport, live overseas, and not pay tax.
While you could feasibly dodge the IRS by hiding overseas with a second passport for a time, it’s illegal – and you will get caught.
Most banks in the world are connected to the US through FATCA, so if you lie and pretend you’re not a US citizen, the IRS will get you sooner or later.
If you’re a US citizen, you’ll need to renounce to fully free yourself from the US tax net – no ifs, ands, or buts.
I personally don’t agree with those rules, but you have to work with them pragmatically to be successful. Cutting corners here just won’t work.
So, in order to renounce your US citizenship, you’ll generally need to get dual citizenship elsewhere first.
Technically, you can become stateless, and people like Glen Lee Roberts have done so successfully.
That’s not something that I recommend, however.
Most US consulates will ask you for another passport before they allow you to renounce.
While they can’t necessarily deny you for not showing them one, indulging that request can make the process of renouncing go a bit more smoothly.
Becoming stateless also isn’t very practical for most people. It inhibits your ability to move around and do business – two essential components of the Nomad Capitalist lifestyle.
Therefore, in order to renounce your citizenship successfully, you’ll need dual citizenship at the very least.
Personally, I recommend building a passport portfolio before you hand in your US passport, so you’ll still have dual citizenship after you renounce.
For US citizens, then, dual citizenship does not do much to lower your taxes in and of itself – but it can be an important part of your larger strategy to reduce your global tax bill.
Where Will Dual Citizenship Lower Taxes?
I have shared my tax-free quadrant before that explains that, in order to legally lower your taxes, you need to consider not only the tax system and tax laws of the country that you are leaving but also the taxes and laws of the country where you are arriving.
So, understanding how the US tax system works or how to legally leave a residential-based tax system is only one half of the puzzle. You also need to consider where you can obtain second citizenship to lower your taxes.
The video above highlights two types of tax-friendly countries where you can obtain second citizenship and lower your taxes:
- Zero-tax Caribbean citizenship by investment countries like Antigua and Barbuda, St. Kitts and Nevis, and Vanuatu.
- Low-tax countries with a large diaspora will likely never introduce a form of citizenship-based taxation like Armenia.
Tax Optimization Strategies
You can watch the video to learn more. You can also check out our other articles about legal tax-reduction strategies as well as tax-friendly passports and residence programs:
- The Zero-Tax Citizen: Tax-Friendly Second Passports
- How to Legally Lower Your Taxes
- Get Second Residency and Pay No Tax in These 26 Tax-Free Countries
- The Trifecta: How to Travel Less as a Tax-Free Nomad
- Tax Freedom Starts with a Territorial Tax System
- The 4 Income Tax Systems Around the World
- Escape the Rat Race to Become a Tax-Free Global Citizen
- 11 Low-Tax Countries for Living in Europe
- “Residence Planning” for Lower Taxes: 6 Ways to Use Zero Tax Residence
One Part of a Holistic Tax-Reduction Strategy
Whether or not dual citizenship has the potential to lower your taxes depends on where you’re from.
If you’re from the US, then dual citizenship can be a part of a larger strategy to reduce your overall taxes.
However, simply getting a second passport from a Caribbean island doesn’t absolve you of US tax and reporting obligations and doesn’t eliminate your tax liability. You’ll need to take the next step and renounce if you want to pay zero.
If you’re a non-US citizen, then dual citizenship does even less for you.
You can become a tax non-resident without dual citizenship, and you can still get caught in residency requirements even if you turn in your passport.
However, a second passport can be advantageous for a number of other reasons, and it’s a good insurance policy to have in case you need to get out.
At the end of the day, it’s all about strategy.
For US persons, paying $100,000 for citizenship by investment is worth it if you can renounce and save money on taxes.
For Australians or Canadians, that’s not the case. There are other, less-expensive ways to get a second tax residence or citizenship.
Dual citizenship can be an important part of your plan to reduce your global tax bill as a Nomad Capitalist, but it doesn’t make your tax obligations immediately disappear.