Due to laws such as FATCA, countless US citizens and specified people, are looking at ways to renounce their passport.
Whilst it isn’t the intention of this article to give tax and legal advice, it will do its best to be accurate and give sound information.
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Renunciation of citizenship:
Introduction – ‘Renunciation of citizenship’ is the process through which a person intentionally and voluntarily gives up their citizenship.
By doing so, they become a foreigner in that respective country and loses all the privileges that can be enjoyed by them, while they were a citizen of that country.
Renunciation of citizenship can be understood as the exact opposite of ‘Naturalization’, in which the person voluntarily goes through the process required to become a citizen of that country.
It is different from ‘Denaturalization’, the process where the citizenship is forcefully taken away by the government of that country.
Different countries have a different set of rules that a person needs to undergo in order to renounce their citizenship of that respective country.
Most countries require citizenship of another country before the person renounces their citizenship because the country doesn’t want that person to become a stateless person.
In order to do so, they require evidence of citizenship of another country/promise that citizenship shall be granted.
Some countries require renunciation of the person’s citizenship in order to go through the naturalization process.
Mexico is an example of such a country. It is a mandatory process in the countries that require ‘Single Citizenship’ from their citizens.
Statelessness – Most countries require the citizenship or guarantee of citizenship before a person can renounce the citizenship of their current country.
But the United States does not require such evidence while a person is applying to renounce their citizenship.
In this case, if a person renounces their citizenship without having the citizenship of another country, they will become stateless. Stateless people would come under the protection of any country’s government, hence making it a major concern to avoid.
However, the ‘DOS (United States Department of State)’, warns the people renouncing citizenship that they should have another citizenship or try to apply for another nationality in order to avoid statelessness.
Taxation and its history – People who voluntarily give up their citizenship are subjected to the taxation known as ‘Expatriation Tax’.
In the beginning, according to the ‘Foreign Investors Tax Act of 1966’, people who renounced their US citizenship in order to avoid US taxation were subjected to US taxation until 10 years on their US-based income.
This made sure that the ex-citizens wouldn’t be able to profit from the tax rates that are applicable only to the foreign investors.
Later in 1996, the ‘Health Insurance Portability and Accountability Act’ made some amendments to the taxation subjected to the ex-citizens.
In this process, it first placed some criteria to find out whether the ex-citizen or ex-permanent resident was a ‘Covered Expatriate’, to get an assumption about whether the person has renounced their citizenship for tax purposes.
It was usually determined depending on the individual’s income, assets, etc.
After that, it made the ‘Department of Treasury’ to point out the names of people who gave up their citizenship.
However, the list didn’t contain all the names of the people who became ex-citizens. To justify this, tax lawyers state that the main objective of the list was to mention the covered expatriates.
People’s names were also mentioned, who renounced their citizenship in the last months of the year before they were able to file the IRS form 8854, regardless of their non-covered or covered status.
So, it is not entirely true that the list only contained the names of the covered expatriates.
Following that, the ‘Illegal Immigration Reform and Immigrant Responsibility Act of 1996’ made an amendment known as the ‘Reed Amendment’ in order to prevent the entry of the individuals who gave their citizenship or determined by an attorney general that they renounced their citizenship in order to avoid their taxes.
This was not very effective as the IRS didn’t have the authority with the tax information of the individuals and cannot share that data with others.
Hence, only people who agreed that they renounced their citizenship in order to avoid US taxation were subjected to this amendment. Since this provision was brought into force, only two people were subjected to this amendment and denied entry till now.
In the year 2008, Congress proposed a bill known as the ‘Heroes Earnings Assistance and Relief Act’, which changed the ten years of taxation on US-based income into one-time capital gains tax on the recent market value of the assets owned by the individual.
After 2008, under some conditions, people are subjected to an expatriation tax, whose primary objective was to levy the taxes on the expatriates which would have been paid if they were still the citizens.
For covered expatriates, all the assets were considered to be sold right on the day before expatriation, and therefore will be sold on the basis of fair market value. This made the income as capital gain and was taxable.
