Dual Citizenship Taxes: Avoid Double Taxation Strategically

Dual citizenship expands global mobility and increases access to international markets. However, one of the obligations that may arise is dual citizenship taxes and double taxation. This is not always the case, as many countries have tax treaties with one another, do not tax worldwide income, or offer a tax credit.  

Some countries, like the US, follow a citizenship-based taxation (CBT) system that requires citizens to report their income from around the world. Most countries do not use CBT and use residency-based taxation instead. This means that you only pay tax on local income.  

Our guide will explain how you can legally and strategically avoid double taxation because of dual citizenship, remain compliant with all the relevant laws and regulations, and enjoy the benefits that holding two passports offers.  

Dual Citizenship Taxes: Key Takeaways

Dual citizenship taxes refer to the possibility of double taxation because of multiple citizenship. This does not mean that all dual citizens will be double taxed all the time.  

Citizenship-based taxation taxes citizens on worldwide income while residency-based taxation taxes citizens on their locally earned income.  

Mechanisms like tax treaties exist to help dual citizens avoid paying tax twice even in CBT countries.  

Countries like the US require citizens to file an annual tax return irrespective of their residency status. Dual citizens should always be aware of their reporting obligations for both countries.  

Dual citizens pay taxes by following the tax laws of each country where they hold citizenship or residency. Some countries tax based on citizenship, while others tax based on residency. 

Understanding the distinction between these taxation systems is crucial for people with dual citizenship so that they can avoid double taxation and meet all their reporting responsibilities. 

Citizenship-based taxation is used by some countries like the US, and this means that citizens are taxed on all the income they earn worldwide, even if they live abroad. US dual citizens need to be aware of their reporting responsibilities as they need to file annual returns with the IRS. Additionally, foreign assets and accounts need to be reported under FBAR and FATCA.  

Residency-based taxation is used by most countries like the UK, Canada, Germany, and Portugal. This means that individuals are taxed based on their residency status. If you spend more than 183 days per year in a country, that usually makes you a tax resident there.  

For example, a US – UK dual citizen is working and living in London. This individual would pay UK income tax because they are a tax resident of the country. They would also need to file a US tax return reporting their worldwide income. Crucially, the individual could claim the FTC and avoid double taxation. 

There are mechanisms to avoid double tax, like the Foreign Earned Income Exclusion (FEIE), and the Foreign Tax Credit (FTC) for US citizens. Other important mechanisms are Double Taxation Avoidance Agreements (DTAA) and tax treaties that can reduce or completely remove double tax. Even if a citizen does not need to pay any tax to a CBT country, they will likely need to file a return.  

The following are the common dual citizenship taxes and obligations that individuals should be aware of:  

• Worldwide Income: This must be declared to the country or countries that have a CBT system in place.  
• FBAR: A Report of Foreign Bank and Financial Accounts is necessary for US citizens to file if they have more than $10,000 in an overseas account at any point in the year.  
• FATCA: The Foreign Account Tax Compliance Act requires that US citizens report foreign assets exceeding IRS thresholds. The average value of the assets must exceed $50,000 to be reportable with some assets having a higher threshold.  
• Social Security Contributions: Dual citizens may have citizenship of two countries with mandatory social security contributions. Thankfully, there are totalization agreements in place to prevent needing to pay into two systems simultaneously.  
• Estate and Inheritance Tax: People with dual citizenship may be liable for estate and inheritance tax in both of their countries if both countries impose these taxes, and there is no tax treaty in place.  

To stay on top of dual citizenship taxes, it’s imperative to keep detailed records of income, tax paid, and time spent abroad. This way dual citizens can support their tax claims and meet all their reporting requirements.  

01/ Determine Tax Residency 

To be able to strategically plan tax, it’s vital that dual citizens are aware of their own tax residency. This is the country in which an individual spends 183 or more days per year. Knowing which of their countries consider them a tax resident helps dual citizens understand their obligations.  

02/ Use the FEIE and FTC 

The FEIE and the FTC exist to help offset or eliminate double taxation for US citizens. Dual citizens of the US should be aware of the benefits that these options offer. The FEIE can exclude foreign income, and the FTC can credit foreign taxes against tax paid in your home country.  

03/ Leverage Tax Treaties 

Tax treaties are there to help individuals avoid double taxation and only need to pay tax to one country. DTAAs establish the nation with primary taxation rights, reduce withholding, and prevent an overlap of tax on the same income.  

04/ Plan Social Security Contributions 

Social security contributions are required by most countries, including the US. Totalization agreements support dual citizens and help them avoid having to pay for social securities in two countries.  

05/ Work with Tax Experts 

International tax experts, such as our team at Global Citizen Solutions, can help dual citizens to fully understand their obligations, maximize tax treaties, credits, and exemptions, as well as ensure that all the necessary returns are filed correctly and on time.