"Tax residence" for US Estate and Gift and "tax treaty tiebreakers with overlapping domicile

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Introduction – Two kinds of tax systems – Two kinds of “tax residency”
Title 26, the Internal Revenue Code of the United States is composed of twelve subtitles. Subtitle A deals with “Income Taxes”. Subtitle B deals with “Estate and Gift Taxes” AKA the “transfer tax regime”. The two subtitles are administered separately. They also have different definitions of “tax residence”.

Subtitle A: “Income Taxes” – Rules for Tax Residency
For the purposes of “Income Tax” the United States uses “deemed tax” residency. “Tax Residency” is based on an objective test. The rule is that ONLY “nonresident aliens” escape the full force of the Internal Revenue Code. The definition of “nonresident alien” is found in S. 7701(b) of the Internal Revenue Code. The test is completely objective.
Subtitle B: “Estate and Gift Tax” – Rules for Tax Residency
For the purposes of “Estate and Gift Tax”, “tax residency” is determined:

  • objectively (deemed residence) for U.S. citizens; and
  • subjectively (domicile – subjective) for non-U.S. citizens.

Deemed Residence – U.S. citizens: U.S. citizens are always subject to the full force of the “Estate and Gift Tax” rules – meaning that the Estate and Gift tax rules are applied on “worldwide assets”.
Facts and circumstances – Non U.S. citizens: Non-U.S. citizens are subject to the full force of the “Estate and Gift Tax” rules (tax is imposed on their worldwide assets) ONLY if they are “domiciled” in the United States. “Tax residency” for Estate and Gift Tax rules is defined by “domicile”.


One can be a “tax resident” of the United States for Subtitle A “Income Tax Purposes” but NOT be a “tax resident” of the United States for Subtitle B “Estate and Gift Tax” purposes. Interestingly “Green Card” holders are deemed U.S. “tax residents” for income tax purposes but may or may not be “tax residents” for Estate and Gift tax purposes.


What is domicile?
Here is a post that is devoted to exploring the meaning of domicile. In general:


How do we know that “residence” for Estate and Gift Tax purposes means “domicile”?
The answer is found in the Treasury Regulations – Specifically Reg. 25.2501-1(b) which defines “residency” for Estate and Gift Tax purposes as follows:

(b)Resident. A resident is an individual who has his domicile in the United States at the time of the gift. For this purpose the United States includes the States and the District of Columbia. The term also includes the Territories of Alaska and Hawaii prior to admission as a State. See section 7701(a)(9). All other individuals are nonresidents. A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of moving therefrom. Residence without the requisite intention to remain indefinitely will not constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal.

Please note that different jurisdictions may define “domicile” differently.


A comparison of “tax residency” for Estate/Gift Tax Purposes and Income Tax Purposes
U.S. Tax Residency – Non-U.S. Citizens (focus on U.S. permanent residents AKA “Green Card” holders)
(U.S. citizens: ALWAYS subject to all the provisions of Subtitle A and Subtitle B)
Subtitle A = Income Tax Provisions – objectively determined tax residency
Subtitle B = Estate and Gift Tax (Transfer Tax) Provisions – subjectively determined based on domicile
The following chart applies to individuals who are NOT U.S. citizens but people who were given the right to reside permanently in the USA – Green Card Holders!

*This would include a permanent resident of the United States as defined by the Immigration laws who has moved to the United States with no intention to live elsewhere.
** This is one of the millions of people who lived in the United States as a permanent resident, but who moved away from the United States permanently but failed to break “tax residency” for income tax purposes. In other words he didn’t file the I–407.
*** This would/could be a person who was admitted to the United States as a permanent resident, who moved from the United States and severed “tax residency” by using an Article IV Tax Treaty Tie Breaker (Sec. 7701(b)(6). In other words he severed “tax residency” but still has the right to live in the USA as a permanent resident.
**** Green card holder who moved permanently from the United States and filed the I-407.
Tax Treaty Tie Breaker Provisions – Domiciled According To The Laws Of Multiple Jurisdictions


The U.S. U.K. Estate and Gift Tax Treaty includes (it is one example) the following “tie breaker” provision in Article 4 (focusing on domicile):

ARTICLE 4 FISCAL DOMICILE
(1) For the purposes of this Convention an individual was domiciled:
(a) in the United States: if he was a resident (domiciliary) thereof or if he was a national thereof and had been a resident (domiciliary) thereof at any time during the preceding three years; and
(b) in the United Kingdom: if he was domiciled in the United Kingdom in accordance with the law of the United Kingdom or is treated as so domiciled for the purpose of a tax which is the subject of this Convention.
(2) Where by reason of the provisions of paragraph (1) an individual was at any time domiciled in both Contracting States, and
(a) was a national of the United Kingdom but not of the United States, and
(b) had not been resident in the United States for Federal income tax purposes in seven or more of the ten taxable years ending with the year in which that time falls, he shall be deemed to be domiciled in the United Kingdom at that time.
(3) Where by reason of the provisions of paragraph (1) an individual was at any time domiciled in both Contracting States, and
(a) was a national of the United States but not of the United Kingdom, and
(b) had not been resident in the United Kingdom in seven or more of the ten income tax years of assessment ending with the year in which that time falls, he shall be deemed to be domiciled in the United States at that time. For the purposes of this paragraph, the question of whether a person was so resident shall be determined as for income tax purposes but without regard to any dwelling-house available to him in the United Kingdom for his use.
(4) Where by reason of the provisions of paragraph (1) an individual was domiciled in both Contracting States, then, subject to the provisions of paragraphs (2) and (3), his status shall be determined as follows:
(a) the individual shall be deemed to be domiciled in the Contracting State in which he had a permanent home available to him. If he had a permanent home available to him in both Contracting States, or in neither Contracting State, he shall be deemed to be domiciled in the Contracting State with which his personal and economic relations were closest (centre of vital interests);
(b) if the Contracting State in which the individual’s centre of vital interests was located cannot be determined, he shall be deemed to be domiciled in the Contracting State in which he had an habitual abode;
(c) if the individual had an habitual abode in both Contracting States or in neither of them, he shall be deemed to be domiciled in the Contracting State of which he was a national; and
(d) if the individual was a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
(5) An individual who was a resident (domiciliary) of a possession of the United States and who became a citizen of the United States solely by reason of his
(a) being a citizen of such possession, or
(b) birth or residence within such possession, shall be considered as neither domiciled in nor a national of the United States for the purposes of this Convention.

John Richardson

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