Just because you became a tax resident in Georgia (country), or plan to soon, doesn’t mean the USA doesn’t still want to tax your personal or business income. Taxes in Georgia are very favorable (between 0% and 20% in most cases) but to really minimize your taxes, you also need to reduce or eliminate your US tax burden.
Fortunately, there are several ways to do this.
In this article, we discuss those options, plus other essential considerations when moving your income to Georgia as a US citizen.
Disclaimer: As a Georgia-based law firm, we support clients with their Georgia-based tax problems. Many of these clients are from the USA so the information below is intended to help them understand the options available. However, all US tax advice should be checked with a US adviser before implementing. We take no responsibility for the accuracy of the below information, how you use it, or the outcomes of such use.
US Citizenship Based Tax Residency
The USA is the only developed country which operates a worldwide tax system. With this system, you are required to file a tax return every year even if you are not physically residing within the USA. The only way to get out of this is to renounce your citizenship.
That said, the amount of tax due in the USA may be as low as zero if you qualify for the Foreign Earned Income Exclusion (FEIE) program or other programs discussed below. But it can also depend on the nature of your income.
Double Taxation Agreements
The only double taxation agreement relevant for Georgia-USA taxation is the 1976 agreement with the USSR. Though the USA honors this currently from their side, having taken the position that the USSR agreement applies to all former Soviet countries since there’s no separate tax treaty in place, Georgia does not honor it.
This means that your tax liable worldwide income will be taxed in Georgia, regardless of whether or not it was already taxed in the USA. Though certain types of international income might be deemed foreign-source, and therefore tax exempt in Georgia, most types of income that you earn by working remotely from within the borders of Georgia will not be tax exempt.
Furthermore, if you operate a US business (legal entity), that business could easily trigger Permanent Establishment rules in Georgia and therefore be taxed as if it was a Georgian company, even if it already paid its taxes in the USA. The best solution is to open a Georgian business and make sure your revenue goes directly to that company and not to the US company. Then the US can typically only tax you on your personal income, not the revenue of the Georgian business.
In summary, paying your taxes in the US almost never fully removes tax liability in Georgia.
This is not surprising as, if you are a Georgian tax resident, it makes sense that they should have the right to tax you. The USA is the one with the unusual citizenship-based tax rules, compared to the rest of the world.
So, the only solution for not being taxed twice is to reduce your tax liability on the US side.
Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion is a program by the IRS to protect the income you earn- while not residing in the USA- from being taxed in the USA, up to a limit of ~$107k USD (2020 figures). There are a number of requirements to qualify.
Here are some of the essential considerations:
- You must pass the bona fide residence test, or the physical presence test (see below).
- Personal income over the ~107k USD threshold will still be taxed as if you were living in the USA.
- You may qualify for additional deductions based on the foreign housing exclusion in some cases.
- FEIE does not automatically exempt you from all US taxes – read more about the self employment tax below.
- It also does not apply to all types of work income earned while abroad (notable exceptions include: working in international waters, military service, and more).
- There are certain types of income which can never be considered “foreign earned”. (Notably: certain dividends, interest, royalties, and more).
The IRS gets final say on whether or not they believe you qualify.
There are elements of risk to this because, to meet the qualification criteria you will need to already have spent time abroad, and hence you may already have tax liabilities abroad and simultaneously no guarantee that the IRS will ultimately accept your claim that you qualify for FEIE status.
The second problem is, you can register this status in your declaration, but the IRS only assesses if you are eligible if/when you are actually audited.
This means that if your case is not watertight, you could end up liable for a lot of back taxes and fines, as you don’t know if the IRS will consider you as qualifying or not, until it’s too late.
If you do get taxed abroad and don’t qualify for FEIE, you may be able to get tax credits against those taxes (see below).
The FEIE rules are complicated, so it’s recommended to both read the IRS information and to check with a US tax adviser (Greenback Expat Tax Services have a guide on FEIE) if your unique situation will qualify, and which portions of your income may qualify.
The most important starting point though, to even consider FEIE, is that you must pass one of the below tests:
Bona Fide Residence Test
The bona fide residence test indicates that you have legal residence abroad. This can be proven in a number of ways but these are some of the essential considerations:
- You need to have spent at least a whole, complete tax year (January to December) residing in a single country. You are allowed to travel, and even visit the USA, but it must be clear that you actually do reside abroad. Meaning, you can spend no more than 90 days visiting the US (the fewer days the better though) and must still demonstrate clear proof of residence abroad. This could include being physically in the country most of the time, having property, having legal residence and/or tax residence, having family in the country, etc. But the final determination is at the discretion of the IRS.
- You can claim bona fide residence for a partial year, but only once you have completed a full tax year. Essentially, if you wanted to apply from June 2019, you would defer your taxes for June to December of 2019, and after December 2020, once you have resided in a country for the whole of 2020, you can then qualify for bona fide residence on the basis of 2020 and add those months from 2019.
More information on reasons you may or may not qualify can be found on the IRS website.
Physical Presence Test
The physical presence test is more straightforward, if you qualify.
