In our previous alert “Are You a U.S. Person?”, we discussed the determination of whether an individual is treated as a U.S. person for U.S. federal income tax purposes. In addition to income tax, the U.S. also imposes certain “transfer” taxes, which include (1) a gift tax on gratuitous transfers made by an individual during his or her lifetime, (2) an estate tax on a decedent’s assets transferred at death to the decedent’s beneficiaries and (3) a generation-skipping transfer tax, which is an ad valorem tax imposed in addition to gift and estate tax for transfers made to certain transferees (typically grandchildren or more-remote descendants).
Individuals who are U.S. citizens or U.S. residents are subject to transfer tax on their worldwide assets. Conversely, individuals who are not citizens or residents of the U.S. are subject to transfer tax only on certain assets that are treated as located, or sitused, in the U.S. What may come as a surprise, however, is that the U.S. Internal Revenue Code defines “resident” differently for income and transfer tax purposes. Because of this difference, a non-U.S. person could conceivably be resident for income tax purposes but nonresident for transfer tax purposes. It is crucial to understand the different definitions of residency.
For U.S. income tax purposes, a non-U.S. citizen is resident in the U.S. if that individual (1) is a U.S. lawful permanent resident (i.e., a “green card” holder) or (2) satisfies the “substantial presence” test (commonly referred to as the “day count test”). Please see our previous alert and our In The Know video for a description of the substantial presence test, the application of which is meticulous but relatively straightforward. Holding a green card or meeting the substantial presence test is not determinative of residency for transfer tax purposes, however.
For U.S. transfer tax purposes, a non-U.S. citizen is resident in the U.S. if that individual’s domicile is in the U.S. Under the Treasury Regulations, “[a] person acquires domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom.” As a result, if an individual does not intend to remain in the U.S. indefinitely, that individual is not domiciled in the U.S. Moreover, an intent to change domicile does not effectuate such a change without the person actually physically moving. Therefore, to be domiciled in the U.S., an individual must both (1) be physically present in the U.S. and (2) have an intention to stay in the U.S.
Physical presence is relatively self-explanatory, although the Treasury Regulations’ use of the words “living there” does suggest more than a transient stay in the U.S. But the Treasury Regulations also indicate that a “brief period of time” is enough to be physically present in the U.S. The more difficult determination for establishing domicile is whether one intends to stay in the U.S.
Factors Considered in Determining Intent To Stay in the U.S.
Whether an individual has intent to stay in the U.S. is inherently subjective. There is neither a bright-line test nor an official checklist applicable in making this determination. Rather, for any individual, a facts and circumstances test must take into account various factors of that individual’s life in the U.S. as compared to in any other country. What follows is a non-exhaustive list of factors that the IRS or a court of law may take into consideration in determining whether an individual is domiciled in the U.S. No single factor below is determinative:
- Residential Property and Lifestyle in the U.S.: An individual’s intentions regarding his or her permanent home will likely be most reflected in his or her residence and lifestyle. Therefore, these facts are potentially the most relevant in determining domicile. Owning a large, comfortably furnished home in the U.S. where an individual keeps most of his or her personal belongings as opposed to renting a small, sparsely decorated studio apartment will be weighed in favor of having domicile in the U.S.
- Statements of Intent: Making statements of intent to reside or remain in the U.S. on an individual’s tax returns, in estate planning documents, on immigration-related forms or in other personal correspondence will be weighed in favor of having domicile in the U.S.
- Visas and Work Permits: Possessing a U.S. immigrant visa, a green card or a U.S. Social Security number will be weighed in favor of having domicile in the U.S. But it must be stated very plainly that having a green card and/or a U.S. Social Security number is just another factor; it is not determinative.
- Location of Business Interests: Having business and property interests in the United States, particularly if they are more significant than those in any other country, will be weighed in favor of having domicile in the U.S.
- Location of Family Members: Having family members present in the U.S. and a family history of immigration to the U.S. will be weighed in favor of having domicile in the U.S.
- Motivation for Being in the U.S.: Being present in the U.S. by choice rather than by necessity or other compelling reason (e.g., health reasons) will be weighed in favor of having domicile in the U.S.
- Length of Time in the U.S.: Spending long periods of time in the U.S. as opposed to periods of short duration will be weighed in favor of having domicile in the U.S.
- Community Affiliations: Having personal, political, charitable, spiritual and social affiliations based in the U.S., particularly if they are more meaningful than those in another country, will be weighed in favor of having domicile in the U.S.
- Voting Registration, Driver’s License and Other Memberships: Registering to vote, obtaining a driver’s license or joining other organizations in the U.S. will be weighed in favor of having domicile in the U.S.
Again, the analysis is based on the actual facts as they relate to the individual whose domicile is being determined. Depending on an individual’s circumstances, each factor will be weighed differently. A fact that on its own would clearly weigh in one direction can be entirely outweighed by other relevant facts. For example, possessing a non-immigrant U.S. visa does not automatically rule out a determination of having domicile in the U.S. if other facts show that the visa holder otherwise intends to remain in the U.S. A fact that in a vacuum seems identical for two different individuals may even lead to different results. Therefore, if a non-U.S. citizen seeks to minimize the impact of U.S. transfer taxes by claiming that he or she is not domiciled in the U.S., then he or she must consider the factors above with respect to his or her life in the U.S.