The Importance of a Certificate of Loss of Nationality (“CLN”) and FATCA – Foreign Account Tax Compliance Act
Immigration law has much relevance to U.S. international tax law. The definitions of who is a “U.S. person”, which is the technical term used for U.S. federal tax purposes, is based in large part on the immigration status of an individual. For a discusion on these rules, see Foreign Persons with Certain Visas and Their California Employers Beware: Non-Conformity of Federal and California Employment Tax Rules (California Tax Lawyer, Volume 15, Number 3/4, Summer/Fall 2006).
The tax law has the following concepts that directly affect whether an individual has U.S. income tax residency, technically known as a “U.S. person”, and hence subject to U.S. income taxation on their worldwide income:
- U.S. citizenship – Almost every individual, born in the U.S. has U.S. citizenship via the 14th Amendment. Also, an individual born to a parent who was a U.S. citizen must consider whether they too are also a U.S. citizen by the concept known as “derivative citizenship“; i.e., “derived” from a U.S. citizen parent. The U.S. Citizenship and Immigration Services (USCIS) has a “Nationality Chart 1, for Children Born Outside U.S.” to help determine if the individual was a U.S. citizen at birth.
- Lawful permanent residency (“LPR”), which has a series of complex rules that can affect “U.S. person” status – See, Sometimes Old is as Good as New – 1998 Treasury Department Report on Citizens and LPRs,
- Non-citizens and non LPRs who meet the so-called “substantial presence test” – See, FATCA of the HIRE Act Crashes Head On into the ‘Twilight Zone’ (Lawful Permanent Residents Living Overseas)
Importantly, related to the above definitions of who is a “U.S. person” are the provisions of the Foreign Account Tax Compliance Act (“FATCA”) that entered into force in January 2014. This new law, FATCA, (Chapter 4 of Subtitle A of the Internal Revenue Code) imposes obligations on financial institutions (“FFI”) and basically all private companies and legal entities (“NFFE”) throughout the world to confirm if they have any “U.S. person” account holders or owners.
A former U.S. citizen must generally provide a Certificate of Loss of Nationality (“CLN”) – Form DS-4083 (CLN) to prove they are no longer a U.S. person. This is a specific requirement both under the FATCA regulations and a provision that has been adopted into the FATCA intergovernmental agreements (“IGAs”). See, Annex I of the IGA between the U.S. and Spain regarding CLNs.
The relevant portion of the Treasury Regulations are Section 1.1441–7T General provisions relating to withholding agents (temporary) – (b)(5)(ii) and (b)(6)(iii):
- . . . A withholding agent may treat the individual as a foreign person, notwithstanding the U.S. place of birth, if the withholding agent has in its possession or obtains documentary evidence described in § 1.1471–3(c)(5)(i)(B) evidencing citizenship in a country other than the United States and either a copy of the individual’s Certificate of Loss of Nationality of the United States or a reasonable written explanation of the account holder’s renunciation of U.S. citizenship or the reason the account holder did not obtain U.S. citizenship at birth.
- (iii) U.S. place of birth. A withholding agent has reason to know that documentary evidence provided by a direct account holder to support an individual’s foreign status is unreliable or incorrect if the withholding agent has, either on the documentary evidence or as part of its account information, an unambiguous place of birth for the individual in the United States. A withholding agent may treat the individual as a foreign person, notwithstanding the U.S. birth place, if the withholding agent has in its possession or obtains documentary evidence described in § 1.1471–3(c)(5)(i)(B) evidencing citizenship in a country other than the United States and a copy of the individual’s Certificate of Loss of Nationality of the United States. Alternatively, a withholding agent may treat the individual as a foreign person if the withholding agent obtains a valid beneficial owner withholding certificate on Form W–8 from the individual that establishes the account holder’s foreign status, documentary evidence described in § 1.1471–3(c)(5)(i)(B) evidencing citizenship in a country other than the United States, and a reasonable written explanation of the individual’s renunciation of U.S. citizenship or the reason the individual did not obtain U.S. citizenship at birth.
In other words, a former U.S. citizen will generally be required to provide a CLN to a FFI or NFFE, for individuals who were born in the U.S.; in order NOT to be treated as a “U.S. person.”
Once someone is NOT a U.S. person, can they avoid being subject to the FATCA reporting to the IRS by their financial institution in their home country or a company or legal entity in any country outside the U.S.?
The short answer should be “yes” – provided the supporting documentation is provide to the financial institution (FFI) or NFFE; namely the CLN. Also, it is often advisable to obtain an “Apostille Certificate” with the CLN, for those third party organizations who require the CLN with such certification.
More posts to follow on the interplay of FATCA and former USCs and LPRs.