Who Is a “U.S. Person” for Tax, and How FATCA Treats Former Citizens and Green-Card Holders
Table of contents
- How does your immigration status decide whether you owe U.S. tax?
- Who counts as a U.S. citizen for tax purposes?
- Can a green-card holder or visa holder be a “U.S. person” too?
- What is FATCA, and why is your foreign bank asking if you are a U.S. person?
- How does a former U.S. citizen prove they are no longer a “U.S. person”?
- Why does a U.S. place of birth make foreign banks ask for extra proof?
- Once you are no longer a U.S. person, does FATCA reporting stop?
- What is an Apostille Certificate, and why pair it with a CLN?
How does your immigration status decide whether you owe U.S. tax?
Your U.S. tax status starts with your immigration status. The U.S. taxes a “U.S. person” (the technical term used for U.S. federal tax purposes) on worldwide income, and whether you are a “U.S. person” depends largely on immigration concepts. Three immigration-based categories can make someone a U.S. person:
- U.S. citizenship;
- lawful permanent residency (a green card); and
- meeting the substantial presence test as a non-citizen.
A person in any of these categories may have U.S. income tax residency, and so may be subject to U.S. income tax on income earned anywhere in the world.
Who counts as a U.S. citizen for tax purposes?
Almost every individual born in the United States is a U.S. citizen under the 14th Amendment. Citizenship can also pass from a parent. A child born outside the U.S. to a U.S. citizen parent may also be a U.S. citizen at birth through “derivative citizenship,” meaning citizenship derived from a U.S. citizen parent. The U.S. Citizenship and Immigration Services (USCIS) publishes “Nationality Chart 1, for Children Born Outside U.S.” to help determine whether such a child was a U.S. citizen at birth. Because U.S. citizens are “U.S. persons,” they are generally subject to U.S. tax on their worldwide income.
Can a green-card holder or visa holder be a “U.S. person” too?
Yes. Two non-citizen categories can still make someone a “U.S. person” for tax. The first is a lawful permanent resident (LPR), a green-card holder; LPR status carries a series of complex rules that can affect “U.S. person” status. The second is a person who is neither a citizen nor an LPR but who meets the “substantial presence test,” a tax test based on the number of days an individual is physically present in the United States. A person in either category may be treated as a “U.S. person” and taxed on worldwide income.
What is FATCA, and why is your foreign bank asking if you are a U.S. person?
If your foreign bank has asked whether you are a U.S. person, FATCA is why. FATCA (the Foreign Account Tax Compliance Act, Chapter 4 of Subtitle A of the Internal Revenue Code) entered into force in January 2014. It imposes obligations on financial institutions (“FFI”) and basically all private companies and legal entities (“NFFE”) throughout the world to confirm whether they have any “U.S. person” account holders or owners. That worldwide duty to check is what leads banks and companies outside the U.S. to ask account holders about their U.S. status.
How does a former U.S. citizen prove they are no longer a “U.S. person”?
A former U.S. citizen must generally provide a Certificate of Loss of Nationality (CLN), Form DS-4083, to prove they are no longer a U.S. person. This is a specific requirement both under the FATCA regulations and under a provision adopted into the FATCA intergovernmental agreements (IGAs) signed between the U.S. and other countries. For example, Annex I of the IGA between the U.S. and Spain addresses CLNs. Without the CLN, a financial institution may continue to treat the individual as a U.S. person.
Why does a U.S. place of birth make foreign banks ask for extra proof?
A U.S. place of birth is a warning sign to a withholding agent. Under Treasury Regulations Section 1.1441–7T, a withholding agent has reason to know that documents claiming foreign status are unreliable if its records show an unambiguous U.S. place of birth. To still treat such an account holder as a foreign person, the agent generally needs documentary evidence of citizenship in a country other than the United States (described in § 1.1471–3(c)(5)(i)(B)), plus one of the following:
- a copy of the individual’s Certificate of Loss of Nationality (CLN); or
- a reasonable written explanation of the renunciation of U.S. citizenship, or of why the person did not obtain U.S. citizenship at birth.
Alternatively, a valid Form W–8 establishing the account holder’s foreign status, together with that citizenship evidence and the written explanation, may satisfy the requirement.
Once you are no longer a U.S. person, does FATCA reporting stop?
Generally yes, once the right documentation is on file. A person who is no longer a “U.S. person” can generally avoid FATCA reporting to the IRS by a foreign financial institution (FFI), or by a company or legal entity (NFFE) in any country outside the U.S. The condition is that the supporting documentation, namely the Certificate of Loss of Nationality (CLN), is provided to that institution or entity. Until the CLN reaches the institution, FATCA reporting on the account may continue.
What is an Apostille Certificate, and why pair it with a CLN?
An Apostille Certificate is an international authentication confirming that an official document is genuine for use in another country. When providing a Certificate of Loss of Nationality (CLN) to a foreign financial institution or company, it is often advisable to obtain an Apostille Certificate along with the CLN. Some third-party organizations will accept the CLN only when it carries this certification. Pairing the apostille with the CLN can help the document be accepted abroad.
Future posts will cover more on the interplay of FATCA and former U.S. citizens and lawful permanent residents.