Since the passing of the ‘Foreign Account Tax Compliance Act (FATCA)’ in the year 2010, the percentage of people who wanted to renounce their citizenship in the United States increased rapidly.
Renunciation of citizenship in the United States:
‘Renunciation of citizenship’ or ‘Relinquishment of nationality’ in the United States is a legal process carried out under the federal law, with the help of which a citizen of the United States is able to voluntarily and intentionally give up their nationality/citizenship of United States.
Most people often get confused between the Renunciation of citizenship and Denaturalization.
Denaturalization is the process through which the US government cancels citizenship.
Denaturalization is not a voluntary process, instead, it is an inevitable process through which the US government tries to take away citizenship from the individuals who have entered the United States and gained citizenship illegally.
There are seven acts that are known to be expatriating acts, with the help of which a United States citizen can be able to relinquish/renounce their citizenship. These seven acts are:
- Wanting to gain the citizenship of another country (after completing at least 18 years of age).
- Taking an Oath of allegiance in another country (after completing at least 18 years of age).
- Having to take up any employment opportunity in another country after acquiring the citizenship or promised with the citizenship or declaring allegiance with that respective country.
- Joining the army of another country in either of the cases where that country is in a hostile situation with the United States or gaining rank as a military officer in that country.
- Legally renouncing the nationality/citizenship of the United States in any abroad country in front of a United States Diplomatic or a Consular Officer.
- Formally renouncing citizenship in the United States, when the country is in a state of war. This has to be done in writing and must be approved by the United States Department of Justice.
- Being convicted for committing crimes such as Treason, Rebellion, and any other illegal activity in order to bring down the United States government.
Earlier in 1907, there was a law that has been brought forward, according to which citizenship of an individual can be canceled if they had been known to be involved in any of the above-mentioned expatriate acts.
At that time no action was needed from the individual as if there was any meager voluntary interaction that was associated with expatriates’ acts, their citizenship was terminated by the United States government.
Later from the 1960s when there were cases related to this issue that were constantly emerging, the government had taken up the cases into consideration and made amends such that the individual’s intentions were required in order to relinquish their citizenship.
In this situation, the person’s actions and words were required. The most important cases that made this possible were the cases of ‘Afroyim V. Rusk (occurred during 1967)’ and ‘Vance V. Terrazas (occurred in 1980)’.
However, after the changes made by the 1990 policy, the government is no longer involved in such activities and only issue a ‘Certificate of Loss of Nationality (CLN)’ when an individual voluntarily applies for the process of relinquishment of their citizenship.
Most of the people who renounce their US citizenship have been living in foreign countries for a considerable amount of time and are citizens of other countries.
Many countries prohibit their citizens from becoming stateless, meaning they would provide proof of their citizenship with other countries or proof of ongoing procedures to acquire the citizenship of other countries.
But the United States does not do so. Although the United States government recommends individuals against becoming stateless, it does not follow any procedures to make this happen.
After World War 2, nobody has renounced their citizenship while they have been a current resident of the United States.
There is a misconception that people who are ex-citizens of the United States or Puerto Rico have the right to reside in the United States even after they have renounced their nationality.
This is not at all true, as the United States courts have rejected these arguments.
Just like any other foreign individual residing in the United States, the ex-citizens would also have to obtain a Visa or Visa waiver from the United States in order to live in the United States.
Although the renunciation of the United States citizenship does not happen commonly as a person might think, there have been many renunciations of citizenship in the United States when compared to that of many other developed countries.
Statistics:
According to surveys conducted, from the time span between 2014 to 2016, approximately 5,000 citizens of the United States were known to have renounced their citizenship.
Between 2005 to 2015, approximately 50,000 people became ex-citizens of the United States.
When compared to this time period, the time period in the 1970s was known to be three times more on an annual basis.
The number of people known to have relinquished their US citizenship is comparatively low to that of the total number of citizens abroad, less likely the people that move into the United States every year.
This is similar in the case of almost all the developed nations in the world.
