Tax Problems Faced by Dual Citizens

As global mobility increases, dual citizenship offers significant freedom for many professionals and investors. However, when it comes to taxes, this freedom can turn into a serious financial burden if not planned correctly. Particularly, being seen as a “tax resident” by both the country you reside in and the country of your citizenship can lead to having to pay taxes on the same income twice.

In this article, we will discuss in detail the tax problems most commonly faced by dual citizens, which legal mechanisms can alleviate these issues, and what you should pay attention to when planning for international mobility.

Why Do Dual Citizenship and Tax Obligations Conflict?

Dual citizenship means that two (or more) states recognize you as their citizen simultaneously. Rights as well as obligations double. The fundamental conflict regarding taxes arises from the way countries define tax liability.

Generally, countries determine tax liability based on two main principles:

• Citizenship-based taxation: Regardless of where a person lives, the country of citizenship taxes their worldwide income. The United States is the most well-known example of this system.
• Residency-based taxation: A person’s tax liability is primarily determined by where they are considered “resident” for that year. Most of Europe, the United Kingdom, and Turkey are close to this approach.

A dual citizen can enter into full tax liability status in both countries because they reside in one country and are a citizen of the other. Research emphasizes that this leads to serious tax conflicts, especially between countries that use citizenship-based taxation and those that use residency-based taxation.

Main Tax Problems Faced by Dual Citizens

1. Risk of Double Taxation

The most common problem faced by dual citizens is that two different countries claim taxes on the same income, which is the risk of double taxation.

A typical example:

• A person who is a dual citizen of the US and the UK resides in London and earns all their income in the UK.
• The UK, due to its residency-based system, considers this person a full taxpayer and taxes their worldwide income.
• The US, however, requires the same person to report all worldwide income to the IRS and pay taxes if necessary due to citizenship-based taxation.

As a result, the person becomes liable to both HMRC (UK) and IRS (US). When tax treaties and foreign tax credits are not used correctly, the actual tax burden can reach unsustainable levels.

2. Double Filing Requirement and Complex Reporting

In most cases, dual citizens are required to file tax returns in both countries. This obligation can apply even in years when there is no actual tax due in one of the countries.

For example, in the US:

• It requires all citizens who exceed a certain, relatively low income threshold to file an annual income tax return, regardless of where they live.
• Moreover, it mandates reporting all sources of worldwide income (including wages, self-employment income, corporate dividends, investment income, rental income, and even gambling winnings).

For dual citizens, this situation means:

• Dealing with different currencies, different calendar years (e.g., calendar year vs. fiscal year), and different definitions of income,
• Mastering the filing deadlines, forms, and exemptions of both countries,
• Facing the risk of severe penalties due to form errors or underreporting.

3. Foreign Financial Account and Asset Reporting

Countries that use citizenship-based taxation require very detailed reporting, especially regarding foreign financial accounts.

Two critical obligations for US dual citizens include:

• FBAR (Foreign Bank Account Report): The obligation to report foreign bank and financial accounts exceeding a certain threshold (e.g., when the total balance exceeds a specific amount) on a separate form.
• Reporting under FATCA (Foreign Account Tax Compliance Act): Again, reporting foreign financial assets exceeding certain amounts independently of the standard income tax return.

These obligations can come as a surprise, especially for individuals who actively live in one country but are passive citizens of another. Retrieving account activity retroactively can be difficult and costly; unreported accounts can lead to extremely high penalties.

4. Social Security Contributions and Double Insurance Risk

A dual citizen may face pressure to pay contributions to the social security system of one country while actively working in another. Particularly:

• Individuals who are salaried in one country,
• Still considered liable for insurance in the other country.

It is theoretically possible for both employee and employer contributions to be demanded in both countries.

To alleviate this issue, many countries, especially the US and European countries, sign totalization agreements (social security agreements). These agreements aim to allow contributions paid in one country to be counted in the other and to prevent double contributions. However, not every country pair has such an agreement, and the determination of which period counts where requires technical analysis.

