While a second passport offers more freedom of movement and investment opportunities, the tax side often becomes more complex than you might think. For dual citizens who are ‘caught’ between countries that implement citizenship-based taxation like the United States and those that apply residency-based taxation, poorly structured tax planning can lead to significant costs.
Why Does Dual Citizenship Complicate Tax Obligations?
As a dual citizen, you fall under the legal jurisdiction of two (or more) countries. This means not only having passport and residency rights but also:
- The risk of being considered a tax resident in multiple countries,
- Tax claims by two countries on the same income (double taxation),
- Different reporting requirements in one country while having a reporting obligation in another,
- Different treatment based on types of income (salary, dividends, rent, capital gains, etc.)
You will encounter situations like these.
Therefore, it is essential to understand not only the ‘residency – passport’ aspect of dual citizenship but also the tax regime.
Two Basic Systems: Citizenship-Based and Residency-Based Taxation
To understand how your tax obligations will shape under dual citizenship, you first need to distinguish between the two main systems:
Citizenship-Based Taxation
The United States is one of the few countries in the world that implements citizenship-based taxation. In this system:
- If you are a U.S. citizen or a green card holder, regardless of where you live in the world,
- You must file a tax return with the IRS every year for your worldwide income (salary, dividends, business profits, rental income, capital gains, etc.).
This means that even if you are a dual citizen and have never lived in the U.S., as long as your citizenship continues, you have a tax filing obligation with the IRS.
Residency-Based Taxation
Most countries, such as the United Kingdom, Canada, Germany, and Portugal, implement residency-based taxation. In this system, the focus is not on citizenship but on actual residency:
- The country where you are considered a tax resident that year generally taxes you on your worldwide income.
- Countries where you are not a tax resident usually only tax you on income sourced in that country (for example, rental income there).
Therefore, when a person is both a U.S. citizen and a tax resident in Canada, the two systems overlap, and the same income can theoretically be taxed in both the U.S. and Canada.
Filing Requirements as a Dual Citizen
Filing Requirements for U.S. Citizen Dual Citizens
Regardless of whether you are a dual citizen, if you are a U.S. citizen, you must file a U.S. tax return (Form 1040) every year. This obligation continues:
- Even if you are a citizen of another country,
- Even if you have never lived in the U.S.,
- Even if all your income comes from another country
For the 2025 tax year, the filing thresholds in the U.S. are roughly as follows:
- Single or Married Filing Separately: Over $15,750 income
- Married Filing Jointly: Over $31,500 income
- Head of Household: Over $23,625 income
Important point: When you exceed these thresholds, you must file a return even if the tax you ultimately owe is “0” (due to exemptions, deductions, or credits). Many dual citizens make a mistake at this point; thinking, “I paid high taxes in a foreign country, so I owe nothing to the U.S.,” they do not file. However, the system works the other way around: you file first, then reduce double taxation with exemptions or foreign tax credits.
Filing Obligation in the Country of Residence
While your U.S. citizenship continues, you are also subject to the tax laws of the country you live in. For example:
- If you are a dual citizen of the U.S. and Canada and live in Canada, you are considered a tax resident in Canada and must file a Canadian tax return.
- If you are a dual citizen of the U.S. and the United Kingdom and work in London, you must file in both the United Kingdom and the U.S.
Result: As a dual citizen, you typically file returns in at least two different countries. This arises in situations where both countries consider you a “full taxpayer.” The critical point here is to correctly use the mechanisms that will prevent the same income from being taxed twice.
How to Avoid Double Taxation?
The good news for dual citizens is that most developed tax systems offer special tools to mitigate double taxation. Let’s look at the three most commonly used mechanisms through the example of the U.S.
1. Foreign Earned Income Exclusion (FEIE)
Foreign Earned Income Exclusion (FEIE) is one of the fundamental protections offered to U.S. citizens living abroad. For the 2025 tax year:
- The exclusion amount is $130,000.
- This amount will increase to $132,900 for the 2026 tax year.
This exclusion applies only to earned income. That is;
- Salary and wage income,
- Self-employment / consulting income
can be excluded under FEIE. In contrast;
- Investment income (interest, dividends),
- Rental income,
- Passive capital gains
are not covered by FEIE.
In married couples, if both spouses meet the conditions, each can use the full exclusion amount independently. This theoretically means that up to $260,000 of income can be excluded from U.S. tax for two people.
2. Foreign Tax Credit (FTC)
Foreign Tax Credit (FTC) allows you to deduct the income tax you paid to foreign governments from your U.S. tax liability on a “dollar-for-dollar” basis. The logic is simple:
- You first calculate and pay the tax owed in the foreign country.
- You then claim this paid tax as a credit on your U.S. tax return.
If the tax rate you paid in the foreign country is higher than the tax rate that would apply to the same income in the U.S., you will not owe additional tax to the U.S. Thanks to the FTC. If it is lower, you may need to pay the difference to the U.S.
