Manuel Garrido
Dual citizenship, which is being a legal citizen of two countries simultaneously, offers significant advantages. These include greater travel freedom, expanded career opportunities, and access to healthcare and education in both countries.
However, it also introduces complex tax considerations. Depending on each country’s tax laws, dual citizens may be required to file taxes in both countries, especially when countries use different tax systems (citizenship-based, residency-based, or source-based taxation).
In this guide, we’ll break down how dual citizenship taxes work, how to avoid double taxation, and what strategies can help you stay compliant and reduce your global tax burden.
What is dual citizenship and how does it affect taxes?
Dual citizenship (or dual nationality) means an individual is legally recognized as a citizen of two countries. This can occur through:
- Birth in a country with jus soli (right of the soil) laws
- Citizenship by descent through your parents or other family members (jus sanguinis)
- Marriage to a foreign national.
- Citizenship by naturalization through residency.
- Citizenship by investment that requires a financial contribution in exchange for citizenship.
While dual citizenship brings lifestyle and travel benefits, it can also complicate your tax obligations, especially if both countries claim taxing rights over your income.
As highlighted by the Global Intelligence Unit’s Global RCBI Report, “a desire to hedge against risk” is one of the key motivations driving individuals toward dual citizenship.
For many high-net-worth individuals and globally mobile families, a second passport is not just about travel but rather a strategic tool for protecting wealth, minimizing tax exposure, and diversifying risk in an uncertain world.
Your tax obligations as a dual citizen depend on which of the following tax systems is used: citizenship-based taxation, residency-based taxation, and source-based taxation.
1. Citizenship-based taxation
Some countries, most notably the United States, tax their citizens on worldwide income, regardless of where they live. That means even if you’ve moved abroad and earn no U.S.-sourced income, you still need to:
- File a U.S. tax return.
- Report foreign bank accounts (FBAR, FATCA).
- Possibly pay U.S. taxes, unless exclusions or tax credits apply.
2. Residency-based taxation
Many countries determine tax liability based on country of residence. Generally, you’re considered a resident for tax purposes if you spend more than 183 days per year there or maintain a home and strong ties in that country.
- Tax residents: taxed on worldwide income.
- Non-residents: taxed only on income earned within the country.
3. Source-based taxation
Some countries tax income only if it’s earned within their borders, regardless of citizenship or residency. For instance, if you own rental property in another country, you may owe tax on that income locally, even if you’re a non-resident.
Understanding how each country treats income sources helps you avoid double taxation and stay compliant.
Understand Residency vs Citizenship with our guide.
Key Tax Rules for US Dual Citizens
U.S. citizens with dual nationality face some of the strictest tax rules globally. Here’s what you need to know:
Foreign Earned Income Exclusion (FEIE)
The FEIE allows U.S. taxpayers living abroad to exclude up to $126,500 for the 2024 tax year of foreign-earned income from U.S. federal tax. This amount is adjusted annually so will change as time goes on.
To qualify, you must:
- Have your country of tax residence in a foreign territory.
- Pass either the Physical Presence Test (stay 330 full days in a foreign country over any 12-month period) or the Bona Fide Residence Test (uninterrupted residence in a foreign country for an entire tax year).
The FEIE does not apply to passive income (dividends, interest, capital gains, or rent). Even if you owe no U.S. tax due to the FEIE, you must still file a U.S. tax return to claim the exclusion.
Foreign Tax Credit (FTC)
The Foreign Tax Credit helps U.S. citizens avoid being taxed twice on the same income by offsetting U.S. tax liability with foreign taxes paid.
Key points:
- You must have paid or accrued tax to a foreign country.
- Credit applies to earned and passive income.
- You must file Form 1116, unless exempt.
The credit is limited to the amount of U.S. tax attributable to the foreign income. In countries with the highest taxes, the FTC can eliminate your U.S. tax liability entirely.
Tax Treaties and Double Taxation Relief
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.
They are based on the OECD Model Tax ConventionOECD Model Tax Convention which provides the foundation for more than 3,000 bilateral tax treaties globally, which are crucial for avoiding double taxation and clarifying tax residency.
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.
Looking for relief from tax burden to build your wealth? Tax haven countries might be just the ticket for you
Estate and Inheritance Tax for Dual Citizens
Estate planning becomes significantly more complex when you hold dual citizenship, especially if your assets span multiple countries.
Each country has its own rules for estate and inheritance tax, which can lead to double taxation, administrative delays, and legal disputes if not properly managed.
Key challenges dual citizens may face:
- Double inheritance tax: Some countries tax an estate based on the citizen’s nationality, while others apply taxes based on residency or location of assets. This means a dual citizen’s estate could be subject to inheritance or estate taxes in both countries unless mitigated by a tax treaty.
