Dual Citizenship Taxes: What it is And How it Works

Dual citizenship is a legal status that allows an individual to be a citizen of two countries at the same time. This can be very beneficial as it provides advantages such as easy travel and more employment opportunities. However, it also comes with a complex tax issue.

Depending on each country’s tax laws, dual citizens may need to file taxes in both countries. Some countries have a tax system based on residency, while others tax based on citizenship or income source. Dual citizens must understand their tax obligations to comply with the law and manage their finances effectively.

This article aims to provide an overview of dual citizenship taxes, explaining the key concepts and considerations for dual citizens.

Dual citizenship taxes

Dual citizenship, also known as dual nationality, allows an individual to enjoy the benefits and privileges of two countries. This includes the freedom to reside, work, and travel more easily between the two.

Dual citizenship can occur in several ways, such as being born in a country that grants citizenship by birth, having a parent who is a citizen of a different country, getting married to a citizen of another country, or through the process of naturalization.

When it comes to taxation, having dual citizenship can complicate tax obligations as individuals may be subject to taxes in multiple countries based on citizenship, residency, and source of income.

Citizenship: Certain countries, including the United States, impose taxes on their citizens based on their global income regardless of their location.

This implies that US citizens, even if they reside overseas and earn income outside of the United States, must submit US tax returns and may owe taxes. However, credits for foreign taxes paid or exclusions for foreign earned income may decrease or even eliminate this tax obligation.

Residency: In some countries, individuals are taxed based on residency instead of citizenship. This means that tax residents are taxed on their income from all over the world, in the country where they live.

On the other hand, non-residents are only taxed on the income they earn within that country. The definition of residency varies, but it generally involves spending a significant portion of the year (such as more than 183 days) in that country.

Source of Income: Different countries have their own tax laws that determine how income is taxed based on its origin. Non-residents who earn income from within a country, such as wages for work performed there, profits from businesses located in the country, or rental income from property situated there, may be liable to pay taxes.

The rules that define what is considered a source of income can significantly vary from one jurisdiction to another.

To properly manage their tax obligations, dual citizens must understand the tax laws and treaties between their countries of citizenship. Tax treaties are agreements between two countries that aim to prevent dual citizens from being taxed twice and establish tax regulations regarding income sources, residency, and citizenship.

By complying with these regulations, dual citizens can ensure that they meet their tax obligations without facing penalties or double taxation.

FEIE for US citizens

The Foreign Earned Income Exclusion (FEIE) is a US tax provision that enables American citizens and resident aliens residing outside the country to exclude a portion of their foreign earnings from US federal income tax.

The exclusion amount is adjusted annually for inflation, and for the 2023 tax year, it was up to $112,000 of foreign-earned income.

To qualify for the FEIE, a taxpayer must meet specific requirements. They must have a tax home in a foreign country and meet either the Physical Presence Test or the Bona Fide Residence Test.

The Physical Presence Test requires the taxpayer to be living in a foreign country for at least 330 full days during a period of 12 consecutive months.

On the other hand, the Bona Fide Residence Test requires the taxpayer to be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.

It is important to note that the FEIE applies only to earned income, such as wages and salaries, and does not apply to passive income, like dividends, interest, or rents.

The FEIE is particularly beneficial for expatriates as it can potentially reduce or eliminate their US tax liability on foreign-earned income, thus helping to mitigate the issue of double taxation for Americans working abroad.

However, even if no tax is owed due to the FEIE, qualifying taxpayers must still file a US tax return to claim the exclusion.

Foreign Tax Credit for dual US citizens

The Foreign Tax Credit (FTC) is a tax credit offered by the United States to reduce the burden of double taxation for US taxpayers earning income outside of the country. This credit allows taxpayers to lower their US tax liability on foreign-earned income by the amount of foreign taxes they have paid on that income.

The aim is to ensure that US citizens and resident aliens are not taxed twice on the same income – once by a foreign country and again by the US.

To qualify for the FTC, the taxpayer must have foreign income that is subject to tax by a foreign nation and must have paid or accrued the foreign tax.

The income must also be eligible for the credit, which generally includes earned income, such as wages and self-employment income, and passive income, such as interest and dividends, from foreign sources.

The credit must be, at most, the amount of US taxes attributable to foreign-earned income, ensuring that taxpayers cannot use the FTC to generate a refund for taxes not actually paid to the US.

