Croatia Agrees To Allow The U.S. To Impose Tax, Forms And Penalties On It’s U.S. Citizen Residents

Podcast – @Tpsmyth01
and @Expatriationlaw discuss: "US Croatia Proposed Tax Treaty Gives The US Taxing Rights Over Renounced US Citizens" https://t.co/aBtDDgUUic pic.twitter.com/ypsWV7PMil

— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) December 18, 2022

On December 7, 2022 a US Treasury Press Release included:

December 7, 2022
WASHINGTON — In a ceremony held at the U.S. Department of State today, Under Secretary of State for Economic Growth, Energy and the Environment Jose W. Fernandez and Croatia’s Minister of Finance Dr. Marko Primorac signed a comprehensive income tax treaty between the United States and Croatia. The new tax treaty is the first of its kind between the United States and Croatia.

“I am honored to sign the U.S.-Croatia income tax treaty with you today, Finance Minister Primorac,” said Under Secretary Fernandez. “We look forward to taking this monumental step towards further strengthening trade and commercial ties between the United States and Croatia.”

“The Treasury Department is pleased to conclude this new tax treaty with Croatia. It is the first comprehensive tax treaty that the United States has signed in over ten years and reflects our current tax treaty policies and is a milestone in the Treasury’s efforts to expand the U.S. tax treaty network. We appreciate the collaboration Croatia showed throughout the negotiations,” said Lily Batchelder, Assistant Secretary (Tax Policy).

The new tax treaty closely follows the U.S. Model income tax treaty. Key aspects of the new treaty include:

Elimination of withholding taxes on cross-border payments of dividends paid to pension funds and on payments of interest;
Reductions in withholding taxes on cross-border payments of dividends other than those paid to a pension fund, as well as royalties;

Modern anti-abuse provisions intended to prevent instances of non-taxation of income as well as treaty shopping;

Robust dispute resolution mechanisms including mandatory binding arbitration; and
Standard provisions for the exchange of information to help the revenue authorities of both nations carry out their duties as tax administrators.

The new tax treaty will enter into force after the United States and Croatia have notified each other that they have completed their requisite domestic procedures, which in the case of the United States refers to the advice and consent to ratification by the U.S. Senate.

The text of the treaty document can be found at: https://home.treasury.gov/system/files/131/Treaty-Croatia-12-7-2022.pdf

Treaty-Croatia-12-7-2022

Of particular note in Treasury’s announcement is:

“The Treasury Department is pleased to conclude this new tax treaty with Croatia. It is the first comprehensive tax treaty that the United States has signed in over ten years and reflects our current tax treaty policies and is a milestone in the Treasury’s efforts to expand the U.S. tax treaty network. We appreciate the collaboration Croatia showed throughout the negotiations,” said Lily Batchelder, Assistant Secretary (Tax Policy).

The new tax treaty closely follows the U.S. Model income tax treaty.

Treasury’s announcement focuses on the mutually beneficial aspects of the US Croatia tax treaty. Notably Treasury’s announcement fails to comment on the inclusion of the enhanced “saving clause” which is identical to the following provisions in the 2016 US Model tax treaty.

4. Except to the extent provided in paragraph 5 of this Article, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens. Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.

5. The provisions of paragraph 4 of this Article shall not affect:
a) the benefits conferred by a Contracting State under paragraph 3 of Article 7 (Business Profits), paragraph 2 of Article 9 (Associated Enterprises), paragraph 7 of Article 13 (Gains), subparagraph (b) of paragraph 1, paragraphs 2, 3 and 6 of Article 17 (Pensions, Social Security, Annuities, Alimony and Child Support), paragraph 3 of Article 18 (Contributions to Pension Funds), and Articles 23 (Relief From Double Taxation), 24 (Non-Discrimination) and 25 (Mutual Agreement Procedure); and
b) the benefits conferred by a Contracting State under paragraph 1 of Article 18 (Contributions to Pension Funds), and Articles 19 (Government Service), 20 (Students and Trainees) and 27 (Members of Diplomatic Missions and Consular Posts), upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that Contracting State.

This represents a significant expansion of the “saving clause” to allow the US to impose US taxation NOT only on its” residents (as determined under Article 4 (Resident)) and its citizens” but also on “a former citizen or former long-term resident” which may are permitted to be subjected to any relevant future provisions of the Internal Revenue Code.

