US Gift Tax on Nonresident Noncitizens: An Overview

Like American income tax, the U.S. gift tax doesn’t stop at national borders. Not only does it follow U.S. citizens wherever they go, it can also impact individuals who aren’t citizens (or even U.S. residents).

If you have international dealings of any kind, it’s important to understand the basics of the U.S. gift tax—and how it can impact you.

The Role of Residency

Residency can be a tricky subject. For starters, immigration law and tax law treat residency differently. While immigration status (e.g., possession of a certain visa) can help determine tax residency, it’s not the sole determinant and is sometimes disregarded.

Additionally, tax residency rules differ for income, estate and gift taxes. What makes someone a resident for one type of tax doesn’t necessarily make them a resident for another.

For the purpose of gift tax, a resident is an individual who is domiciled in the U.S. at the time of the gift. Here, domiciled means living in the U.S. indefinitely (i.e., without the definite intention of moving).

General Rule for Nonresident Noncitizens

In general, with respect to nonresidents who aren’t citizens (NRNCs), U.S. gift tax “applies only to the transfer of real property and tangible personal property situated in the United States at the time of the transfer.” In other words, NRNCs are excluded from U.S. gift tax on transfers of intangible assets.

The determination of tangible vs. intangible property becomes vital for analysis of gift tax on NRNCs. The actual definitions under the Internal Revenue Code and U.S. Treasury regulations are quite complex. In a nutshell, however, the simplified definitions are as follows:

• For the purpose of gift tax, intangible assets are generally stocks and bonds.
• Real property is real estate—mainly land and buildings.
• Tangible personal property is (essentially) everything else that doesn’t fall into the first two definitions.

Starting Point for Analysis

To determine whether a foreign person is subject to gift tax in a particular instance, we start with three questions:

• Was the person a nonresident under the gift tax definition (and not a U.S. citizen) in the year of the gift?
• Was the gift real property, tangible personal property or intangible property under the gift tax definitions?
  1. If the gift was intangible property, stop – it is not subject to U.S. gift tax.
  2. If the gift was real or tangible personal property, continue to Question 3.
• Where was the property physically situated (its “situs”)?
  1. If situated in the U.S., the gift is subject to U.S. gift tax.
  2. If situated outside the U.S., the gift is not subject to U.S. gift tax.

Gifts of Cash

Cash is considered tangible personal property in the context of gift tax. This is particularly important; cash is one of the most common types of property gifted across borders, since all it takes is a bank transfer or a wire.

NRNCs should exercise caution with cash gifts. If the cash is held at a U.S. bank, it’s considered situated in the U.S. and therefore is subject to U.S. gift tax. NRNCs could instead consider gifting cash held overseas or intangible property like stocks and bonds.

Receivers of Gifts from Foreign Persons

The responsibility for paying gift tax lies with the donor. However, the receiver of gifts from a foreign person might be subject to reporting requirements if said receiver is a U.S. person. Form 3520 must be filed by U.S. persons who receive gifts from foreign persons in excess of $100,000.

Reporting gifts on Form 3520 is strictly informational; no additional tax is owed upon filing it. However, there are hefty penalties for late filing, failure to file or filing inaccurate or incomplete information. Generally, the initial penalty for failure to file starts at $10,000. An additional penalty could also apply, starting at 5% of the value of the gift and increasing with time until the form is filed.

Overseas Means Complex Waters for U.S. Tax

This information is just a starting point; U.S. international tax is a highly complex area. Definitions and treatment are greatly nuanced and often require an international tax professional to interpret. So a complete gift tax analysis for a nonresident of the U.S. should not be undertaken alone. Consult James Moore’s international tax team to make sure your bases are covered.

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