With concern over higher tax rates in the United States relative to some low tax destinations such as Singapore and Belarus, and the rise of economic citizenship in many emerging countries around the world a record number of United States citizens especially those who identify themselves as investors have sought renunciation of US citizenship as a tax planning strategy. Many have even inquired about “relinquishment” without full renunciation of US citizenship to avoid paying U.S. taxes while still preserving U.S. citizenship and its benefits.
Loss of Citizenship
Section 349 (a) of the Immigration and Nationality Act set out the expatriation acts by which a national of the United States by birth or naturalization can lose United States nationality. Formal or official renunciation at a U.S. consulate [Section 349 (a) (5)] is one means of losing United States nationality but it not the only means. Some United States citizens with dual nationalities who hold political office abroad may lose United States nationality when they take an oath of allegiance to a foreign state, if the act of taking the oath was done with the intent of relinquishing United States nationality.
Renunciation of US citizenship for tax reasons can make a former citizen ineligible for a U.S. visa
The Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (IIRIRA) added a new ground of inadmissibility for certain former citizens who renounce citizenship to avoid paying taxes. Section 212 (a) (10) (E) of the Immigration and Nationality Act states.
“Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States is inadmissible.”
But the ground of inadmissibility in Section 212(a) (10) (E) applies only to renunciations of U.S. citizenship that took place on or after September 30, 1996. Furthermore the statute requires specific intent to avoid paying U.S. taxes. Specific intent requires that the former U.S. citizen subjectively desired loss of U.S. citizenship to avoid paying U.S. taxes. Therefore the reason for renouncing U.S. citizenship is important. Public statements about the reason for renouncing US citizenship may come back to bite. But the surrounding circumstances of the renunciation may still prove specific intent to avoid paying U.S. taxes even if the former U.S. citizen was silent on the issue.
The regulations effecting the statute state that “an alien who is a former citizen of the United States, who on or after September 30, 1996, has officially renounced United States citizenship and who has been determined by the Secretary of Homeland Security to have renounced citizenship to avoid United States taxation, is ineligible for a visa under INA 212(a) (10) (E).” 22 CFR 40.105. But the statute has been criticized both for the ambiguity of its language and as a possible violation of international law.
Role of U.S. consulate
The role of the State Department and the consular officer is very limited in implementing this ground of inadmissibility. The extent of coordination between the Internal Revenue Service and the immigration agencies is unclear. But unless the applicant appears as a hit in the consular lookout system revealing a finding of inadmissibility under INA 212(a) (10) (E), a consular officer is required to assume that the visa applicant is eligible. So it is entirely possible that persons who renounce to avoid U.S. taxes may slip under the radar.
Renunciation of US citizenship is a very serious decision and is not just a matter for high net worth individuals. However choosing to live abroad as over 6 million Americans do, is not the same as renunciation. As with many areas of immigration law the general rules seem simple but the details and exceptions to the rules are complex and confusing. So look before you walk on thin ice. Before renouncing citizenship consult with both an immigration attorney and a tax attorney to evaluate the specific circumstances of your case as each case is unique. Under current immigration law even if you are found inadmissible a discretionary waiver may be available for non-immigrant admission into the United States.
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CIRCULAR 230 NOTICE: IRS Regulations require us to inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transactions or matter addressed herein.
Las Vegas Immigration Attorney Gary Goodin
Resources for more information
1. Laura Saunders, Should you renounce Your U.S. citizenship W.S.J. , May 18, 2012