Citizenship-Based Taxation: The US and Eritrea Compared

In the landscape of global taxation, nearly every country operates a residence-based tax system: you pay tax where you live. The person who moves from Germany to Singapore pays German tax until they leave and Singapore tax thereafter. The concept is intuitive, widely accepted, and forms the basis of most bilateral double-tax treaty networks.

Two countries stand apart from this consensus. The United States and Eritrea both impose income tax on their citizens worldwide, regardless of where those citizens live, work, or pay tax in any other jurisdiction. A US citizen who has lived in Singapore for twenty years, earns all their income in Singapore, and has no economic connection to the United States beyond their passport is still required to file a US federal income tax return every year and may owe US federal tax on income that Singapore has also taxed.

For internationally mobile individuals, understanding how these two citizenship-based tax systems work — and how they differ — is essential for citizenship planning. For most people the relevant question is the US one, but the Eritrean system illustrates what a minimalist citizenship-based tax looks like and why the international response to the two regimes has been so different.

The US Citizenship-Based Tax: Scale and Complexity

Who Is Subject

US citizenship-based taxation (CBT) applies to:

• All US citizens (including those who were born US citizens and have never lived in the United States)
• All long-term permanent residents (green card holders who have held a green card for at least eight of the last fifteen years — the Long-Term Permanent Resident or LTPR threshold)

The US tax obligation does not end when a US citizen leaves the United States. It continues throughout their life abroad, imposing annual filing obligations and potential tax liability until the citizenship is formally renounced (a legally permanent act that triggers its own exit tax under the HEART Act for covered expatriates).

What Is Taxed

The US taxes worldwide income: income from employment, self-employment, investments (dividends, interest, capital gains), rents, royalties, business profits, and virtually every other economic category, regardless of where that income is earned or received.

Several relief mechanisms partially mitigate the double-taxation that would otherwise result:

Foreign Earned Income Exclusion (FEIE). US citizens resident abroad can exclude a limited amount of foreign earned income from US taxable income — USD 132,900 for 2026, adjusted annually for inflation. The exclusion applies only to earned income (wages and self-employment income); investment income is not excludable under the FEIE.

Foreign Tax Credit (FTC). US taxes can be offset by a credit for income taxes paid to foreign governments on the same income. This prevents full double taxation in most cases where the foreign tax rate is at least as high as the US rate. However, the FTC calculation is complex, subject to per-category "basket" limitations, and does not always produce a clean offset — particularly for investment income, passive income, or income from countries with low tax rates.

Tax treaties. The US has income tax treaties with approximately 68 countries, which typically include tiebreaker provisions for determining residency and may reduce withholding tax rates on specific categories of income. However, treaties with the US explicitly preserve the right of the US to tax its citizens as if the treaty did not exist (the "savings clause"), which significantly limits the relief available to US citizens resident in treaty countries.

The Compliance Burden Beyond Tax

Beyond the direct tax liability, US CBT imposes a substantial compliance reporting framework:

FBAR (FinCEN 114). US persons with foreign financial accounts whose aggregate maximum value exceeds USD 10,000 at any point during the year must file an annual Report of Foreign Bank and Financial Accounts. The FBAR is filed with the Financial Crimes Enforcement Network (FinCEN), not the IRS, and is separate from the income tax return. Penalties for wilful failure to file can reach USD 100,000 or 50% of the account balance per violation.

Form 8938 (FATCA). US persons with specified foreign financial assets above reporting thresholds (USD 50,000 for domestic filers; higher thresholds for overseas filers) must file Form 8938 with their income tax return, reporting the details of those assets.

Form 5471. US persons who are officers, directors, or shareholders of certain foreign corporations must file Form 5471, a complex information return reporting the corporation's activities. Penalties for late or incomplete filing are severe.

Form 3520 / 3520-A. US persons with interests in foreign trusts or who receive certain gifts or bequests from foreign persons must file Forms 3520 and 3520-A. Again, substantial penalties apply.

PFIC reporting (Form 8621). US persons holding interests in passive foreign investment companies — which includes many non-US mutual funds, ETFs, and investment vehicles — must file Form 8621 and face complex and often punitive tax treatment of income and gains from those vehicles.

The aggregate compliance cost for a US expatriate with a typical international investment portfolio and business interests can easily reach USD 10,000 to USD 30,000 or more per year in professional adviser fees, before considering any direct tax liability.

The Eritrean Citizenship-Based Tax: A Different Model

Eritrea's diaspora tax — officially the Rehabilitation Tax — is levied at a flat rate of 2% on the estimated worldwide net income of Eritrean citizens living abroad. The rate is low, the compliance requirement is relatively simple, and the revenue collected funds, in part, the Eritrean government's operations and reconstruction programmes.

Who Is Subject

All Eritrean citizens living abroad, regardless of where they reside.

