PRE-IMMIGRATION TAX PLANNING
TAX PLANNING TO PREPARE FOR IMMIGRATION to the united states
The United States continues to be a global economic powerhouse, and this attracts people from all around the world to its shores to seek opportunity and prosperity. Foreign persons who expect to become subject to U.S. tax as a result of moving to the United States should consult a qualified U.S. tax attorney to understand any potential U.S. federal tax issues as a result of their immigration. In particular, such persons should understand that if they are treated as a resident of the United States (or if they later obtain citizenship), they will be subject to worldwide federal income taxation on both U.S. and non-U.S. assets and activities. In addition, they could be subject to worldwide federal estate and gift taxation depending on whether they intend to permanently stay in the United States.
A common planning situation is an individual executive or employee that obtains a nonimmigrant visa for a temporary work assignment in the United States. When such individual moves temporarily to the United States, he should be concerned with the possibility that any U.S. property or assets could be subject to U.S. federal estate tax if he dies while on assignment. In addition, his worldwide business and investment income could be subject to U.S. federal income tax if he becomes a resident.
The first step is to ensure that the individual does not become “domiciled” in the United States for U.S. estate tax purposes. If such individual avoids domicile, his estate tax situation will be the same as if he had not moved to the United States—only his U.S. situs assets will be subject to estate tax, as discussed above. To the extent that the individual holds such assets (or acquires such assets during his assignment), he should consider whether he needs to structure his holdings through a foreign entity—either a corporation or a trust.
However, these estate considerations need to be balanced against any U.S. income tax considerations. A foreign corporation could be subject to certain anti-deferral regimes—particularly the passive foreign investment company (PFIC) rules and the controlled foreign corporation (CFC) rules. Additional reporting requirements may also apply. It may be desirable to see U.S. tax advice before beginning the work assignment to minimize income tax exposure.
Permanent work assignments raise different issues, as the individual will likely be treated as “domiciled” in the United States and thus subject to U.S. estate tax on his worldwide assets. However, this may not be a significant result due to the high U.S. estate exemption amount that is currently available ($13.61 million in the year 2024). Note, however, that beginning the year 2026, this exemption amount will be cut in half due to expiring legislation, unless Congress acts to extend it. If the individual expects to have assets exceeding the exemption amount, a “drop-off” trust could be viable option to ensure his or her assets are protected from U.S. estate tax.
As discussed, any such structuring would need to be carefully coordinated with local counsel in his or her home jurisdiction.
INTERNATIONAL TAX ISSUES FOR U.S. RESIDENTS
U.S. citizens and residents are subject to U.S. federal income tax with respect to their cross-border activities, otherwise known as “outbound” activities. These outbound activities could include passive investments in the securities of a foreign issuer. On the other hand, some U.S. taxpayers operate their business overseas through the use of a foreign corporation, either directly held or held through a U.S. corporate parent, and such taxpayers could be subject to adverse rules applicable to “controlled foreign corporations” (“CFCs”) or “passive foreign investment companies (“PFICs”). U.S. taxpayers face numerous potential issues with respect to these activities and are advised to consult a qualified U.S. tax attorney.
As a result, although the United States continues to be a global economic powerhouse, the United States also has a complex, and at times, financially burdensome tax regime that may cause U.S. taxpayers to seek greener pastures elsewhere. If any U.S. taxpayer wishes to escape the U.S. tax net, they should consult a qualified U.S. tax attorney to understand any potential U.S. tax issues with such expatriation. An expatriation would require a renunciation of U.S. citizenship (in the case of a U.S. citizen) or a termination of U.S. residency (i.e., termination of a green card after a certain period). If certain thresholds are met, the expatriation could trigger a punitive “exit tax” which would apply to all the expatriate’s assets (subject to certain exemptions).
U.S. citizenship can be terminated through several methods. The most typical method is to renounce U.S. nationality abroad by appearing in person before a U.S. consular or diplomatic officer in a foreign country and to sign an oath of renunciation of U.S. citizenship. The renunciation is effective upon the approval of a “Certificate of Loss of Nationality (CLN)”, which is effective retroactively to the date of the oath of renunciation.
As previewed above, serious tax consequences under Section 877A of the Code can apply to anyone who is treated as a “covered expatriate” for U.S. tax purposes (i.e., a person who renounces U.S. citizenship or a person who has terminated permanent residency after a certain duration). However, these consequences would only apply if certain income or asset thresholds are met for the periods preceding the expatriation, or if the expatriate has not been compliant with certain U.S. tax reporting obligations.
If the expatriation tax applies, it would be calculated on a mark-to-market basis with respect to the expatriate’s worldwide assets (subject to certain exceptions). However, the first $866,000 (for the year 2024) of deemed gain would generally be excluded for the purposes of calculating the expatriation tax.