It was just last year on September 12, 2014 that the Department of State raised the fee for “renunciation” of US citizenship by 422% — from $450 to $2,350. At that time, no fee was imposed for documenting “relinquishments” of US citizenship. Things have now changed! A new fee was just instituted this September. The Department of State announced on September 8, 2015 that for the first time ever it would begin charging a $2,350 fee for individuals seeking a Certificate of Loss of Nationality (CLN) based on “relinquishment” of US citizenship — the same as the fee for a “renunciation” of US citizenship.
The Announcement acknowledges that the Consular service demanded for a “relinquishment” case is “among the most time consuming of consular services, [but] it was rarely performed so the overall cost to the Department was low and the Department did not establish a fee”. The Department of State also noted that ‘[r]equests for a Certificate of Loss of Nationality on the basis of a non-renunciatory relinquishment have increased significantly in recent years, and the Department expects the number to grow in the future, causing the total cost of this service to increase.”
With respect to the costing matter, I could imagine it takes the State Department significant time to process a “relinquishment” as opposed to a “renunciation” case. In many instances the person who is documenting the “relinquishment” and trying to obtain the CLN has performed the “potentially” expatriating act many years earlier (This is more fully discussed below. Examples of such “potentially” expatriating acts include the taking on of a new citizenship; serving in a foreign government office or in the foreign armed forces). The State Department must examine the situation very closely to see if the individual had the requisite intent to give up his/her US citizenship when he committed that act. Often this involves examining the individual’s behavior and actions undertaken after the purported “relinquishment” occurred to ensure these subsequent acts are consistent with the individual having had the requisite intent to give up US citizenship at that earlier moment in time. For example, has the individual still used his US passport or renewed it after committing the potentially expatriating act? It is a big job to sift through all the facts.
The Department of State announcement provides some insight as to the time involved in working a “relinquishment” case:
The consular officer must also ensure that the commission of an expatriating act was as prescribed by statute, which is often an issue in non-renunciation relinquishment cases. The loss of nationality service must be documented on several forms and in consular systems as well as in a memorandum from the consular officer to the Department’s Directorate of Overseas Citizens Services in Washington, DC (‘‘OCS’’), in the Bureau of Consular Affairs. All forms and memoranda are closely reviewed in OCS by a country officer and a senior approving officer, and may include consultation with legal advisers. This review entails close examination of whether the requirements of voluntariness and intent are satisfied in the individual case. Some applications require multiple rounds of correspondence between post and the Department. The final approval of the loss of nationality must be done by law within the Department (8 U.S.C. 1501), by OCS, after which the case is returned to the consular officer overseas for final delivery of the Certificate of Loss of Nationality to the individual.
What is the Difference Between “Relinquishment” and “Renunciation”?
Divesting oneself of US citizenship can be achieved either by “renunciation” or “relinquishment” (in certain specific cases). “Renunciation” of one’s citizenship is done by making a formal sworn declaration before a US Consular Officer renouncing one’s US citizenship. The procedures for renunciation are rather straightforward and fully outlined in the Department of State’s Foreign Affairs Manual Chapter 7 Section 1260 et seq.
“Relinquishment” of one’s US citizenship is more complicated and not very well understood. Essentially, relinquishment involves a formal confirmation after a person has turned 18 years old that the individual committed a prior “expatriating act” with the voluntary intent to give up the rights and privileges of US citizenship. It is not clearly addressed in the Foreign Affairs Manual. See 7 FAM 1220 et seq. While certain procedures are outlined in the Foreign Affairs Manual for relinquishment cases, it is clear that much uncertainty surrounds this area. For example, when a person affirmatively, explicitly and unequivocally asserts that he performed one of the potentially expatriating acts with an intent to relinquish US nationality, the administrative presumption that a US citizen intends to retain US nationality when he or she commits such an act becomes inapplicable. The consular officer is then required to fully develop the case, following the guidelines and procedures outlined in 7 FAM 1224, in order to assess the individual’s voluntariness and intent. Additionally, expanded departmental review in appropriate cases is advised.
Section 349 of the Immigration and Nationality Act of 1952 (8 USC 1481) contains a list of acts that are considered expatriating – including, for example, taking on the citizenship of a foreign country, serving in the armed forces of a foreign country, or taking an oath of allegiance to a foreign country. The US Supreme Court has ruled, however, that commission of the act alone is insufficient. An individual’s committing of a statutory act of expatriation will result in relinquishment of US citizenship only if the act is performed (1) voluntarily and (2) with the intention of relinquishing US citizenship.