3. Tax Treaties (Double Taxation Avoidance Agreements)
The double taxation avoidance agreements that the U.S. has signed with over 60 countries regulate which country has the primary tax right over which types of income. For example:
- U.S.–Canada,
- U.S.–United Kingdom,
- U.S.–Germany
These agreements determine where dual citizens will primarily report their income and how credits/exemptions will be applied in the other country.
Special Scenarios: U.S.–Canada and U.S.–United Kingdom Dual Citizens
U.S.–Canada Dual Citizens
The typical process for a U.S.–Canada dual citizen living in Canada is as follows:
- First, they pay Canadian income tax as a tax resident in Canada.
- Then, they file a return with the U.S. and claim the taxes paid in Canada as a credit using Form 1116 – Foreign Tax Credit.
This way, in most cases, they do not have to pay additional tax in the U.S. or their tax burden is significantly reduced. However, the obligation to file returns and documentation does not disappear.
U.S.–United Kingdom Dual Citizens
Let’s consider a U.S.–United Kingdom dual citizen living in London who earns £80,000 (approximately $100,000) gross income:
- Since this income is below the FEIE limit of $130,000 for 2025, the individual can claim FEIE through Form 2555 to exclude this income from U.S. tax.
- Since they reside in the United Kingdom, they already pay tax on this income according to UK tax rules.
In such a structure, they do not pay additional tax from a U.S. perspective; they only achieve full compliance with the correct forms and exemptions.
Strategic Points in Dual Citizenship Tax Planning
When structured correctly, dual citizenship can provide tax advantages; when mismanaged, it can lead to high costs. Clarifying the following questions forms the first strategic step:
- In which country are you considered a tax resident?
- What are the types of your income? (salary, self-employment, dividends, rent, capital gains, etc.)
- Is there a tax treaty between the countries you are citizens of?
- How can you benefit from the Foreign Earned Income Exclusion and Foreign Tax Credit?
- Are elements like company formation, international payroll (EOR), or posted worker models involved?
Impact of Dual Citizenship in Company Formation, Posted Worker, and EOR Models
One of the most common confusions seen in the field by Corpenza is the simultaneous positioning of dual citizens or multiple passport holders with different business models in various countries. For example:
- When assigning a Turkey–EU dual citizen employee under the posted worker model in Germany;
- When employing a U.S. citizen senior executive under a remote work or local employment (EOR/payroll) model in Portugal.
In these situations, it is crucial for both the employee and employer:
- To determine in which country social security contributions will be paid,
- To identify in which country withholding will be applied,
- To ascertain in which country the employee will be considered a tax resident,
- To clarify which portion of the salary will be reported in which country
In a misconfigured situation, both the company and the employee may face double taxation and late penalties.
Therefore, it is critical for companies operating internationally with employees who have multiple citizenships to:
- Conduct a country-to-country tax analysis before assignment,
- Design company formation, payroll outsourcing (EOR), and posted worker processes in accordance with the relevant country legislation if necessary
to ensure compliance.
How Corpenza Supports Dual Citizenship and International Tax Structuring?
At Corpenza, our focus is to correctly structure the multi-layered tax and compliance issues faced by companies and individuals in the area of international business development and mobility from the outset. When it comes to dual citizenship:
- We optimize your corporate structure (holding, operational company, branch, etc.) from a tax perspective in Europe and globally.
- We evaluate residency permits, golden visas, and citizenship by investment processes along with potential tax residency implications.
- When sending personnel abroad, we design payroll/EOR and posted worker models according to the employee’s citizenship and residency status.
- We assist you in managing the filing – withholding – social security obligations of different countries in a single framework in your international accounting and payroll processes.
Thus, dual citizenship offers you not only passport advantages but also a well-structured tax and mobility strategy.
Conclusion: How Does Dual Citizenship Change Your Tax Obligations?
In summary, dual citizenship:
- Does not simplify your tax obligations; often complicates them.
- In countries like the U.S. that implement citizenship-based taxation, regardless of where you live, there is a filing obligation on your worldwide income.
- In countries that apply residency-based taxation, as long as you are a tax resident, that country also retains rights over your worldwide income.
- With tools like FEIE, Foreign Tax Credit, and tax treaties, you can often avoid paying tax on the same income twice; however, their correct application requires expertise.
Therefore, when planning a second passport or a new residency program, it is essential to focus not only on immigration procedures but also on tax implications and long-term costs. Especially if you have dual citizen employees within complex structures like international corporatization, citizenship by investment, posted worker, and EOR, it is critical to design the process correctly from the beginning.
Disclaimer
This text has been prepared for general informational purposes. The information here does not constitute legal, tax, or financial advice in any way. Tax legislation varies by country and is updated frequently; always check current official sources and seek support from a qualified tax advisor or legal professional before making decisions regarding your situation.
