Sean Parker: You don’t even know what the thing is yet. How big it can get, how far it can go. This is no time to take your chips down. A million dollars isn’t cool, you know what’s cool?
Eduardo Saverin: You?
Sean Parker: A billion dollars.
So what does that make two billion dollars? Apparently, a pretty good reason to give up your citizenship.
Brazilian-born Eduardo Saverin, who helped co-found the mega-successful social networking site Facebook in 2004 has called it quits in the U.S. The 30 year old Saverin has renounced his U.S. citizenship in advance of the May 2012 initial public offering (IPO) for Facebook. The IPO is expected to boost Saverin’s already staggering net worth, which is already estimated at $2 billion, putting him solidly at #634 on the most recent Forbes List of Billionaires.
The move is not altogether surprising. Saverin was neither born in the U.S. nor is he a resident. Saverin was born in Brazil and moved to the U.S. as a young boy when his wealthy father discovered that Saverin’s name was on a list of potential kidnapping victims. Saverin eventually landed at Harvard, where he met Mark Zuckerberg. Zuckerberg realized that Saverin’s wealth could help bankroll his start-up and eventually, Saverin became Facebook’s first investor.
Saverin’s involvement in Facebook was actually fairly minimal beyond putting up the dollars. But those dollars were invaluable: without them, Zuckerberg would not have been able to keep his servers going. When the rest of Facebook’s team moved west, Saverin stayed put. Zuckerberg tried to edge Saverin out of the company but Saverin sued and the resulting settlement gave him a stake in the company.
Over the years, Saverin has divested himself of much of his Facebook holdings. He has generally eschewed the spotlight (that Zuckerberg appears to relish) and two years ago, moved to Singapore where he reportedly owns a luxury penthouse.
In 2011, Saverin moved to renounce his U.S. citizenship, joining the ranks of Princess Grace of Monaco, Queen Noor, Jet Li, Terry Gilliam and Andreas Papandreou (now the Prime Minister of Greece).
Saverin’s notice of renunciation was published in the April 30, 2012, edition of the Federal Register along with more than 400 other people who are no longer U.S. citizens. Under the [entity display="Health" type="section" active="true" key="/health"]Health[/entity] Insurance Portability and Accountability Act, signed into law in 1996 under President Clinton, each year the Internal Revenue Service (IRS) is required to publish the names of persons who are no longer U.S. citizens.
But why IRS? Why not the INS, BCIS, USCIS (the U.S. Citizens and Immigration Services or whatever we’re calling it these days)?
Taxes, of course. While there may be legitimate non-tax reasons for renouncing U.S. citizenship, the majority of those Americans who give up citizenship these days do so for tax reasons.
Of course, fleeing the country isn’t the silver bullet that you might expect to avoid reporting and paying taxes. Americans who expatriate after 2008 are still subject to certain reporting and tax requirements under our tax laws. Those laws apply if any of certain criteria are met. In Saverin’s case, he would be subject to the expatriation tax because his net worth is $2 million or more on the date he expatriated (one of the three criteria than can make you subject to the tax).
The expatriation laws are a bit tricky. The basic rule is that, for purposes of the tax, any assets that you leave the country with are treated as though you had sold them on the date before you leave. Any gain which would have occurred had you actually sold those assets are subject to tax (with some exceptions).
So Saverin doesn’t get a free pass. His assets are still subject to tax. Lucky for Saverin, however, the value of his assets pre-IPO are still considerably less than the value of his assets post-IPO. And by lucky, I mean absolutely planned.
Saverin may also still be subject to U.S. tax when he moves out, depending on the nature of his assets. That’s where the IPO, which makes Facebook a public company, gets interesting. Nonresidents pay tax on what’s considered U.S. source income. Income earned from a U.S. business (such as dividends) is generally considered effectively connected and therefore taxable with a fairly important exception: capital gains or losses on the sale of shares of publicly traded companies are not usually considered effectively connected or subject to U.S. tax (REITs and the like are another story).
Of course, you have to choose carefully when leaving the U.S. because it makes a difference where you go. Saverin’s advisors are pretty savvy: Singapore is a terrific choice because it does not have a capital gains tax. It’s also no stranger to expats from all over the world because of its favorable tax laws. It was previously considered a tax haven though it was removed from the dreaded gray list of the Organisation of Economic Cooperation and Development (OECD) after it signed a number of financial transparency agreements with other countries.
The U.S. has made international tax compliance a serious matter over the past couple of years, starting with crackdowns on foreign accounts and most recently, ramping up for FATCA, or the Foreign Account Tax Compliance Act (arriving in a city near you in 2013!). You can bet that IRS is watching this move closely.
Note to Zuckerberg: if Doug Shulman (IRS Commissioner) friends you on Facebook, I suggest you click “Not Now.”