Facebook founder renounced US citizenship to escape tax net

14 May 2012

It has emerged that Eduardo Saverin, one of the founders of Facebook, is one of thousands of wealthy Americans who have recently renounced citizenship in order to avoid the country's international taxation regime.

Facebook is due to launch itself on the stock market later this week, with an Initial Public Offering (IPO) in which shares will be priced at USD28-35 each. This could value Saverin's holding in the company at nearly USD4 billion. It is, tax accountants generally agree, a good time to escape the US tax net.

Saverin will not entirely avoid the Internal Revenue Service's (IRS) attentions, though. Renouncing Americans must pay a one-time exit tax in the form of a Capital Gains Tax (CGT) charge on their assets; the IRS will tax his shares as if he had sold them at the moment of renunciation, believed to be September 2011. But shares in a privately owned company are almost always heavily discounted compared to quoted stocks in the same firm after it has gone public, because private shares are more difficult to sell. Also the IRS cannot challenge the valuation of publicly traded shares. So his CGT liability will now be much less than it would have been if still a ‘US person’ liable to worldwide US taxation.

The 30-year-old has instead opted for Singaporean residency, according to his spokesman. Thus he will also avoid taxation on future CGT (Singapore has zero CGT), and pay less income tax (the US top rate of income tax is set to rise from 35 per cent to 39.6 per cent next year). He will also be excused from the need to file multiple declarations to the IRS each year, with the associated risk of heavy penalties for failure to file.

On the negative side, Saverin must now pay his CGT bill immediately. If he had kept his citizenship the tax would have been deferred until he sold the shares. So his tax bill in the short term has increased significantly. Probably he considers that, at the age of thirty, he has a great deal more to gain than lose.

Saverin is Brazilian by birth but obtained US citizenship in 1998 after taking residence there in 1992.

 

Sources

 

Bloomberg

Washington Post

Taxprof (1)

Taxprof (2)

Forbes (1)

Forbes (2)

 

 


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