US Citizenship, Yachsteading, and Taxes

More US wealthy opt to surrender their citizenship

Private client lawyers and relocation specialists are reporting a surge in wealthy Americans living abroad who are prepared to give up their citizenship to avoid the scrutiny of US tax authorities.

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The level of interest is set to increase following the tax disclosure deal between the US Government and UBS of Switzerland, involving the names of 5,000 alleged US tax evaders being handed over to the authorities. The UK concluded a tax deal with Liechtenstein last week.

Because of this, many ultra-wealthy individuals who have chosen to become stateless now cruise outside coastal waters in their mega-yachts in the belief that if they stay on the move, tax authorities will not be able to catch up with them. One analyst who did not want to be named, has estimated the number of stateless tax evaders amounted to a few thousand.

If true, sounds like a great potential market for seasteads.

There are structural reasons for the increase in people giving up citizenship – the reform of the previously-horrendous exit tax (10 years of taxation) to a one-time mark-to-market tax, combined with the recession and low asset prices, means the exit tax is effectively much lower than usual:

Under US tax laws, the worldwide income of any US citizen or resident is subject to tax. The US is the only country in the world that requires its citizens to stump up, no matter where they live.

Krause said current economic conditions are making it more conducive for Americans to contemplate paying exit tax demands from the US Internal Revenue Service. “The mark-to-market provision in the Exit Tax from the IRS is a big incentive,” he said.

In the final months of the Bush administration, the US Government introduced a package of tax reforms that included an amendment to the exit tax on US citizens and long-term green card holders who expatriate the US.

The tax allows US citizens and permanent residents wanting to renounce citizenship or permanent residency to pay a one-off income tax on gains over $600,000 (€420,000). All assets beyond this amount are valued at mark-to-market.

The exit tax allows a clean break from the US tax system from the date of expatriation without imposing the previous 10-year period after expatriation where tax rules used to apply – another big incentive, say lawyers.

Still, getting a second citizenship is out of the reach of most Americans:

St Kitts and Nevis is favoured for its perceived security, while Austria is one of the few European countries where it is possible to purchase citizenship.

Typically, it will cost $400,000 to secure a St Kitts and Nevis passport, whereas Austrian citizenship might run into several million euros.

The costs are high because the competition is low – only a few countries offer citizenships for sale, post-9/11.  The trends we talk about here: increased number and diversity of nations, increased commoditization of sovereignty, and viewing citizenship as a business relationship (taxes in return for services) rather than an emotional homeland, will all push to reduce prices.