Taxation

While citizenship was initially created to enable participation in the affairs of state, it has since evolved increasingly into a tool of population control and tax collection. This brings us to the tax implications tied to citizenship.

There are currently three tax models in use. The citizenship model, the residential model and the tax haven model. There can be some overlap though and some countries use a mix of both the residential model and the citizenship model. In some cases, a high-tax country can also be a tax haven if certain conditions are met.

Mainly for practical reasons, the vast majority of countries use the residential model. I cannot cover every country in the world in this course but I will cover some of the most common ones. If a country you are interested in is not covered, simply let me know via the contact page.

First of all, let us start with the countries using the citizenship model. The list is quite short, thankfully, as only two countries in the whole world use it. Eritrea and the United States. What is the citizenship model? Let us cover the United States first. The way things work is fairly simple: if you are a citizen you are liable for taxation. Where you actually live does not matter. Even if you have never set foot on US soil you are still liable for taxation. In my opinion, this is clearly not a fair system. There are, of course, the Foreign Earned Income Exclusion and the Foreign Tax Credit but they only apply to the first 130000 USD or so in annual earned income (FEIE) or come with severe restrictions (FTC) and in both cases, you are still required to file a tax return every year.

In the case of Eritrea, things are a bit better. Citizens only have to pay a flat tax of 2% on their foreign income. This is still unfair, as far as I am concerned, but is definitely an improvement over the US system where all income is taxed at the normal rate. Also, given the limited resources at the disposal of the Eritrean tax authorities, one could likely just ignore the tax and never get into any trouble (not what I would advise an Eritrean citizen to do obviously).

The second model is the residential one. The vast majority of countries using this model only tax their citizens if they maintain regular residential ties. The exact definition of “residential ties” vary from country to country but usually means spending 183+ days in-country, owning a permanent home, having a local job etc.

Let us start with my own country, Canada.

‍Canada does not tax its citizens if they maintain their domicile abroad. As such, to be exempt from Canadian taxation, a citizen has to establish their domicile abroad, in addition to cutting primary ties to Canada, and limiting visits to 182 or fewer days annually.

‍Australia, New Zealand and the United Kingdom all use similar systems. The way they assess someone’s situation differs, however. For example, the UK uses the Statutory Residence Test to determine whether a citizen is a tax resident. Australia and New Zealand uses a ties system which takes into account income, assets and family connections.

‍Scandinavian countries tax their citizens if they meet physical presence requirements, with strict discontinuance rules for those who move abroad. Finnish citizens, for example, are taxed by Finland for up to three years after they move abroad if they cannot show that they have cut all primary ties to Finland.

For most other EU countries, things are simpler. A citizen will not usually be liable to tax if they do not meet the presence requirement, and do not maintain their primary home within the country. Some EU countries, however, will tax their citizens even if they do not qualify for tax residency, in specific circumstances. Spain, for example, will tax its citizens on their worldwide income for up to five years if they relocate to a blacklisted tax haven.

The last model is the tax haven model. There are two types of tax havens, the pure tax havens and the territorial tax havens. The pure tax havens do not impose any taxes on their citizens while the territorial tax havens only tax locally sourced income (by definition, they do not impose any tax on their citizens if they live abroad and derive no local income). There are very few pure tax havens left, and they are usually small nations (islands, especially). The most famous are Anguilla, Bahamas, Bahrain, Bermuda, Cayman Islands and Sark. Territorial tax havens are far more common, and they include well known financial hubs (Hong Kong, Singapore, Panama) and popular expat destinations (Belize, Costa Rica, Paraguay).

‍Dual or multiple citizenship and taxation
Having multiple citizenship does not usually result in any taxation related complication, except if one of those citizenships is that of the United States or Eritrea.