Cross-border marriages can trigger complex U.S. tax issues especially under community property laws of foreign countries, including FBAR and FATCA filings. Understanding the foreign country laws and early careful planning with U.S. and foreign counsel is essential to prevent harsh U.S. tax results.
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When love crosses borders, tax complexity often follows. I know this from first-hand experience having married a Swiss national almost 4 decades ago. When U.S. citizens marry foreign nationals who are not U.S. tax residents a host of U.S. tax rules can upend marital bliss by causing tax compliance complexities that are often difficult to resolve. Foreign spouses, international community property regimes and the U.S. tax laws make for a very complicated married life.
Community property laws are one of the most overlooked areas causing the dual national couple to enter a confusing and stressful labyrinth of tax rules. Most Americans associate community property with U.S. states such as California, Washington or Texas. Community property rules also operate in many foreign countries, predominantly those following civil law systems.
In these countries (for example, China, Switzerland, Mexico, France, Spain, and various Latin American countries) spousal co-ownership of assets that have been acquired during the marriage is generally presumed, although each country has its own special rules. For couples in these jurisdictions, the consequences can come as a surprise, especially when one spouse is a U.S. person and the other a nonresident alien.
Community Property, International Mobility And Serious U.S. Tax Complications
Whether the marital property regime of a foreign country will apply to a married couple often depends on the couple’s first common habitual residence after they are married, and not the jurisdiction where the wedding took place. If the country of the couple’s first common residence after marriage applies community property rules, those may govern the treatment of assets even after the couple later moves to another country.
International mobility is far more common today and it can complicate legal and tax matters. When the couple moves from a separate property jurisdiction to a country that follows community property rules, it doesn’t automatically subject the couple to the new country’s regime. Most civil law jurisdictions continue to apply the original property regime unless the couple formally opts into the new system or satisfies long-term residency requirements.
This so-called “immutability principle,” means the original regime continues to govern the couple’s property rights despite moving to another country. While the original regime generally controls, the couple can often transform the regime by formally opting to change it (typically accomplished through a notarial act and court filing), or by establishing a sufficient connection or long-term residence in the new jurisdiction that triggers an exception. The immutability principle helps create legal certainty in such international situations. However, for the mixed-nationality couple, it can lead to unexpected and disastrous tax outcomes years later when U.S. tax rules look to local law to determine property ownership.
Community Property: FBAR, FATCA And Other Tax Complications
A U.S. person must file FinCEN Form 114 (commonly known as the FBAR) annually if they have a financial interest in or signature authority over foreign financial accounts that in the aggregate total more than $10,000 at any time during the calendar year.
In a mixed-nationality marriage, community property laws may deem the U.S. spouse to own half of their NRA spouse’s assets acquired during marriage, including foreign financial accounts. This is so regardless that the accounts are titled solely in the name of the NRA spouse. For example, if Carina (a Swiss NRA) and William (a U.S. citizen) are married, living in Lucerne, Switzerland and holding assets under a Swiss community property regime, William would be considered to have a financial interest in Carina’s accounts. If the aggregated accounts exceeded $10,000 during the year, William would be required to file the FBAR listing not only the accounts in his name, but those in Carina’s name as well. The IRS has shown growing interest in scrutinizing offshore accounts, especially when ownership is clouded by local family law. Penalties for failing to file an FBAR can be steep; $10,000 for non-willful violations and the greater of $100,000 or 50% of the account balance when the violation was willful.
While the FBAR requirements can catch even the most diligent couples off guard, the ripple effects extend to other U.S. reporting obligations under the Foreign Account Tax Compliance Act. In addition to FBAR issues, William may also be required to file Form 8938 listing not only his solely titled specified foreign financial assets (such as foreign stocks, bonds, ETFs and more) but those titled solely in Carina’s name.
FATCA’s Form 8938 mandates disclosure of specified foreign financial assets exceeding certain thresholds. In a community property regime, the U.S. spouse’s reportable assets can balloon to include half of the NRA spouse’s holdings. This type of scenario is more than just a paperwork headache. It can be a potential audit trigger with cross-references of FBAR and Form 8938 filings. Discrepancies could invite deeper scrutiny, especially if the couple’s international moves have layered on multiple property regimes over time.
For high-net-worth couples, the stakes can become even higher. Community property can inadvertently cause a foreign company to be treated as passive foreign investment company or controlled foreign corporation, pulling these into the U.S. spouse’s tax net and triggering complex Subpart F income inclusions or punitive PFIC default regimes. A Swiss insurance product held solely by the NRA spouse, for example, might qualify as a PFIC, forcing the U.S. spouse to report phantom income on undistributed earnings—taxed at ordinary rates up to 37%, plus interest on deferrals.
Add in the immutability principle, and the complexities multiply dramatically. For example, when assets such as real estate or art collections are treated as community assets due to the immutability principle (perhaps having been acquired by the NRA spouse decades later when the couple is living in a non-community property jurisdiction) complications arise in basis calculations and depreciation deductions.
Strategies For Mixed-Nationality Couples
Couples can prevent these pitfalls without unsettling marital harmony by proactive planning. The first step is understanding the marital property rules that will apply to them, followed by a robust prenuptial or postnuptial agreement. In many civil law countries, these instruments permit the couple to elect separate property regimes, clearly delineating ownership and shielding the U.S. spouse from unintended interests. Timing matters though. Such agreements are most effective before marriage or prior to major asset acquisitions; retroactive changes can invite IRS challenges under substance-over-form doctrines.
Beyond agreements, annual tax mapping is essential to keep track of the couple’s domicile history and asset portfolio. For mobile couples, this kind of tracking is very important. In my four decades of navigating U.S. international tax terrain, one truth stands out: Ignorance isn’t bliss. It’s expensive. By anticipating how community property regimes intersect with U.S. reporting mandates, couples can reclaim control, turning potential crises into manageable scenarios.
Stay on top of tax matters around the globe.
Reach me at vljeker@us-taxes.org
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NO ATTORNEY-CLIENT RELATIONSHIP OR LEGAL ADVICE
This communication is for general informational purposes only. It is not intended to constitute tax advice or a recommended course of action. Professional tax advice should be sought as the information here is not intended to be, and should not be, relied upon by the reader in making a decision.