According to a study carried out in 2017, the renunciations carried out in 28 countries, mainly the Organization for Economic Co-operation and Development (OECD) countries, the United States occupied the sixth place based on the ratio of ex-citizens and citizens abroad.
The first five places in this category were occupied by ‘Singapore’, ‘South Korea’, ‘Taiwan’, ‘Estonia’, and ‘Japan’.
This means the people who were even though living as expats didn’t opt to relinquish their citizenship.
The most important factors that affect the relinquishment rates in this case study were dual citizenship prohibitions and emotional factors involved with it.
The higher rates in other countries were probably due to the compulsory enlistment of the people in the military services, as most countries require these services from the individuals who are willing to become the permanent residents of that country.
The highest number of relinquishments were recorded in the year 2016 when approximately 5,000 people have renounced their citizenship in the United States.
However, it was decreased in the following years when the number came down to approximately 4,000 by the year 2018.
Main Objectives to consider:
- Based on the ‘Section 349 (a)(5)’ of the ‘Immigration and Nationality Act’, any citizen of the United States has the right to renounce their citizenship in the United States of America depending on their involvement with the expatriate acts mentioned earlier.
This can be done by making a formal renunciation of citizenship in front of a Diplomatic Officer or a Consular Officer working for the United States in a foreign country as directed by the Secretary of State. They would also have to sign an oath of Renunciation.
- By renunciation of citizenship, a person voluntarily gives away all the benefits that have been acquired by him for being a citizen of the United States. Some of these include the Right to Vote, applying for the government jobs, protection from the government while traveling/living abroad, citizenship for their children, etc.
- Renunciation of citizenship is not as easy as it sounds. There is a lot of procedure involved in it such as the extreme amount of paperwork, interviews with the professionals in the specific field, fees, etc.
- Renunciation of citizenship is a permanent process and cannot be undone. This means once the person becomes an ex-citizen of the United States, they cannot be able to gain the citizenship back if they have a change of mind.
- Most of the people belonging to the United States have opted to renounce their citizenship as they are subjected to double taxation on their worldwide assets based on the norms of the IRS. This means if a person has a property in some other country, they would have to pay taxes in that country as well as in the United States.
- Some other major reasons for the renunciation of citizenship in the United States include personal reasons of the individual, political reasons, against an ongoing war, opposing a local leader/political party.
- Based on the laws of the United States government, citizenship can be canceled for any reason that is known to be involved in the expatriate acts. Especially if the person is enlisted in an opposing country’s army during the time of war or trying to bring down the existing government.
Covered Expats:
Any person can be considered as a ‘Covered Expatriate’ if they fall under certain criteria. The criteria for covered expats is as follows:
- The person’s annual US-based income’s tax liability has been greater than $165,000 over the time period of five years prior to the date of expatriation.
- The net worth of the expat is greater than or equal to $2 million dollars by the time of their expatriation.
- The person hasn’t been tax compliant for the last five years.
Married couples have to qualify individually. Exceptions are made to these rules in case of dual citizens who have been born in another country or haven’t lived more than 10 years over the last 15 years.
Exit Tax:
‘Exit Tax’ is the one-time tax on the capital gains that have been earned by the individual after the selling of all their underlying assets.
The Exit Tax is also applicable to the assets that cannot be sold. The overall estimated profits on all the assets are taxed.
People are exempt from the exit tax up to $713,000 and are only taxed for an amount that exceeds this limit.
People who qualify for these criteria are covered expats and are usually taxed at the highest marginal tax rates. However, there are some exceptions for the expats who are eligible for deferred compensation plans as well as cash in their accounts.
Double taxation might occur on the assets which have been subjected to the Exit Tax, by the country of residence. This happens only if the assets are sold and the amount is received by the Individual.
Taxes on Inheritance and Gifts:
Another major aspect involved with renunciation that has to be taken into consideration is the taxation on Inheritance and Gifts.
After renunciation, the individuals are subjected to a relatively higher amount of taxes on Inheritance and Gifts. The citizens of the United States are exempt from the taxes on Estate taxes up to $11.2 million. Non-US citizens are exempt only up to $60,000.