What Is Taxed

Broadly, worldwide income, at the flat 2% rate. The simplicity of the rate structure eliminates most of the complexity associated with the US CBT — there is no progressive rate schedule, no foreign tax credit calculation, and no parallel regime of information reporting obligations.

How It Is Collected

The Eritrean diaspora tax is not enforced through an internationally recognised treaty network or through FATCA-style reporting by foreign financial institutions. It is collected primarily through:

• Voluntary compliance — Eritreans abroad who travel to Eritrea, access Eritrean consular services, or otherwise need to engage with Eritrean state institutions are required to demonstrate compliance with the diaspora tax.
• Community pressure — In some diaspora communities, local Eritrean community organisations (which may have ties to the ruling party) apply social pressure to ensure compliance.
• Conditionality on consular services — Eritreans who need consular services (document issuance, certified documents, etc.) may find these conditioned on demonstrating diaspora tax compliance.

International Response to the Eritrean Tax

The international reaction to Eritrea's diaspora tax has been broadly critical. Several Western countries have issued formal statements asserting that the collection of the diaspora tax from their Eritrean-origin residents by Eritrean consulates or community organisations amounts to coercive taxation of individuals who are legally resident in a different country. Canada expelled an Eritrean diplomat in 2013 following concerns about improper collection activities. The Netherlands and Germany have made similar statements.

The UN Monitoring Group on Eritrea has repeatedly reported on the diaspora tax in the context of its broader examination of Eritrean government financing, noting the coercive dimensions of the collection mechanism in some diaspora communities.

Why the International Response to the Two Systems Differs

Despite both being citizenship-based taxation systems, the international response to the US CBT and the Eritrean diaspora tax is fundamentally different — and understanding why illuminates the political economy around citizenship-based taxation.

Scale. The US CBT affects an estimated nine million Americans living abroad. The Eritrean diaspora tax affects a much smaller population. The sheer scale of the US expatriate population creates enormous lobbying pressure from advocacy groups (American Citizens Abroad, Democrats Abroad, etc.) and generates significant academic and policy attention. The Eritrean tax, affecting a smaller and politically less influential diaspora, receives attention primarily in the human rights context.

Enforcement mechanism. The US enforces its CBT through a comprehensive international infrastructure: FATCA (reporting by 500,000+ financial institutions), FBAR, tax treaties with savings clauses, and the worldwide reach of IRS enforcement. The Eritrean tax is enforced through more informal community-based mechanisms that, in some jurisdictions, have been characterised as coercive. The US enforcement machinery, while burdensome, operates through legal and treaty channels that other countries have negotiated. The Eritrean approach has in some cases crossed into territory that other governments consider extraterritorial overreach.

Economic relationship. The US is the world's largest economy, and the US dollar underpins global financial markets. US financial institutions, US capital markets, and US trade relationships give the US government unparalleled leverage in implementing FATCA globally. No country has effectively resisted FATCA because the cost of exclusion from US financial markets would be too great. Eritrea has no comparable leverage.

Political capital. A country with the international standing of the United States can implement CBT without facing meaningful diplomatic pushback from allies. Eritrea faces significant international censure on multiple grounds; its diaspora tax is one more item on a list of concerns.

Lessons for Citizenship Planning

The US-Eritrea comparison illustrates a fundamental principle: the tax obligations that attach to a citizenship depend not just on the rate and scope of the tax, but on the enforcement infrastructure and political power available to the imposing government.

For investors and internationally mobile individuals, the practical lesson is this:

• US citizenship imposes a uniquely burdensome worldwide tax and compliance obligation that persists wherever the individual lives and requires active and expensive management throughout its continuation.
• All other citizenships (with the partial exception of Eritrea) impose tax obligations only on the basis of where the individual actually resides, not on the basis of citizenship per se.
• Renunciation of US citizenship is the only definitive exit from US CBT (plus the LTPR rules for green card holders), subject to the exit tax.

For anyone planning a multi-passport portfolio, these distinctions are foundational. The starting point for any US person's international tax planning is the acknowledgement that the citizenship imposes obligations that residency cannot escape.

How Global Investments Can Help

Global Investments advises clients on the international tax dimensions of citizenship and residency planning, including the specific obligations that arise from US citizenship for American expatriates. We introduce clients to specialist international tax advisers — including US-qualified practitioners with expatriate expertise — and coordinate the advisory process across all relevant jurisdictions.

If you are a US citizen living or planning to live outside the United States, or if you are a non-US individual considering the acquisition of a CBI passport and want to understand the tax implications, contact our team for a confidential initial discussion.

This guide is for general educational information only. US tax law and international tax obligations are complex and subject to change. Nothing in this guide constitutes tax advice. Qualified professional advice in all relevant jurisdictions is essential.