Taxpayers can claim the Foreign Tax Credit by filing Form 1116 with their US federal income tax return unless they qualify to claim the credit directly on their Form 1040 without Form 1116.

The FTC is particularly useful for taxpayers living and working in countries with higher tax rates than the US, as it can significantly reduce or even eliminate their US tax liability on foreign income.

However, applying the FTC involves specific rules and limitations, making it advisable for taxpayers to consult with a tax professional to navigate the complexities and maximize their potential tax benefits.

Avoiding Double Taxation

Countries worldwide recognize the challenges posed by double taxation for individuals and corporations engaging in international activities. To mitigate these challenges, they enter into tax treaties.

These agreements usually aim to prevent double taxation – where the same income is taxed by two countries – and encourage cross-border trade and investment by making fiscal environments more predictable and equitable.

Here are some examples of countries with tax treaties designed to avoid double taxation:

United States and Canada: The US and Canada have a comprehensive tax treaty that covers both individual and corporate taxation, providing relief from double taxation for residents and citizens of both countries.

It addresses various forms of income, including dividends, interest, royalties, and capital gains.

United Kingdom and Germany: The UK and Germany have a double taxation agreement that ensures individuals and businesses are not taxed twice on the same income.

This treaty covers various types of income and establishes which country has taxing rights on different income sources.

Australia and Japan: Australia and Japan have entered into a tax treaty to avoid double taxation and prevent fiscal evasion.

This agreement covers numerous forms of income, including business profits, dividends, interest, and royalties, outlining how each is taxed between the two countries.

France and India: The tax treaty between France and India helps residents of both countries avoid being taxed twice on the same income.

It includes provisions for different types of income and capital gains, aiming to foster economic cooperation between the two nations.

Brazil and Italy: The tax treaty between Brazil and Italy is designed to avoid double taxation and prevent tax evasion.

It covers a wide range of income categories, providing clear guidelines on taxation rights to eliminate or reduce double taxation issues.

How Can Global Citizen Solutions Help You?

Global Citizen Solutions is a boutique migration consultancy firm with years of experience delivering bespoke residence and citizenship by investment solutions for international families. With offices worldwide and an experienced, hands-on team, we have helped hundreds of clients worldwide acquire citizenship, residence visas, or homes while diversifying their portfolios with robust investments. 

We guide you from start to finish, taking you beyond your citizenship or residency by investment application. 

Frequently Asked Questions About Dual Citizenship Taxes

Do I file tax returns in both countries?

Yes, in many cases, dual citizens need to file tax returns in both countries.

However, the requirement depends on each country’s tax laws. Countries like the United States require their citizens, including dual citizens, to file tax returns on their global income regardless of where they live.

Meanwhile, other countries tax based on residency or the source of income. Always check both countries’ tax regulations to understand your obligations.

Can I be taxed in both countries?

While it’s possible to face taxation on the same income in both countries, many countries have tax treaties to prevent double taxation.

These treaties typically allow for tax credits in one country for taxes paid in another or establish exclusive taxing rights for certain types of income in one country.

It’s essential to understand the specific tax treaty that applies to your situation.

How does FEIE affect dual citizens?

For American dual citizens living abroad, the FEIE allows them to exclude a portion of their foreign-earned income from US taxes, reducing or potentially eliminating their US tax liability on that income.

However, they must meet either the Physical Presence Test or the Bona Fide Residence Test and file a U.S. tax return to claim the exclusion.

What happens if I don't report foreign income?

Failing to report foreign income on a U.S. tax return can lead to penalties and interest charges.

The US IRS requires citizens, including dual citizens, to report their worldwide income. However, mechanisms like the FEIE and Foreign Tax Credit can often offset any owed taxes.

It’s crucial to report all foreign income and file the necessary forms to avoid compliance issues.

Are there tax considerations for estate planning?

Yes, dual citizenship can complicate estate planning, especially regarding inheritance taxes and the transfer of assets between countries.

Tax laws concerning estates and inheritances vary widely between countries, and dual citizens should consider these laws when planning their estates. Sometimes, treaties may provide guidelines or relief for estate taxes.

Consulting with a tax professional experienced in international tax law is advisable for dual citizens’ estate planning purposes.