“Relinquishments” Involve Immigration and Tax Law Complexities
Not only is relinquishment of US citizenship more complex from an Immigration law perspective, the US tax ramifications for “relinquishment” cases can become a veritable nightmare. Numerous individuals who had relinquished US citizenship many years before (usually by taking on the citizenship of another country with the requisite intention to give up their US citizenship), now have serious concerns about their US status due to the introduction into the US tax laws in 2004 of the concept of the so-called “tax citizen”. This is a very complicated topic. You can read more here.
Is it “Better” to Relinquish?
A possible benefit to “relinquishing” one’s citizenship as opposed to “renouncing” it involves being allowed back into to the US, even for a visit! Current US immigration laws provide that former US citizens who are deemed to have renounced their US citizenship for tax avoidance purposes may be banned from entering the US by including them in a class of “inadmissible” aliens. This law is commonly referred to as the “Reed Amendment” and was enacted in 1996. [Public Law 104-208, § 352; INA § 212(a)(10)(E); 8 USC § 1182(a)(10)(E)].
Although we understand that the law has never been enforced (probably because of doubts as to its constitutionality as well as the fact that no guidelines have ever been issued by the Department of State as to determining “tax avoidance” ) we have been hearing anecdotally of more and more US entry and visa denials to those who have expatriated. Remember, it is within the discretion of the consular officer to grant a visa to enter the US or to permit entry to those holding passports entitled to the 90-visa waiver. Given the growing trend in expatriations, and (in the eyes of some) the taint associated with giving up one’s US citizenship, if the would-be entrant’s record shows he has “renounced”, I think it is entirely possible that the officer might simply refuse the entry request.
Numbers Anticipated to Keep Rising
It is no secret that the number of people who are giving up their American citizenship has been rising very significantly. In part, this has been due to the implementation of the Foreign Account Tax Compliance Act (FATCA), a law which puts greater scrutiny on foreign accounts held by U.S. persons. The recent State Department announcement also provided estimates for the anticipated number of relinquishments and renunciations for the fiscal year 2015. It estimates the number of applications for CLNs for the 2015 Fiscal Year based on renunciations at 5,986 and the number based on relinquishment at 559, for an estimated total of 6,545 individuals seeking CLNs for the 2015 Fiscal Year.
Whether By Renunciation or Relinquishment — US Tax Rules Apply
The US “expatriation tax” provisions apply only to certain US citizens who have renounced or relinquished their citizenship and certain long-term residents (generally those holding a green card for 8 out of the past 15 years), who have ended their US resident status for federal tax purposes.
Under the current US expatriation rules, an individual will be treated as a so-called “covered expatriate” if any of the following tests apply:
The individual’s average annual net income tax (note – this means the amount of tax the individual paid, not his income) for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation (for 2015 this 5 year average is $160,000).
- The individual’s net worth is $2 million or more on the day before the date of expatriation or termination of residency.
- The individual fails to certify on Form 8854 that he or she has complied with all US federal tax obligations for the 5 years preceding the date of expatriation or termination of residency.
If any of these tests are triggered, the individual is a “covered expatriate” subject to the “Exit Tax” or “Mark-to-Market” regime which generally means that all property owned by the covered expatriate worldwide is treated as sold for its fair market value on the day before the expatriation date. This phantom gain is then taken into account for the tax year of the deemed sale and subject to tax, usually at capital gains rates. (There is an exclusion from the Exit Tax on certain amounts of gain. For the 2015 calendar year, the exclusion is for USD 690,000 of gain). In lieu of the “Exit Tax”, special withholding tax rules apply to certain types of deferred compensation items and to trust distributions.
In addition to the Exit Tax, US recipients (US citizens or US “residents”, as specially defined) of any gift or bequest at any time in the future from the “covered expatriate” will be hit with a special tax upon receiving that gift or inheritance, known as “covered” gifts or bequests. Currently, the tax is at the rate of 40% assessed on the fair market value of the “covered” gift or bequest. Ir is argued (although the argument is certainly flawed) that this is an alternative way for the US to recoup US Gift or Estate taxes that it would otherwise have received (upon the making of lifetime gifts, or upon death) had the individual not given up his US citizenship or long-term residency. The Internal Revenue Service has just issued Proposed Treasury Regulations about the tax on “covered” gifts or bequests.
More information about the current expatriation tax regime can be found on my tax blog posting here.
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