By Robert F. Loughran
The annual number of relinquishments of U.S. Citizenship has grown exponentially in just the last few years. According to data published by the U.S. Department of the Treasury, in 2015, a total of 4,279 people relinquished their U.S. citizenship, 800 more than the previous year. In contrast, the number of renunciants was a few hundred per year when I first started practicing in this area in the early 1990s. Many attribute this dramatic increase to the Foreign Account Tax Compliance Act (FATCA), which became effective in part on 18 March 2010 and made fully effective on 31 December 2012.
In an effort to increase sources of tax revenue not previously identified, this law requires all foreign financial institutions to search their records for indications that their clients are “U.S. persons” and report the assets and identities of such persons to the U.S. Department of the Treasury.
As a practical matter, the USA had no organised method of identifying the assets of U.S. citizens living abroad, so this legislation threatened to cut off access to U.S. financial markets to those financial institutions found not reporting the details of bank accounts held by U.S. citizens. Many banks, not wanting to undergo the burden of reporting, but also fearing the business consequences of being cut off from U.S. financial transactions, instead started communicating with their account holders that they would have to affirmatively establish that they were not U.S. citizens and not subject to the reporting requirements. Non-responsiveness on the part of account holders could lead to closure of accounts. These notifications from financial institutions are to a large extent behind the awakening a long-dormant issue at this time. Professional advisors are also affirmatively contacting their clients about the United States’ renewed enforcement interest and exploring whether a citizenship decision must be embraced in this new environment.
The USA is one of the very few countries to impose global income taxation on their citizens, even non-resident citizens. Many “incidental” citizens have up to now been unaware of this requirement, or not understood the seriousness of the consequences of non-reporting. The relatively recent focus on non-resident enforcement has caused word to be spread internationally about the changing reality and caused non-resident citizens, in unprecedented numbers, to re-evaluate the cost/benefit ratio of U.S. citizenship.
What is an “incidental” citizen?
There are perhaps more than 100,000 U.S. citizens who have not resided in the USA for any meaningful period as adults. “Incidental” citizens are individuals who have either derived citizenship from U.S. expatriate parents while living abroad or have been born in the U.S. over the last half-century to parents of means from the Caribbean or Latin America who were looking for superior medical care in the U.S. Incidental citizens can also be the children of parents on assignment or in graduate school in the USA at the time of their birth. These incidental citizens may have also undergone a degree of schooling in the USA and visited from time to time on their U.S. passports. However, their lives and residence are primarily outside the United States, and they may feel a closer connection to another country and utilise their U.S. passport as merely a travel convenience and perhaps a form of insurance policy for whatever future decades may bring.
Those modest benefits may now be outweighed once the reality of the attendant responsibilities of U.S. citizenship and the reality of enforcement are understood.
There is also a distinct subset of individuals who may have been born and raised in the USA but whose life changes in their adult years either through marriage to a spouse residing in another country, expat career opportunities or some other life-changing event where they find themselves more closely connected to another country. Those individuals may over time apply the same cost/benefit analysis to retaining U.S. citizenship. Political views and disagreement with the evolution of U.S. society or the direction of U.S. governmental policies may also cause individuals to consider abandoning their U.S. citizenship.
Renunciants as a scrutinized category
Although renunciation may be the most commonly used term when referring to loss of U.S. nationality, renunciation is only one of the seven expatriating acts that may be performed voluntarily and with the intent to relinquish U.S. nationality stated in Section 349 of the Immigration and Nationality Act (INA). The expatriating act of renunciation became an issue of media notoriety in the 1990s which was referenced in the legislative history underlying the passing of the Reed Act, which imposed the threat of permanent exclusion from the USA if the purpose of renunciation is determined to be taxation avoidance. Renunciants are also a class of individuals that were identified in the Federal Gun Control Act of 1968 to restrict possession of firearms or ammunition to the same extent as convicted felons. The Reed Act and the Federal Gun Control Act treat renunciants differently than those that may lose citizenship through other means, and specifically cite the act of renunciation rather than the section identifying the other methods through which citizenship may be voluntarily and intentionally relinquished.
How does one abandon U.S. citizenship?