5. Double Burden in Inheritance and Estate Taxes

The tax risk for dual citizens continues not only during their lifetime but also after their death. Particularly:

• Some countries tax the worldwide assets of their citizens for inheritance/estate tax,
• Other countries collect inheritance tax based on residency, according to the last place of residence.

In this case, the same asset (e.g., a property or company shares abroad) can be subject to inheritance tax in both the country of citizenship and the country of residence. Tax treaties regarding inheritance and transfer are limited; therefore, without advanced planning, a significant portion of assets can be lost to taxes.

Mechanisms to Reduce the Burden of Double Taxation

1. Double Taxation Agreements (DTA)

Many countries sign Double Taxation Agreements (DTA) to clarify their taxing rights and reduce double taxation. These agreements typically:

• Determine which type of income is primarily taxed in which country (e.g., real estate income, dividends, interest, royalties),
• Provide for the other country to credit the taxes paid in the first country,
• In cases where both countries consider the individual a “full taxpayer,” activate tie-breaker rules to reduce tax residency to a single country.

Tie-breaker rules generally examine the following criteria in order:

• The country where the permanent home is located,
• The center of vital interests (business, family, economic ties),
• The country of habitual residence,
• Citizenship,
• And ultimately, mutual agreement between tax administrations.

These rules reduce the risk of double taxation by preventing both countries from considering the individual a full taxpayer at the same time. However, in practice, the internal legislation of each country, how they internalize the provisions of the agreement, and their actual interpretation practices are important; thus, professional analysis is required.

2. Foreign Tax Credits

Many countries allow taxpayers to consider taxes paid abroad as foreign tax credits in their tax calculations. The logic is simple:

• To prevent double taxation on the same income,
• The individual should pay taxes in the country where they earned the income first,
• The tax calculated in the country of citizenship or residence should be reduced by the amount paid in the foreign country.

For example:

• A dual citizen pays a tax rate of 30% in the country where they reside.
• Let’s say the theoretical tax in their country of citizenship is 35%.
• The difference of 5% can be claimed in the country of citizenship; however, the agreement and credit mechanism prevents a second payment of 30%.

For this system to work effectively:

• Documentation of the foreign tax paid,
• Correctly entering the return with the appropriate forms and attachments,
• Considering specific limitations applicable to each type of income.

Especially in investment income, limited credits or no credits in some countries can lead to unexpected tax burdens.

3. Foreign Earned Income Exclusions (e.g., FEIE)

In citizenship-based taxation systems, additional exclusions can be anticipated for citizens living abroad. The Foreign Earned Income Exclusion (FEIE) in the US is one of the most well-known examples.

Such regimes allow individuals who meet certain conditions (e.g., spending a certain part of the year abroad or being considered a resident abroad) to exclude foreign-sourced income up to a certain limit from taxation in their country of citizenship. For example, this limit can be over 100,000 USD for the relevant year and is updated annually for inflation.

However:

• The exclusion is only valid for certain types of income (mostly active business/wage income); investment income and self-employment income may be subject to different rules.
• Despite the exclusion, filing and other reporting obligations generally continue.

4. Totalization Agreements in Social Security

To avoid paying double social security contributions, totalization agreements signed between countries are of great importance for dual citizens. Through these agreements:

• Insurance periods spent in a specific country can also be considered in retirement calculations in the other country.
• Simultaneous contributions to two countries can be prevented, reducing costs for employers and employees.

However, there is no such agreement in every country combination, and issues like which rule will apply to aggregate periods or where retirement rights will arise require expertise. Especially in posted worker, EOR, or payroll outsourcing models, steps taken without this planning can turn into a financial burden that is difficult to reverse in the future.

Risks of Non-Compliance and Penalties

One of the most critical dangers for dual citizens is failing to fulfill filing and reporting obligations either unknowingly or due to misguidance.

Possible consequences include:

• High penalties for late or incomplete filings,
• Severe administrative fines calculated as a percentage of account balances if foreign bank accounts are not reported,
• Accumulated interest on tax debts growing over the years,
• In extreme cases, suspicion of tax evasion and criminal investigations.

In particular, penalties related to foreign financial account and asset reporting can start from thousands of dollars and rise to much higher amounts per case. Therefore, the attitude of “I am already paying my taxes in another country, nothing will happen” is extremely risky for dual citizens.