From the perspective of Croatia, the “saving clause” found in Paragraph 4 of Article 1 means:

4. Except to the extent provided in paragraph 5 of this Article, this Treaty shall not affect the taxation by the United States of its residents (as determined under Article 4 (Resident)) and residents of Croatia who happen to be US citizens. Notwithstanding the other provisions of this Convention, a former US citizen or former long-term US Green Card holder who is a resident of Croatia may be taxed by the United States according to the Internal Revenue Code.

This confirms the intentions (expressed in the August 29, 2022) letter to the Dutch Embassy that the United States fully intends to impose the terms of the Internal Revenue on code on tax residents of other countries which happen to be US citizens. The terms of the Internal Revenue Code: (1) a system of US taxation that is more punitive that the system imposed on resident Americans (2) substantial reporting requirements (some of which apply even if no tax return is required) and (3) an aggressive penalty regime.

I emphasize that Croatia has agreed to allow the USA to impose tax on tax residents who are either (1) currently US citizens or residents and (2) who were US citizens or residents!

Q. What country in its right mind would sign a treaty like this?

A. Only one that didn’t understand what it was signing.

Croatia didn’t understand the impact of US citizenship taxation and how it allows the United States to extend its tax laws into other countries. The extension of US tax laws into other countries(1) is a clear assault on the sovereignty of other nations and (2) allows the United States to syphon capital out of those other nations. (Think the 877A Exit Tax, Transition Tax, GILTI, PFIC, phantom capital gains and more.) Furthermore, as previously explored: the “saving clause” will make it impossible for Croatia residents who are US citizens to participate in certain financial/retirement planning programs in Croatia.

The “Saving Clause” And Citizenship Taxation

The United States is the only country that imposes full force of its domestic tax code on its citizens who live outside the country. For this reason the “saving clause” has a different meaning to the United States than it does for other countries.

To put it simply:

– For countries that employ residence-based taxation the “saving clause” operates to ensure that residents of the country do NOT benefit from treaty provisions that are intended to apply to cross border activities; but

– For the United States (the only country that employs citizenship taxation) the “saving clause” NOT ONLY prevents US residents from benefiting from treaty provisions, but IN ADDITION (because of the treaty right to tax its US citizens) it extends US tax jurisdiction and rules into other countries.

Comparing The “Saving Clause” Found In The OECD, UN and US Model Tax Treaties

The 2017 OECD Model Tax Convention – No Mention Of Citizens

The commentary to the 2017 convention reports:

The addition of new paragraph 3 to Article 1 (the “saving clause”) and of related Commentary changes. These changes appear in the Report on Action 6.

The specific text of the “saving clause” in the OECD Tax Convention is:

3. This Convention shall not affect the taxation, by a Contracting State, of its residents except with respect to the benefits granted under paragraph 3 of Article 7, paragraph 2 of Article 9 and Articles 19, 20, 23 [A] [B], 24, 25 and 28.

https://www.oecd.org/ctp/treaties/model-tax-convention-on-income-and-on-capital-condensed-version-20745419.htm

The 2017 UN Model Tax Treaty – No Mention Of Citizens

The “saving clause” appears in paragraph 3 of Article 1. The specific text of the UN Model Treaty as follows:

3. This Convention shall not affect the taxation, by a Contracting State, of its residents except with respect to the benefits granted under[paragraph 3 of Article 7], paragraph 2 of Article 9 and Articles 19, 20, 23 A [23 B], 24 and 25 A [25 B] and 28.

https://www.un.org/esa/ffd/wp-content/uploads/2018/05/MDT_2017.pdf

The 2016 US Model Tax Treaty – Includes Both Residents And Citizens Forever

4. Except to the extent provided in paragraph 5 of this Article, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens. Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.

5. The provisions of paragraph 4 of this Article shall not affect:
a) the benefits conferred by a Contracting State under paragraph 3 of Article 7 (Business Profits), paragraph 2 of Article 9 (Associated Enterprises), paragraph 7 of Article 13 (Gains), subparagraph (b) of paragraph 1, paragraphs 2, 3 and 6 of Article 17 (Pensions, Social Security, Annuities, Alimony and Child Support), paragraph 3 of Article 18 (Contributions to Pension Funds), and Articles 23 (Relief From Double Taxation), 24 (Non-Discrimination) and 25 (Mutual Agreement Procedure); and
b) the benefits conferred by a Contracting State under paragraph 1 of Article 18 (Contributions to Pension Funds), and Articles 19 (Government Service), 20 (Students and Trainees) and 27 (Members of Diplomatic Missions and Consular Posts), upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that Contracting State.

