US Tax Implications of a Second Passport Plan B

US Tax Implications of a Second Passport “Plan B”

How Plan B “Second Passports” Can Actually Increase Tax Liability: For many US Taxpayers who are either seeking to avoid recognizing tax for gains on the sale of US assets and/or seeking to avoid US tax altogether, may consider what is commonly referred to as a Plan B or “second” passport. The idea is that the taxpayers (usually US Citizens and lawful permanent residents) are purchasing Citizenship-By-Investment (CBI) and/or residence-by-investment (RBI) passports (aka Golden Visas) — just in case they want to high-tail it out of the United States. The problem is, just purchasing a second passport without fully expatriating from the United States, has no tax benefits (since the US taxes US persons on their worldwide income). In fact, by purchasing a Plan B second passport, the taxpayer may be inadvertently increasing their tax liability. Let’s go to the basics of US tax implications of a second passport “Plan B” in 2021.

US Follows a Worldwide Income Tax Model

The United States is one of only a handful of countries that utilizes the worldwide income tax model. What that means is that, unlike most other countries, the United States taxes US persons on their worldwide income. For example, if David is a US citizen residing in a foreign country “A” and earns all of his income from foreign country “B” — the United States can still tax David on all of that income. Thus, even if David goes off and purchases a second citizenship or residence visa — all he has effectively done is subject himself to more potential tax implications in a foreign country as well — not “instead of.” Once David actually expatriates from the United States, the rules are different, but for many taxpayers to consider a Plan B second passport — this is not their intended goal (e.g., expatriation).

Here are a few considerations before obtaining a Plan B second passport:

Nonresident Taxes and US Tax (Pre-Expatriation)

Even though most other foreign countries do not tax nonresidents of their country on their worldwide income, there may be other taxes that are due. That is because, in order to purchase a CBI or RBI, it requires an investment into that country’s economy, which will typically generate income. And, even if that income is generated at a lower tax rate in the foreign country — the United States would still tax it as it would tax any other income. And, most countries that offer citizenship or residence by investment are not “treaty countries.”

Foreign Country’s Tax Rules/Benefits May Change

Sure, at the current time of acquiring the second passport, the Golden Visa country of choice may have great tax benefits. But, those benefits may change in the future — and some countries will distinguish who benefits from the previous tax regime based on who was considered a resident of that country vs. a nonresident of that country at that time. That is why typically second passports are obtained at the time the person is going to formally expatriate — so they can be grandfathered into any tax benefit provided by the foreign country (presuming the country allows grandfather clauses).

Foreign Country Wealth Tax with a Plan B Second Passport

Some foreign countries utilize a wealth transfer or similar type of tax for just “being wealthy.” The problem for US taxpayers that purchase a plan B second passport is that some of these countries may consider the taxpayer’s total net worth in order to determine whether or not they qualify to have to pay a wealth tax. Thus, even if the taxpayer’s investment into the foreign country is limited, if the country is going to use the taxpayer’s overall net worth to determine wealth tax — it could be a problem.

PFIC Taxes on Investment for Plan B Passport

Oftentimes, taxpayers will utilize an investment strategy that involves acquiring investment assets in a foreign country similar to mutual funds (such as SICAVs). From United States’ tax perspective, this could ignite the PFIC tax regime — which may result in significantly more tax liability for the foreign investment in comparison to the US taxes due, had the Taxpayer made a US-based investment.

Know the Tax Implications of a Second Passport 

Just acquiring a second passport is not sufficient to minimize or eliminate US tax risk. That is because the United States follows a worldwide income tax model, which stays in place until the taxpayer formally expatriates. Therefore, the Second Passport will not only have taxpayers still holding the bag for Uncle Sam but they will also hold it for a second country as well until they formally expatriate from the USA — which is usually not the intended goal of the taxpayer when they acquired a second passport.

Golding & Golding: International Tax Lawyers Worldwide

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

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