- Conflict over estate residency: Determining which country has taxing rights over the estate can be difficult. If both countries claim the deceased was a resident at the time of death, the estate may fall into a legal grey area. This often occurs when an individual maintains property, family ties, or tax residency status in more than one country.
- Asset valuation and currency issues: Differing rules on how assets are valued (e.g., property, investments, or pensions) can cause disputes or delays in probate. Converting and reporting values in multiple currencies adds another layer of complexity.
- Cross-border asset transfers: Transferring real estate, bank accounts, or investments across borders may require navigating local inheritance laws, probate courts, or even forced heirship rules (as seen in countries like France or Spain), which limit testamentary freedom.
How to minimize risks:
- Check for estate and inheritance tax treaties: Some countries have signed estate tax treaties that clarify which country has taxing rights, prevent double taxation, and offer credits or exemptions. The U.S., for example, has treaties with countries like the UK, Germany, France, and Canada.
- Use dual wills: In some cases, creating wills in each country (aligned and legally valid in both countries) can simplify administration.
- Consider trusts or legal structures: Depending on the countries involved, using international trusts, foundations, or holding companies may help reduce estate tax exposure and protect beneficiaries.
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 dual citizens have to pay taxes in both countries?
Yes, in many cases, dual citizens may be required to file tax returns in both countries, especially if one uses citizenship-based taxation (like the United States) and the other uses residency-based taxation.
Whether you owe taxes in both countries depends on factors such as tax treaties, residency status, and the source of your income.
Do you pay taxes if you are a U.S. citizen and live in another country?
Yes. The United States taxes its citizens on their worldwide income, regardless of where they live. Even if you live abroad full-time, you must file a U.S. tax return annually.
However, you may qualify for relief through provisions like the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC) to avoid being taxed twice.
How can dual citizens avoid double taxation?
Dual citizens can avoid double taxation by using tools such as:
- Tax treaties that allocate taxing rights between countries
- The Foreign Tax Credit, which offsets U.S. tax liability with foreign taxes paid
- The FEIE, which excludes a portion of foreign-earned income from U.S. tax
Are dual citizens eligible for tax credits or exemptions in both countries?
Yes, dual citizens may qualify for tax credits or exemptions in both countries, depending on local laws and whether a tax treaty exists.
In the U.S., common examples include the Foreign Tax Credit, which offsets taxes paid abroad, and the FEIE, which excludes earned income up to a set limit. Other countries may offer similar credits to avoid taxing income already taxed elsewhere.
Do dual citizens need to file taxes in both countries every year?
Often, yes. If both countries require tax reporting from citizens or residents, dual citizens may need to file annually in each country.
However, they may not owe taxes in both places due to credits, exclusions, or treaty benefits. Filing does not always mean paying, especially if tax relief mechanisms apply.
How does FATCA affect dual citizens?
The Foreign Account Tax Compliance Act (FATCA) requires U.S. citizens, including dual citizens, to report certain foreign financial accounts and assets if they exceed specified thresholds. Foreign banks may also report account information to the IRS.
FATCA increases compliance requirements and can result in penalties if not followed correctly.
Are there penalties for not reporting taxes as a dual citizen?
Yes. Failing to file required tax returns or disclose foreign accounts can result in significant penalties, interest charges, and potential criminal liability, especially under FATCA and FBAR regulations in the U.S. Penalties can apply even if no taxes are owed, so staying compliant is essential.
How does the IRS treat dual citizens?
The IRS treats dual citizens the same as any U.S. citizen when it comes to taxation. They are required to report worldwide income, file annual tax returns, and comply with foreign asset reporting rules (e.g., FBAR, FATCA).
Dual citizenship does not exempt someone from U.S. tax obligations, although relief may be available through credits or exclusions.
What are the tax reporting requirements for dual citizens with offshore accounts?
U.S. dual citizens must report offshore banking accounts if the total value exceeds $10,000 at any point in the year by filing an FBAR (FinCEN Form 114). Additionally, Form 8938 (FATCA) may be required for foreign financial assets exceeding certain thresholds. Non-compliance can lead to steep fines, even if the accounts generate no income.
Do dual citizens pay inheritance tax in both countries?
It’s possible. Some countries tax estates based on citizenship, others on residency or asset location. Without an estate tax treaty, a dual citizen’s estate could be subject to inheritance or estate tax in both countries. Proper estate planning and treaty analysis can help reduce or eliminate duplicate taxation.
Does renouncing citizenship eliminate tax obligations?
Renouncing citizenship may end future tax obligations, but it does not eliminate prior liabilities. U.S. citizens who renounce citizenship must file a final tax return and may be subject to an exit tax if they meet certain wealth or income thresholds. Tax obligations may continue until renunciation is officially processed and all forms are filed.