With this test, if you are physically present in any foreign country (or countries) for at least 330 days within the US tax year (January to December), then you would potentially qualify.
However, to then qualify for the FEIE you would also have to prove your “Tax Home” was in a country other than the USA. So, for digital nomads trying to country hop and pay no taxes, they would still be liable to pay taxes in the USA, and potentially pay taxes in any/all countries they worked from their laptop in during their travels, as constant travel rarely ever establishes a tax home.
For Georgia, you must be physically present for at least 183 days in a rolling 12 month period to gain tax residency, or be part of the High Net Worth Individual (HNWI) tax residency program (with which you can get tax residency remotely, and/or in less than 183 days of continued physical presence). If you do not gain a Georgian tax residency certificate through one of these two methods, then you have far less hope of convincing the IRS that Georgia is your tax home.
Even with that certificate, if you do not maintain any home in Georgia and all your income is sourced from outside Georgia (e.g., you either work remotely for or own a non-Georgian company), you still run the risk that the IRS will default to your tax home as being located in the USA.
The IRS defines a tax home thusly:
“Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Having a ‘tax home’ in a given location doesn’t necessarily mean that the given location is your residence or domicile for tax purposes.”
“If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work.” – Source. IRS Tax guide for US citizens abroad. Chapter 4, Page 12.
The two above-mentioned paragraphs will satisfy the majority of readers when it comes to deciding if Georgia could legitimately be considered their tax home by the IRS. If you are still not 100% sure, read the full section directly from the IRS using the link above.
For those considering the High Net Worth Individual program to get tax residency from Georgia without having to actually live here, if none of your income is from Georgia, and you have no ties to Georgia (property, family, etc.) and you rarely even visit, the chances are that the IRS would consider your tax home to still be the USA. You’ll only discover the outcome once you have been audited, at which point it is far too late.
Tax residency via the High Net Worth Individual program may be sufficient in some cases for those from countries other than the USA, living outside their country of domicile, but for US citizens it’s a gamble.
Foreign Tax Credits
The concept of Foreign Tax Credits is relatively straightforward:
“If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.” (Source: IRS)
Whether you qualify is not as straightforward.
In essence, if you received income while living abroad that was taxed by the authorities in a foreign country, you can claim back the amount of tax that was levied against your US federal income tax, either as a deduction or a tax credit.
A tax credit reduces US tax liability, with any excess able to be carried backward or forward to other years. But a deduction reduces taxable income only in the current year. All foreign income tax must be treated in the same way; you cannot choose to deduct some foreign tax and take a credit on other tax.
Determining the exact amount you can claim, and on which types of income, is very complicated.
If you are moving to Georgia in search of a more favorable tax situation, then you really want to qualify for the FEIE discussed above, because foreign tax credits really only mean you will be reducing your US tax bill by the amount you have paid in taxes elsewhere, and hence you will be paying approximately the same amount of tax as if you had never left. While this is better than paying tax twice on the same income, it is probably not the result you really want.
Self-Employment Tax & Medicare Levy (aka social security tax)
If you are self-employed, even with the FEIE, in most situations the IRS expects you to pay the 15.3% self-employment/medicare tax on your net income, even if your income is foreign-sourced and your business is based outside the US. However, there are options that may help to reduce or eliminate this tax.
If you qualify for the Georgian 1% tax with Small Business Status, then your overall tax burden reduction may still be quite appealing. If not, you could end up paying almost as much as you were when living in the US, with that 15.3% going to a country you no longer live in.
If you are based in Georgia but are an employee of a U.S. corporation, that employer will probably withhold these taxes at source.
If you are based in Georgia and employed by a US company, but nominating to get paid a gross salary to avoid US tax withholding, you will need to discuss with a US adviser and/or your employer as to whether or not you will have to pay the full 15.3%, or if the company will pay some or all of this tax.
If you are employed by a non-US company and do not have any foreign social security benefits withheld at source by that non-US company, you will most likely have to pay the 15.3% tax to the US. If the company does withhold local social security at source, this may or may not change your US liability depending on the agreements the US has with the country you are working in.
If you are employed by a Georgian employer and are liable to contribute to the local pension scheme (because you have Georgian legal residency) you may have some scope to eliminate the 15.3% US tax. Speak to a US adviser for more details.
FATCA is an agreement that allows the IRS to monitor foreign bank accounts belonging to US citizens. If you open a bank account in Georgia, or any other country, whether it is within the FATCA network or not, you are required by US law to report your ownership of that account to the IRS.
If the opened account is in a country within the FATCA network, the IRS then has easy access to digital records disclosing how much money you have in your foreign bank account(s). Banks within the FATCA network, like Georgia, will ask you to sign relevant documents at the time of opening the account.
As you can see, being a US citizen trying to reduce taxes by living abroad, or even just comply with taxation laws while choosing to live abroad, is incredibly complex.
If you need an expert in Georgian tax law, who is also fluent in English, to sit in on your calls to your US tax adviser to maximize the efficiency of that meeting, our consultants are here to help. Contact us.
And if you need help with the Georgian side of your tax responsibilities, book a free consultation (online via Zoom or in-person in Tbilisi).