Multiple Nationalities – Caught in the Big FAT(CA) Trap

There is no international law or convention that determines an individual’s nationality or citizenship. One’s nationality is strictly a matter of the laws of a particular country. For example, a country can grant citizenship by descent (usually from a parent or a grandparent). The nationality laws of the United States are found in various citizenship and nationality statutes such as the Immigration and Nationality Act, some provisions of which bestow citizenship based on descent. US nationality is also based on the principle of “jus soli” (the law of the soil). “Jus soli” is a rule of common law followed by the United States, under which the place of a person’s birth determines his citizenship. In addition to common law, this principle is embodied in the 14th Amendment to the US Constitution which states, in part, that: “All persons born in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.”

Depending on the particular laws of the various countries involved, a person can have multiple citizenships. Multiple citizenship can arise precisely because different countries can and do, have different rules governing the criteria for citizenship with the result that the individual may satisfy the citizenship requirements of more than one nation at the same time.

Having multiple citizenships can sometimes cause problems since one country’s laws or policies might conflict with the other country. Some countries prohibit their citizens from holding dual or multiple citizenships. This prohibition can be enforced by requiring the individual who applies for naturalization in that country to renounce all existing citizenships. It can also be enforced by stripping citizenship from an individual who voluntarily acquires the citizenship of another nation, or by other means.

Many GCC countries do not permit dual nationality – for example the Kingdom of Saudi Arabia, the United Arab Emirates, Bahrain, Kuwait.

FATCA – Root of All Evil?

By now, just about everyone has heard of the Foreign Account Tax Compliance Act, “FATCA”. FATCA has turned the lives of Americans living abroad completely upside down. It has resulted in many banks, both US and non-US, denying financial services to the estimated 7.6 million overseas Americans; decreased employment and investment opportunities for US persons and has been cited as one reason that so many are now giving up their US citizenship. Ultimately, it is said, it may result in weakening the position of the US dollar as the global reserve currency and causing significant harm to the US economy.

Closer to home, FATCA has had other unexpected consequences. Many of my Middle Eastern clients obtained US citizenship by happenstance of being born there while their parents were temporarily studying or working in the US. Others obtained US citizenship when living in the US for educational purposes. Those who left the US (many as infants) and returned to their homeland were clueless about their US tax obligations until their banks told them about FATCA. Many persons coming to me for help are very frightened and do not have a strong grasp of the English language. How on earth do I explain to such people that the mutual fund they hold in their home country is treated as a “foreign” mutual fund by the US and is really a dreaded US tax creature known as a “PFIC”?

Or that the pension plan set up by their employer in the country where they live and work might be a “foreign trust” for US tax purposes and that they should have been filing annual information returns or paying tax on the contributions and investment build-up?

Many do not have Social Security numbers (SSN) and are trying to obtain them simply in order to file US tax returns. They are learning the hard way that obtaining a SSN is extremely difficult to do after one has attained the age of 12. Some individuals are flying to the US in the hopes the process might be more expedient than dealing with the few Consulates or Embassies overseas that can process the SSN. If one resides in the Middle East, the specified Embassy for obtaining the SSN is located in Jerusalem, which isn’t accessible to Arabs due to escalating political tensions in the region. Becoming tax compliant is far easier said than done for many of my clients.

Between a Rock and a Hard Place

Not only are many desperately struggling to become US tax compliant, many GCC nationals are becoming quite concerned that their government will learn they hold a prohibited “second” nationality. Under FATCA, foreign financial institutions must agree to verification and due diligence procedures – meaning they must be on the look-out for customers, owners or beneficiaries evidencing any “US indicia”. They must identify and report directly to the US Internal Revenue Service or to their own government via an intergovernmental agreement (IGA), information on US account holders. FATCA will help expose GCC nationals who hold US citizenship by a financial institution’s transmission of that information directly to the home country government agency responsible for gathering information under the IGA. America, in its quest to root out tax cheats, has now put many of its own innocent citizens in a very perilous position.

This fear of detection seems particularly acute right now in the Kingdom of Saudi Arabia. In Saudi Arabia, Saudi citizenship can involuntarily be lost if a Saudi citizen obtains a foreign citizenship without the prior permission of the Prime Minister. See Articles 11 and 13 of the Saudi Arabian Citizenship System.

A recent news article in the Saudi press entitled “ American FATCA pursues 200,000 Saudis…and the Civil Status Department Threatens to Pull their Citizenship” offers some insight. Translated below are some of the more relevant portions of the article:

“In addition to the “strict” US tax system, Saudi laws are no less strict when dealing with dual nationals, even if these laws have not yet been actively enforced. Civil Status Department Spokesman Mohammed Al-Jasser said: “When dual nationality is discovered, the laws of the Saudi Nationality will be strictly applied. Article 11 of the regulations states that ‘no Saudi may have/acquire a foreign nationality, without prior authorization from the head of the Saudi Ministers Cabinet, and whoever has/acquires a foreign nationality without getting such advance permission, will remain Saudi, unless the Government of his Majesty the King of Saudi Arabia sees fit to strip him of the Saudi nationality”.

Article 13 provides that “By Decree, in any case, Saudi Arabian nationality can be stripped from Saudis, if they have any other nationality in violation of article 11 of this regulation”, stressing that “Saudis would be notified of the consequences of such actions, a legal notification, three months prior to the execution date of the Decree of the loss of Saudi Arabian nationality”. Under the provisions of this article “the liquidation of the property of the person who lost his nationality, in accordance with the legal system of property ownership, and be denied residence in the territory of the Kingdom and barred from any return to it”.

Many of my GCC dual national clients are now looking at renouncing their US citizenship. Many more thought they had already given up their US citizenship years ago when they took on, say, Saudi citizenship (usually after marriage to a Saudi national) and pursuant to Saudi law specifically renounced their US citizenship at such time. They are now learning, many years later, that this might not have been enough and that they are still US citizens because they did not give notice to the Department of State that they had the intent at that time to give up their US citizenship. They never obtained that critical document called a Certificate of Loss of US Nationality (CLN). If they try to get the CLN now with a retroactive relinquishment date, they will have to demonstrate they had the intent to relinquish US citizenship at that earlier time. This is often a very difficult burden to meet.

Many of my Saudi clients, for example, live in limbo – they are unsure of their legal status and unsure what may happen to them under the citizenship laws in their homeland that prohibit dual nationality. If they give up their US citizenship, what will happen if the Saudi government strips them of their retained nationality at a later time, once it learns of the transgression? They will be stateless and can be denied residence in the country they viewed as home. I also understand that all assets there can confiscated by the government. The consequences of FATCA could not be more far-reaching than this.

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