Renouncing U.S. citizenship involves a two stage, in-person interview with a U.S. Consular at a U.S Embassy or Consulate outside of the U.S. which may, or may not, trigger an “exit tax” assessed on global assets of the renunciant and could, at a later date, result in exclusion from the USA under the provision of the Reed Act. More common are stories of individuals who renounce their U.S. citizenship and, having not been appropriately prepared, cannot secure a visa to return to the U.S. due to a presumption of “immigrant intent” and a failure to demonstrate appropriate qualifications, including sufficient ties to their home country or country of residence.
Alternate citizenships and passports
If someone were to renounce their U.S. citizenship without having an alternate citizenship in place and their alternate passport valid and containing appropriate visas, they could find themselves stateless or otherwise unable to travel.
Many relinquishers hold dual nationality. They may revert to their second citizenship upon loss of U.S. citizenship, whereas others acquire a second or third nationality on the basis of which they relinquish their U.S. citizenship. The expatriating acts of relinquishment associated with acquiring a second nationality are found in INA 349(a)(1) and (2) for obtaining naturalisation in a foreign state and swearing allegiance to such state, respectively. Under limited circumstances, the acquisition of an additional citizenship with the intent of abandoning U.S. nationality can result in a loss of nationality under U.S. Immigration and Nationality laws that are technically distinct from the “renunciation” identified in the Reed Act and Federal Gun Control Act of 1968.
There are a significant number of countries that offer residency or direct citizenship by investment with varying levels of physical presence required as a prerequisite to citizenship. It’s important to determine whether the potential expatriate may have ties to a particular country through ancestry, or their own birth in that country which may be sufficient to claim citizenship without a substantial investment.
More common are residency by investment programmes, which may or may not result in citizenship after a substantial period (years) of physical presence as a prerequisite to citizenship. While there may be approximately three dozen countries that provide residency based on investment, there are only a handful of countries that do not impose a length period of physical residency in their country as a prerequisite to citizenship by investment. These programmes generally require an investment in real estate and/or a contribution of a specific amount to a government programme in order to secure citizenship in as short a time as a year.
U.S. nationals benefitted from visa-exempt or visa on arrival travel to approximately 172 countries and territories in 2015, substantially more than the travel benefits of holding a passport from the countries identified above in the Caribbean but not significantly different than the benefits of EU member countries that have currently open citizenship by investment programmes. For frequent international travellers seeking to secure a citizenship in the European Union, the citizenship by investment programmes of certain EU countries may present a viable option. However, the programmes in these European countries impose additional requirements and investments in the millions of dollars/euros compared to similar programmes in the Caribbean which require investments in the hundreds of thousands.
Certain other direct citizenship by investment programmes have been subject to rumours but not officially published. There are many countries in which large scale programmes are not in place but in which citizenship may be granted in unique individual situations as a result of substantial contributions to the social, economic, and cultural development of a country.
It’s important to note that residency as it relates to the immigration laws of many countries requires a totality-of-the-facts-and-circumstances test rather than the black-and-white day counting approach common in tax laws. When seeking to secure a secondary citizenship by investment and thereafter relinquish U.S. citizenship, it is important to determine the required investment as well as the level of physical presence and period of formal residency required in that country to secure citizenship. In every case the background of the individual should be explored to determine if there are ties through residency, descent, ethnicity, cultural affiliation or existing business commitment to a specific country by which citizenship may be obtained in a bespoke manner.
Can citizenship be revoked quickly?
U.S. citizens have an unrestricted right to abandon their citizenship. A U.S. consular officer must make him or herself available for an initial interview followed by a “cooling-off” period, and then a second interview to determine that a renunciant is of sound mind and understands the irrevocable consequences of his or her actions. That is likely to be the last time the renunciant has a “right” to require anything of a U.S. Consular Officer as thereafter the renunciant will become “an alien” to the United States. An appropriate level of humility and understanding is therefore always advisable so that bridges are not burnt and appropriate visas can be issued at a future date. Those interviews will create a permanent written record of the state of mind and intentions of the renunciant as understood by the Consular Officer. Those records can be referenced throughout the renunciant’s lifetime and may impact the individual’s ability to return to the USA
Relinquishment of U.S. citizenship can be one of the most consequential and stressful decisions one can make. It is not unlike the decision to marry or divorce and should be approached with appropriate planning and a full understanding of any and all consequences.