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There are several ways that a U.S. citizen can expatriate; i.e., end their U.S. citizen status.
A U.S. citizen loses nationality by voluntarily performing any of the following acts with the intention of relinquishing U.S. nationality:
- Being naturalized in a foreign country.
- Taking an oath or similar declaration of allegiance to a foreign state.
- Entering, or serving in, the armed forces of a foreign state if (A) such armed forces are engaged in hostilities against the United States, or (B) serving as a commissioned or non-commissioned officer.
- (A) Working for a foreign government as a citizen of that government; or (B) if such work requires an oath of allegiance or similar declaration.
- Making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state.
- Making a formal renunciation of nationality in the United States in wartime.
- Committing treason, attempting by force to overthrow, or bearing arms against, the United States.
(Several of these actions require that you be at least 18 years old for them to be effective.)
The overwhelming majority of individuals who voluntarily expatriate do so under options #1 or #5. For instance, obtaining a second passport from another country (#1) is an expatriating act. If you choose to expatriate after doing so, that is your right under U.S. law.
In the past, Ive generally advised clients who have used our services to help them expatriate to avoid renouncing their citizenship (option #5). The reason is an obscure law enacted in 1996 called the Reed amendment. This law gives the U.S. Attorney General the discretion to deny entry into the United States to a former U.S. citizen who renounces U.S. citizenship in order to avoid U.S. taxation. Other categories of excluded persons are those with communicable diseases or other health conditions; those convicted of crimes involving moral turpitude or illegal drugs or with multiple criminal convictions; prostitutes; spies; terrorists; and draft evaders.
Because the wording of the Reed amendment appears to apply only to those who renounce U.S. citizenship, Ive recommended to our clients that they choose another expatriation option other than renunciation. Generally this is #1, in which you acquire a foreign nationality and subsequently relinquish U.S. citizenship.
However, 15 years after its original enactment, regulations under the Reed amendment have not been promulgated, nor has its power ever officially been invoked. One reason is that the law is so extreme that even that paragon of civil liberties, former Attorney General Janet Reno, questioned its constitutionality.
Another reason is that the law is likely obsolete. The tax law that discourages expatriation no longer requires that a persons expatriation be tax-motivated to come into effect. Anyone who meets the criteria to be defined as a covered expatriate is subject to it. Among other consequences, covered expatriates must pay an exit tax on unrealized gains that exceed $636,000 (indexed annually for inflation). Your motivation for expatriation is irrelevant.
These facts havent stopped U.S. consular officials from occasionally denying visa applications from former U.S. citizens, apparently using the Reed amendment as legal authority for doing so. In another case, U.S. customs officials used the Reed amendment as justification to deny a former U.S. citizen permission to board a U.S.-borne jet. Fortunately, the situation was quickly resolved in favor of the former U.S. citizen seeking to re-enter the United States.
The officials apparently made no effort to determine if the targeted individuals had renounced or merely relinquished their U.S. citizenship. In addition, the State Department helpfully lumps anyone who U.S. citizen who expatriates into a single category, which it calls renunciants.
These facts make the distinction Ive made between renunciation and relinquishment largely irrelevant. As the procedure for renunciation is simpler, and removes any question of intent, I no longer see any reason to avoid this option.
Why might you wish to give up U.S. citizenship? One possible reason, of course, is that you no longer need to pay U.S. tax on your worldwide income if you reside outside the United States. Another reason is that youll find it much easier to invest or do business overseas as a non-U.S. citizen.
My newly revised report, The Billionaires Loophole, describes these advantages, and outlines the procedure for giving up citizenship, step-by-step. It also shows you practical ways to avoid the exit tax and other consequences of being a covered expatriate. Fortunately, you dont need to be a billionaire to benefit from expatriation. To learn more, click here. And, if youre ready to expatriate, or would like to explore its suitability for your particular circumstances, please contact me at [email protected].
Reprinted with permission from The Nestmann Group, Ltd.