Practical Strategies for Dual Citizens

1. Correctly Determine Tax Residency

The first step should be to clarify your tax residency status from the perspective of both countries. To do this:

• Analyze the residency tests in each country’s internal legislation (days present, permanent home, family location, economic ties),
• If applicable, review the tie-breaker provisions of the relevant double taxation agreement,
• Support these determinations with written documentation (lease agreements, family records, employment contracts, etc.)

to reduce potential disputes in the future.

2. Structure Income Flows and Investments

Tax planning for dual citizens is not just about the question of “where will I pay taxes?”; it also includes the question of “how can I structure my income and assets to achieve optimal results in both systems?”.

For example:

• For investment income that is highly taxed in one country but has limited credit allowed in the other, alternative instruments or jurisdictions may be considered.
• A dual citizen earning income through a company should decide where to establish their business and how to plan profit distribution, taking into account the tax regimes of both countries.
• It is necessary to analyze how different asset classes such as real estate, stocks, and cryptocurrencies are taxed in both countries simultaneously.

3. Keep Records and Documents Properly

Maintaining regular and detailed records is an indispensable part of tax planning for dual citizens:

• Income documents, payrolls, bank statements from all countries,
• Receipts for taxes paid abroad,
• Contracts related to investment and sales transactions,
• Entry-exit records and residency documents.

These play a vital role in potential tax audits as well as when applying foreign tax credits and agreement provisions.

4. Seek Expert Support

The tax problems faced by dual citizens often exceed the expertise of traditional accounting firms that operate from a single country perspective. Therefore, working with consultants who are knowledgeable about both domestic legislation and international tax agreements, and who have cross-border experience, makes a significant difference.

Corpenza’s Perspective: Designing Tax and Mobility Together

At Corpenza, our focus is not just on questions like “which country should a company be established in?” or “which program should residency be obtained from?” but also on how these steps will affect your global tax burden and compliance risk.

For profiles at risk of dual citizenship or double taxation:

• We design corporate and branch structures in Europe and other jurisdictions, considering both local and international taxation.
• When sending personnel abroad, we focus on minimizing the risks of double contributions and double income tax by evaluating the posted worker model, EOR/payroll solutions, and social security agreements together.
• In golden visa, investment residency, or citizenship programs, we not only consider the passport or residency card but also the new tax residency scenario that may arise.
• We aim to minimize tax surprises for dual citizen managers and employees by structuring international accounting and payroll processes to ensure compliance across multiple countries simultaneously.

Thus, we help you manage your citizenship, residency, corporate, and employment decisions within a single integrated strategy that considers tax, social security, and compliance dimensions.

Conclusion: Is Dual Citizenship an Advantage or a Tax Trap?

When planned correctly, dual citizenship offers significant advantages such as free movement, broader business and investment opportunities, and the preservation of familial and cultural ties. However, if the tax aspect is overlooked, these advantages can quickly evaporate due to:

• Double taxation,
• Heavy filing and reporting obligations,
• High penalties and disputes.

To summarize the fundamental principles:

• Understand the tax systems of both countries (citizenship vs. residency-based) and how they define you.
• Effectively utilize double taxation agreements, foreign tax credits, and any special exclusions if available.
• Never underestimate additional reporting obligations for foreign bank accounts and assets.
• Design income, investment, and corporate structures with an international perspective.
• At the outset, if possible, address your residency, citizenship, and corporate steps together with tax and social security planning.

When managed with the right strategy, dual citizenship is a powerful tool for global positioning. The tax aspect is one of the most critical elements of this strategy.

Disclaimer

This article is for general informational purposes; no part of it constitutes legal, tax, or financial advice. Tax legislation changes frequently, and each country’s regulations and their implementation vary. The information here does not take into account your personal situation, citizenship(s), the country of your residence, or current legislative changes.

We strongly recommend that you check the current official sources of the relevant countries (such as tax administrations and foreign ministries) and seek support from professionals with expertise in the field before making any tax, residency, citizenship, corporate, or investment decisions.