Clearly the “saving clause” in the US Model Tax Treaty (the model for Croatia) includes both “residents” and “citizens” in its scope. The “saving clause” in the OECD and UN Tax Treaties include only “residents”!

The Evolution Of The “Saving Clause” In US Tax Treaties

The evolution of the “saving clause” seems to be intended to follow the US expatriation tax rules. The genesis of the modern 877A exit tax is rooted in the 2008 HEART Act. Prior to 2008 the Exit rules found in IRC 877 created an “alternative tax regime” which continued for ten years following the year of expatriation. The US Model Tax Treaty prior to the 2016 Model Tax Treaty was in 2006. The “saving clause” in the 2006 Model Tax Treaty reads as follows:

4. Except to the extent provided in paragraph 5, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens. Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may, for the period of ten years following the loss of such status, be taxed in accordance with the laws of that Contracting State.

Significantly the technical interpretation of the 2006 U.S. Model Tax Treaty includes the following comment about the “saving clause” found in paragraph 4 of Article 1:

Under paragraph 4, each Contracting State also reserves its right to tax former citizens and former long-term residents for a period of ten years following the loss of such status. Thus, paragraph 4 allows the United States to tax former U.S. citizens and former U.S. long-term residents in accordance with Section 877 of the Code. Section 877 generally applies to a former citizen or long-term resident of the United States who relinquishes citizenship or terminates long-term residency if either of the following criteria exceed established thresholds: (a) the average annual net income tax of such individual for the period of 5 taxable years ending before the date of the loss of status, or (b) the net worth of such individual as of the date of the loss of status. The thresholds are adjusted annually for inflation. The United States defines “long-term resident” as an individual (other than a U.S. citizen) who is a lawful permanent resident of the United States in at least 8 of the prior 15 taxable years. An individual is not treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country and the individual does not waive the benefits of such treaty applicable to residents of the foreign country.

Clearly the “saving clause” is designed to follow the evolution of the US expatriation tax rules.

Actual Tax Treaties: The “Saving Clause” At Different Points In Time

A list of US tax treaties is available here. I suspect that we will find a correlation between the text of the “saving clause” and the state of the expatriation rules.

Example 1 – France 1994

The text of the “saving clause” found in paragraph 2 of Article 29 of the 1994 US France Tax Treaty was:

2. Notwithstanding any provision of the Convention except the provisions of paragraph 3, the United States may tax its residents, as determined under Article 4 (Resident), and its citizens as if the Convention had not come into effect. For this purpose, the term citizen” shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of income tax, but only for a period of 10 years following such loss.

Note that the ten year rule applies only to US citizens. This is because Green Card holders were not (in 1994) subject to the expatriation tax rules.

Example 2 – France 2004 Protocol To The 1994 Tax Treaty

The 2004 protocol to the 1994 French tax treaty expands the scope of the “saving clause” to include “long term residents”. It protocol reads as follows:

1. The last sentence of Paragraph 2 of Article 29 (Miscellaneous Provisions) of the Convention shall be deleted and replaced by the following:

“For this purpose, the term “citizen” shall include a former citizen or long-term resident whose loss of such status had as one of its principal purposes the avoidance of tax (as defined under the laws of the United States), but only for a period of ten years following such loss.”

By 2004 the expatriation rules had been amended to include “long term residents” AKA Green Card holders.

Conclusion: It seems clear that the text and scope of the “saving clause” found in US tax treaties is a function of rules that apply to those who relinquish US citizenship or abandon Green Cards.

Q. What can be inferred about the expansion of the scope of the “saving clause” to include “former” US citizens and Green Card holders? (The ten year rule was eliminated. Perhaps this is because effective June 16, 2008 there was no more “ten year alternative tax regime”.)

A. Could it be that the US wants to reserve the right to impose US taxation on former citizens and Green Card holders in perpetuity? A commenter at the Isaac Brock Society made the following comment days after the 2016 Model Treaty was published:

Making reference to “former citizens” in tax treaties is ridiculous.

The US has zero legal connection to them after they have renounced/relinquished US citizenship.

No doubt Robert Stack, enemy of Non-Resident Americans, stuck that in there with the blessing of the Democrat establishment, ie. Chuck Schumer et al.