Our recent articles have dealt with the details of the present and, potentially, the future of the 'Non-Dom' regime in the UK. We've also looked at how the UK compares with other similar regimes across Europe. But what about the other side of the Atlantic? Might 'would-be' UK Non-Doms choose instead to spend their days in the Big Apple or sunny California while benefitting from a similar tax regime? In short, not really: there is no equivalent to the UK Non-Dom regime in the US that enables an individual to reside permanently in the US. By and large, the US taxes individuals on the basis of: (i) citizenship; (ii) permanent resident (i.e., green card) status; and (iii) presence in the US (which is defined differently for income versus transfer tax purposes).
US federal income tax
US citizens are taxed on their worldwide income and gains regardless of residence and regardless of the source of the income or gains. A non-citizen will be taxed in the same way under one of two objective tests: (i) the green card test; and (ii) the substantial presence test.
The green card is an immigrant visa granting the individual a permanent (as opposed to temporary) right to US residence. Green card holders are taxed globally on income and gains just like US citizens. In certain circumstances, a green card holder may be able to 'treaty tie break' to another treaty country if they are eligible to rely on the specific income tax treaty between the US and the other country. However, this may have other adverse US tax and immigration consequences.
The substantial presence test is based on a mathematical formula of the number of days the individual is physically present in the US during the current calendar year and the prior two calendar years. A non-US individual who is, on average, present in the US for 122 days or more during each year of a three-year period and is present at least 31 days in the current year will be considered a resident for US federal income tax purposes in the third year (again, subject to 'treaty tie breaker' relief). Generally, individuals spending fewer than 121 days in the US every year should not become US resident. For some, therefore, it may be possible (or even desirable) to reside in the US for just part of the year, carefully managing their days to avoid meeting the threshold of the substantial presence test.
There are also a number of exemptions by which some individuals will not be considered physically present in the US for the purpose of the substantial presence test. For example, certain students or scholars residing in the US on certain visas, as well as diplomatic staff and employees of certain international organizations (e.g., the United Nations) will not have their US days counted under the substantial presence test.
Individuals who are not deemed to be US resident generally are taxed on US source investment income and effectively connected US trade of business income, subject to tax treaty relief.
US federal transfer taxes
As with income tax, US citizens are subject to US federal transfer taxes regardless of their residence or domicile and regardless of the location of their assets (though they have the benefit of a lifetime exemption amount).
A non-US citizen's liability to US transfer taxes is determined by domicile and by the situs of their assets. Like the UK, US situs assets generally will be subject to US transfer tax, subject to any treaty relief. A non-US citizen is considered to be domiciled in the US for transfer tax purposes by residing in the US with an intention to make it their permanent home, which is determined on a 'facts and circumstances' test. If US domiciled, that individual will be taxed in the same manner as a US citizen (i.e., regardless of whether the transferred asset is located in the US or abroad), with the benefit of the same lifetime exemption afforded to US citizens.
While there is a presumption of US domicile for green card holders, it is rebuttable. For other non-US nationals whose residence in the US is genuinely temporary, they may be able to reasonably maintain that they are not domiciled in the US for transfer tax purposes.
Non-US nationals who are not US domiciled generally are subject to US federal gift tax only with respect to real estate and other tangible assets located in the US, including US bank accounts. US federal estate tax will apply to those assets, as well intangible assets located in the US, such as US incorporated stocks and mutual funds.
State and local taxes
Individuals should also be aware of the application of state and local tax regimes. While the US federal tax regimes described above tend to be the primary focus, state tax regimes can present further complications. Not every state or locality imposes either income or transfer taxes and some state impose one but not the other. In addition, states like California do not follow the federal rules on the determination of residence. Individuals could therefore be treated as resident for California state tax purposes even though they are not resident for US federal income tax purposes.
Ultimately, the best way to mitigate potential US tax exposure is to plan ahead.
For an individual planning to move to the US there are several types of pre-immigration tax planning that should be considered, including:
- realising gains, income or deductions before or after becoming a US income tax resident;
- rebasing assets prior to moving;
- mitigating the impact of US anti-deferral rules under the 'CFC' and 'PFIC' regimes;
- examining tax implications of existing trusts; and
- considering the availability of insurance products.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.