The Tax Implications of a Second “Plan B” Passport in the United States
Plan B ‘Second Passports’ Can Increase Tax Liability
Many U.S. taxpayers seek ways to avoid taxes on gains from U.S. assets and escape U.S. taxation entirely. A common strategy involves obtaining a Plan B or “second” passport. Taxpayers, typically U.S. citizens and lawful permanent residents, buy Citizenship-by-Investment (CBI) or Residence-by-Investment (RBI) passports, often called Golden Visas, in case they need to leave the country. However, merely purchasing a second passport without leaving the United States offers no tax benefits, as the U.S. taxes its citizens on worldwide income. By buying a second Plan B passport, taxpayers may inadvertently increase their tax liability. This article will review the U.S. tax implications of obtaining a second “Plan B” passport.
The United States Uses a Global Income Tax Model
The United States is one of the few countries employing a global income tax model. Unlike most other countries, the U.S. taxes Americans on their worldwide income. For instance, if David, a U.S. citizen, lives in a foreign country “A” and earns all his income in a foreign country “B,” the U.S. may still tax David on the entire amount. Even with a second citizenship or residency visa, David will face additional tax implications in the foreign country rather than avoiding U.S. taxes. The rules change once David has effectively expatriated from the United States, but for many taxpayers, obtaining a second Plan B passport is not about expatriation.
Considerations Before Getting a Second Plan B Passport
Non-Resident Taxes and United States Taxes (Pre-Expatriation)
Most foreign countries do not tax non-residents on worldwide income, but different taxes may still be owed. To buy a CBI or RBI, one must invest in that country’s economy, generating revenue. Even if the income is taxed lower in the foreign country, the U.S. would still tax it like any other income. Moreover, most countries offering citizenship or residency in exchange for investment are not “treaty countries.”
Changing Foreign Country Tax Rules and Benefits
Countries offering second passports can provide significant tax benefits. However, these benefits may change over time. Some countries differentiate who benefits from previous tax regimes based on residency status. Generally, second passports are obtained when a person is about to expatriate officially, allowing them to take advantage of any tax benefits provided by the foreign country.
Foreign Wealth Tax with a Second Plan B Passport
Some foreign countries levy a wealth transfer or similar tax solely for “being wealthy.” This can be problematic for U.S. taxpayers purchasing a second Plan B passport. Some countries may consider the taxpayer’s total net worth in determining wealth tax eligibility. Even if the investment in the foreign country is limited, the wealth tax could be based on the taxpayer’s overall net worth.
PFIC Investment Taxes for Plan B Passport
Taxpayers often use an investment strategy similar to mutual funds, acquiring investment assets in a foreign country (such as SICAVs). From a tax standpoint, this can aggravate the PFIC tax regime, resulting in a higher tax burden for foreign investments compared to U.S. taxes owed if the investment were U.S.-based.
Understanding the Tax Implications of a Second Passport
Obtaining a second passport is insufficient to reduce or eliminate U.S. tax risk. The U.S. uses a global income tax model that remains in effect until the taxpayer formally emigrates. Therefore, taxpayers will be liable for taxes in both the U.S. and the second country until they officially emigrate from the United States. This is usually not the goal when obtaining a second passport.
Case Studies: Tax Implications and Second Passports
Case Study 1: John’s Experience with a Second Passport
A U.S. citizen, John invested in a Golden Visa program in Portugal. He hoped to benefit from Portugal’s favourable tax regime. However, he did not realize that the U.S. would still tax his worldwide income. John’s investment income from Portugal was subject to Portuguese and U.S. taxes, leading to a higher overall tax burden. John learned that without officially expatriating, his second passport did not provide the tax relief he sought.
Case Study 2: Maria’s Wealth Tax Dilemma
Maria, another U.S. citizen, acquired a second passport through an investment in Spain. Spain imposed a wealth tax based on her total net worth. Despite her limited investment in Spain, the wealth tax applied to her overall net worth. Maria faced unexpected tax liabilities in Spain and the U.S., complicating her financial planning.
Case Study 3: David’s PFIC Tax Challenges
David, a U.S. expatriate, invested in foreign mutual funds through his second passport in Switzerland. He encountered significant PFIC tax implications. The tax burden on his foreign investments was higher than if he had invested in the U.S. David realized that understanding the tax implications of a second passport is crucial for effective financial planning.
Case Study 4: Sarah’s Expatriation Decision
Sarah, a U.S. citizen, obtained a second passport from Malta with the intention of expatriating. She carefully planned her move to avoid double taxation. By officially renouncing her U.S. citizenship, Sarah benefitted from Malta’s favourable tax regime. Her successful expatriation allowed her to avoid the complications faced by those holding second passports without emigrating.
Case Study 5: Michael’s Investment in Cyprus
Michael, seeking a new identity and protection, acquired a second passport through Cyprus’s investment program. He hoped to disappear legally and ensure a safe disappearance. However, he encountered unexpected tax implications. Cyprus imposed a capital gains tax on his investments, which, combined with U.S. taxes, resulted in a significant tax burden. Michael realized that thorough research and professional advice were essential for effective tax planning.
Case Study 6: Emma’s Identity Change Strategy
Emma, a U.S. citizen, sought a new legal identity by obtaining a second passport from Dominica. She planned to escape U.S. taxation by living in Dominica. However, Dominica’s tax policies changed, imposing new taxes on foreign income. Emma was taxed by Dominica and the U.S., complicating her financial situation. She learned that understanding the tax implications of new identity creation is crucial for successful financial planning.
The Dark Side: How Criminals Use Plan B Passports to Launder Money
While many use second passports for legitimate reasons, some criminals exploit these programs to launder money. By obtaining a second passport, criminals can open bank accounts, make investments, and conduct financial transactions under a new identity, making it harder for authorities to trace illegal activities.
Case Study 7: The Case of Viktor Kozeny
Viktor Kozeny, the “Pirate of Prague,” used a second passport to evade capture and launder money. After defrauding investors of millions of dollars, Kozeny acquired a passport from Antigua and Barbuda through their Citizenship-by-Investment program. This new identity allowed him to open bank accounts and hide his illicit gains, complicating efforts to bring him to justice.
Case Study 8: The Operation of Jho Low
Jho Low, a Malaysian financier, orchestrated the 1MDB scandal, laundering billions of dollars through various schemes. Low used multiple passports from countries offering CBI programs to facilitate his money laundering activities. These passports enabled him to move money across borders and evade detection by authorities for years.
Case Study 9: The Story of Sergei Pugachev
Sergei Pugachev, once a powerful Russian banker, fled to the UK with billions of dollars in stolen assets. He obtained multiple passports from various countries, allowing him to move his wealth undetected. Pugachev’s use of second passports highlights how criminals can exploit these programs to launder money and evade justice.
Conclusion
Obtaining a second passport might seem attractive to reduce U.S. tax liabilities. However, without officially emigrating from the United States, taxpayers remain subject to U.S. taxes on their worldwide income. Additionally, foreign countries’ tax rules can introduce new liabilities, such as wealth taxes and PFIC tax implications.
Understanding these tax implications and planning accordingly before acquiring a second “Plan B” passport is essential. Considering these factors, taxpayers can make informed financial and tax planning decisions.
Understanding the tax implications of a second passport is critical for those seeking a new identity, identity change, or identity protection. Legally disappearing and ensuring a safe disappearance requires careful planning and knowledge of U.S. and foreign tax laws. Fugitives’ use and creation of new identities often involve navigating complex tax environments and making indispensable professional advice.
If you would like to work with a professional team that can help make your transition to a life of freedom, contact Amicus Int. for New Identity services today.
