By EB5 Investors Magazine Staff
Citizenship by investment programs are an increasingly popular option for investors interested in easier international mobility, family security, education, quality of life and of course, business opportunities. But, another reason wealthy investors seek economic citizenship is for tax planning and optimization.
Economic citizenship can be advantageous for tax planning since some countries only tax income earned from that country and without imposing capital gains to taxes as well. Examples include Dominica and St. Kitts who also do not subject tax on gifts, inheritance and international income. In Dominica and St. Kitts, there are no taxes or surcharges on income, profits, interest or revenue made outside of these countries.
“Popular destinations are the Caribbean countries offering citizenship-by-investment programs and countries like Bulgaria,” says Vicky Katsarova, CEO of Canada-based High Net Worth Immigration.
Investors find the tax laws advantageous, she said.
“Corporate and personal taxes are calculated at a flat rate of 10 percent making it the lowest tax regime in the EU, Katsarova said.” There are also tax incentives for specific business investments. Bulgaria also has double-taxation agreements with several countries.
According to the International Monetary Fund it is affluent private investors from emerging market economies that are fueling the popularity of citizen by investment programs.
“In the same way as multinational companies are looking for more competitive jurisdictions to operate from, affluent individuals are also looking for such solution. Due to the decreasing IT costs, since the beginning of the 1990s it is getting easier and easier to transfer the place where you want to conduct your business from a high-tax jurisdiction to a lower one, saving huge amounts of taxes - and legally,” says Laszlo Kiss, managing director of Malta-based Discus Holdings LTD.
Kiss says there are several famous examples, including Eduardo Saverin who obtained citizenship in Singapore, mainly for tax purposes. Saverin, co-founder of Facebook, renounced his US passport before the social network went public. Others include singer Tina Turner who went to Switzerland and Bitcoin angel investor Roger Ver who lives mainly in Japan.
It is residency rather than citizenship that dictates where an individual pays taxes, with the exception being American citizens who are required to pay federal taxes regardless where they reside.
“As the US taxes its citizens and resident aliens on their worldwide income, irrespective of where they actually live, for them changing citizenship requires full renunciation of their US citizenship - and not many are doing that. On the other hand, clients coming from other countries applying in Cyprus or Malta for citizenship could gain a very favorable tax situation, which could save the cost of citizenship many times,” says Kiss.
One way to reduce the tax burden and regulatory restrictions legally and in a considerable way is to relocate, according to Henley & Partners.
“We are seeing hundreds of Chinese buying Maltese residency for $1 million and on the other hand seeing thousands of foreign nationals obtaining a U.S. "E" visa for $500,000 or $1 million” says James Paul Sabo, a CPA who runs US-based Expatriate Tax Services LLC.
For the small number of U.S. citizens willing to relinquish their US citizenship, swapping a U.S. passport for one from St. Kitts and Nevis would lower their tax rates to zero percent on income and capital gains.
Sabo says American citizens who have the opportunity and interest in working and living outside the U.S. on long term assignments in low tax jurisdictions like Bermuda, Hong Kong or Saudi Arabia often wonder why they are still paying U.S. Federal and in some cases, state income tax. Sabo says the financial answer is easy, “You don’t have to.” However, he says the emotional answer is harder, but relinquishing one’s American citizenship makes financial sense.
“For example, a U.S. citizen earning $1 million a year living in Saudi Arabia, who is domiciled in Massachusetts, pays about $315,000 in federal income tax and $50,000 in Massachusetts income tax or $365,000 in total. On a 10-year assignment, they pay $3,65 million in U.S. income taxes and what do they get in return? Financially, nothing.
Sabo says tax planning is facts and circumstances driven. For example, he says if the wife works and the husband enjoys fishing every day, the wife can surrender her U.S. citizenship and attain citizenship from almost any island in the Caribbean for as little as $200,000 without ever going there.
“The wife relinquishes her U.S. citizenship, stops paying Federal and Massachusetts individual income tax and saves $3,65 million annually in US income taxes over the next 10 years that is worth $6 million or more,” says Sabo.
And, if it’s time to retire, with lots of grandkids in the U.S., could the wife move back to the U.S.? Sabo says as long as she is still married, her U.S. citizen husband can sponsor her to reside in the U.S. and eventually get a green card.
“The "nest egg' can be invested in tax free municipals bonds, be kept in an offshore trust, purchase an annuity or a whole range of other investments at minimal tax cost,” says Sabo.
Or, he says, after spending a decade in Saudi Arabia they can move to the Caribbean or Bermuda and spend up to 182 days a year in the U.S. without paying U.S. income tax.
“Planning is limited to one's imagination,” says Sabo.