Gifts from non-US spouses to the US-based spouses have taxes levied upon them. However, there is an exception for a limit of up to $154,000. Generally, the US-based spouses can enjoy the benefits of tax-free gifting while sending gifts to their US-based spouses.
Procedure:
Before renouncing one’s citizenship, a person should know that they would become exempt from all the privileges that have been offered to them while they were a citizen of the United States.
They also have to undergo a lengthy process which could take a lot of time and effort.
To certify the relinquishment of citizenship, the United States State Department issues a ‘Certificate of Loss of nationality’ to an individual.
It is not mandatory for an individual to obtain a CLN in order to become an ex-citizen of the United States, however, obtaining a CLN can be useful for them. The following procedure is needed to be carried out in order to renounce citizenship in the United States.
- Acquiring citizenship from another country:
The first and foremost thing that needs to be take care of is acquiring a second passport.
Although it is a person’s right to relinquish their citizenship, it is essential to have citizenship of another country in order to avoid becoming a stateless person. people having a visa in their respective country of residence should acquire a second passport before renunciation.
Any person can be able to obtain a second passport by participating in the residency/citizenship through investment programs, family in other countries, etc. Many countries such as ‘Portugal’, ‘Antigua’, ‘Nevis’, ‘Malta’, ‘Bulgaria’, ‘Spain’, ‘Turkey’, etc., have attractive residency through investment programs.
- Completing all the US taxation processes and being up to date on those:
People should file their taxes for up to 5 years before expatriation in order to avoid automatically becoming covered expatriates. In case any individual hasn’t filed for their tax returns, there are some streamlined procedures.
- Getting ready with all the necessary expatriation paperwork:
People who want to renounce their citizenship are required to fill a form known as ‘Request for Determination of Possible Loss of US Citizenship’, also known by the name of ‘DS-4079’ form. Supporting documents should also be attached including the birth certificate, certificate of naturalization from the current country of residence.
The valid reason should be submitted which should not at all be taxes. Some valid reasons are strong connection with another country, permanently moving to another country, injustice because of being an American, etc.
- Booking an appointment:
Booking an appointment in the city or country where the person is going to live is the best available option. If this is not possible, they can book an appointment in any other city.
- Attending for the renunciation appointment:
While appearing for the renunciation appointment, the individual should carry their ‘United States Passport’, ‘Second passport’, and ‘Birth Certificate and the naturalization certificate of the country of future residence’.
Once the appointment ends, the individual is provided with a Certificate of Loss of Nationality.
- Filing the final tax return in the United States:
The final tax return will usually be from January 1st to the day when the person decides to expatriate. The renunciation date being different from December 31st, the person is required to file ‘Form 1040’ and ‘1040 NR’ for their final tax return.
If an individual is considered to be a covered expatriate, then they would also have to calculate their ‘Exit tax’ on their ‘IRS Form 8854’.
If an individual failed to do so, they would still be subjected to the United States Income Tax, even if the renunciation has been completed successfully.
People having foreign assets underlying, they would also have to file ‘FinCEN Form 114’, also known by the name ‘FBAR’.
Conclusion
Even after expatriating, the people can be able to receive social security if they have been qualified previously by having enough credits.
Pensions and 401k can be received by them but are subjected to US taxes. Unless having an automatic withholding, the ex-citizen is also required to file ‘1040NR’.
Military pensions can be officially canceled if the person cannot be helpful to the US as a non-citizen when needed.
Failure of filing the expatriation form can lead to a penalty of up to $10,000.
Under certain conditions, an individual can be free from taxes, interest, penalties, exit taxes, etc., if they are eligible for the criteria of ‘Relief Procedures for Certain Former Citizens (EXPAT Relief)’.
The process of renunciation can be extremely complex and hence, it is ideal to consult a tax professional (like us) before undergoing the procedure in order to avoid any type of mistakes.
Further Reading
Will more countries follow the US lead of taxation by citizenship?
