Some high-net-worth Venezuelan American taxpayers may be considering a change in residency ahead of possible economic headwinds in Venezuela, but a senior tax professional who has worked with Latin American clients for decades recommends factoring in the mechanics of both the U.S. expatriation regime and tax treaty between the two countries.
Economic Opportunities
According to Holland & Knight Partner Eduardo Arista, who is also a member of the firm’s International Private Client Group, the value of Venezuelan real estate and business interests have long been dormant. But the capture of President Nicolás Maduro in early January has spurred cautious optimism among some Venezuelan Americans seeking investment opportunities and exploring tax planning options.
Some Venezuelan taxpayers are considering purchasing real estate, Arista told Checkpoint, “because you have asset values right now that are extremely depressed.” Arista is a multilingual attorney and certified public accountant with over 30 years of experience assisting American and multinational families, family offices, and private companies with long-term tax, legal, and wealth transfer planning. He added that there is “an opportunity when valuations are low to make transfers, to set up structures, and freeze the value.”
The dynamic is part of a familiar cycle in Latin America, which sees capital flow out of countries during periods of economic depression and flow back in when conditions improve. With a potential recovery on the horizon for Venezuela, a redeployment of capital back into the country is now in play. However, Arista noted that there has not been a major spike in investment activity yet.
A company that once had a thousand employees might have been scaled down to just a few dozen to avoid shutting down entirely. Now, these same owners are exploring how to regrow those businesses, Arista explained.
Expatriation Regime Triggers
For some Venezuelan nationals who are U.S. lawful permanent residents (green card holders), the changing economic landscape presents a decision of whether to relinquish their U.S. residency, which Arista emphasized entails several important non-tax factors. Many Venezuelans feel they are in exile and are hesitant to give up the security of a U.S. residency in case conditions in their home country worsen again. For those who have obtained other citizenships, such as from Spain or Italy, the decision may be less risky.
An individual who formally expatriates may be classified as a covered expatriate if they have a net worth of $2 million or more or have been a long-term green card holder. The current low asset valuations can provide a path to avoid this status by staying under the $2 million net worth test. Arista pointed to the example of a Caracas mansion that was once worth $10 million but might now be valued at just $1 million.
Becoming a covered expatriate triggers an immediate exit tax on worldwide unrealized gains and a steep succession tax on any future gifts or bequests to a U.S. person. This second tax is often overlooked since the tax consequences are felt much later.
As Arista described, the exit tax “isn’t going to hurt” much when a taxpayer does not have many unrealized gains. But if that taxpayer’s child moves back with them to Venezuela, and that child is a U.S. citizen, the transfer tax would apply when the taxpayer passes away. “When she inherits that $20 million … that may now be $60 million because it grew over time. She’s going to have to pay a 40% tax” because “she’s inheriting from a covered expatriate.”
Cross-Border and Treaty Implications
When planning for expatriation, taxpayers should not assume that a tax treaty between the U.S. and another country will provide a shield against these taxes. In fact, using a treaty to one’s advantage can indeed trigger the very tax one seeks to avoid. Arista clarified that if a green card holder files a U.S. tax return and uses a treaty’s tie-breaker rule to be treated as a resident of another country, the IRS considers that an act of expatriation that triggers the exit tax.
However, a treaty can still be a valuable tool after one has formally expatriated. Arista explained that if an expatriate later spends enough time in the U.S. to meet the “substantial presence test,” they risk being classified as a U.S. tax resident all over again. In that situation, a treaty can provide crucial protection against re-establishing U.S. tax residency. The treaty, therefore, doesn’t prevent the exit tax on the way out, but it can be helpful later.
“You always have to look at both sides of the coin,” Arista suggested. This involves “counsel on both sides to be working together to plan the transfer and help the client implement the transfer in a way that is going to avoid unnecessary taxation in both jurisdictions, or at least try to find what is the happy medium.”
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