Reasonable Doubt

Citizenship-Based Taxation: 3 Signs Europe Might Follow in The US’ Footsteps

Reasonable Doubt
With David Lesperance

A contrarian expert on contingency plans for the wealthy delivers uncomfortable truths.

I have been assisting wealthy Americans legally and permanently leave the US tax system for over three decades. This process is uniquely complex because the IRS taxes not only on the basis of residence but also on citizenship.

In practice, this means that – in order to leave the US tax system – wealthy Americans must first acquire a second citizenship; they must then execute an integrated financial and immigration exit strategy.

If this exit strategy involved an alternative citizenship through lineage or citizenship by investment in an EU country the inevitable question that follows is whether this country will eventually follow the American lead and also tax based on citizenship. My answer, for three decades, was always ‘no’.

That is, until now.

Over the last three decades, three major developments have increased the likelihood of one or more EU countries adopting citizenship-based taxation (CBT). 

#1 – European governments’ ability to locate their nationals abroad
As a result of computerization, all European countries keep excellent records of children born in their country and any children of their nationals who are born abroad. Depending on the citizenship rules, this means that they can identify new (and existing) nationals of their country.

It is no longer necessary for one of their citizens abroad to “register” their newborn at a local embassy. Tax authorities can still locate them. This is possible through simple data-mining using Google and other social media. Alternatively, they can use the troves of information secured through the Common Reporting Standard (CRS). Both methods are surprisingly effective in uncovering their citizens and their assets abroad.

A message from our partners
Middle East Road Show Ad

Finally, information-sharing, multi-lateral intelligence alliances such as the Five Eyes and EU information-sharing  have turned “if the government finds me” to “when the government definitely finds me.”

#2 – European governments’ ability to enforce taxation on foreign source income and foreign source assets
Supplementing CRS are “mutual legal assistance treaties” and “mutual collection” clauses in tax treaties. These allow an EU country to assess tax liability and then enforce tax collection.

#3 – The future tax revenue needs of every EU country have significantly increased
In response to the Covid-19 pandemic, every EU country has taken on huge deficits. When addressed, this additional debt will undoubtedly require additional tax revenues. As a government cannot get “blood from a stone”, it will undoubtedly continue the tradition of targeting the wealthy for more revenue. This will undoubtedly be egged on by the populist tax-the-rich rhetoric already being spewed. 

In light of these three developments, it was not wholly surprising that voices in the UK and elsewhere floated the idea of adopting CBT. In fact, last year, China started its version of CBT and has begun to selectively tax the overseas income of some of its nationals.

What preventative action can you and your clients take now?
My message to wealthy families is simple: The implementation of CBT in a country in which your hold a passport is the equivalent of your house catching on fire.

Depending on your assets and income, such a fire might be financially catastrophic. Therefore, simple prudence would recommend that you acquire the “fire insurance (or Back-Up Plan) of alternative citizenship(s) and residence(s). If the possibility of such a policy becoming law increases, the acquisition of a fire escape plan, such as those that wealthy Americans now follow to escape US taxation, could be a financial lifesaver.

At the end of the day, the money spent acquiring these simple precautions will be nominal compared to the potential financial devastation that may impact the unprepared. And right now, lots of European politicians are playing with matches!

David Lesperance AuthorSubscriberParticipant

David Lesperance is a global leader of international tax and immigration advisors.

A published author in the field, his personal interest in these areas of law grew from his experience working as Canadian immigration and customs officer while studying law. Since being called to the bar in 1990, he has established his expertise with major law firms, his own law firm and as a private consultant. David has successfully advised scores of high and ultra high net-worth individuals and their families, many of whom continue to seek his counsel today. In addition he has provided pro bono advice to many governments on how to improve their Citizenship by Investment, Residence by Investment or Golden Visa type programs to better meet the needs of his global clients. David is supported by a team of professionals, some of whom have worked with him since the early 1990s.

follow me