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Facebook Co-Founder Ditches U.S. Citizenship -- & Tax Burden -- Right Before IPO

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Ditching your citizenship right before an IPO is “a very smart idea,” from a tax standpoint.

Just in time for Facebook’s initial public offering (IPO), which values the company at approximately $96 billion, billionaire co-founder Eduardo Saverin had decided that he doesn’t want to be an American citizen anymore.

This will significantly reduce his tax bill.

“Facebook plans to raise as much as $11.8 billion through the IPO, the biggest in history for an Internet company,” Bloomberg reports.

Eduardo Saverin

“Saverin’s stake is about 4 percent, according to the website Who Owns Facebook. At the high end of the IPO valuation, that would be worth about $3.84 billion,” the report adds.

However, Saverin's decision to drop his citizenship isn’t exactly groundbreaking. He’s just one of a growing number of citizens who have renounced their citizenship in what some experts think is an effort to trim the fat off their tax burden.

According to recently published IRS documents, Saverin’s name is on a list of people who have opted to drop their citizenship as of April 30. Saverin renounced his U.S. citizenship “around September” of last year, according to his spokesman.

“Renouncing citizenship is an option chosen by increasing numbers of Americans. A record 1,780 gave up their U.S. passports last year compared with 235 in 2008,” Bloomberg reports.

“Income tax rates for top U.S. earners will rise to 39.6 percent from 35 percent next year, and rates on capital gains and dividends also are scheduled to rise unless Congress blocks the increases,” the report adds.

While Singapore has no capital gains tax, the country does tax personal income as well as “certain foreign- sourced income.”

Saverin will also have to pay an an “exit tax” when his citizenship ends.

“Americans who give up their citizenship owe what is effectively an exit tax on the capital gains from their stock holdings, even if they don’t sell the shares,” said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan’s law school.

Ditching your citizenship right before an IPO is “a very smart idea,” from a tax standpoint, Avi-Yonah told Bloomberg. “Once it’s public you can’t fool around with the value.”

Saverin’s spokesman is assuring people that his client has long been invested in Asia.

“[Saverin] recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time,” said Tom Goodman, a spokesman for Saverin, in an e-mailed statement to Bloomberg.

However, some experts are convinced Saverin decided to renounce his citizenship because a) he stands to make a massive chunk of change from Facebook’s IPO and b) he’d like to hold on to as much of it as possible.

“It’s a loss for the U.S. to have many well-educated people who actually have a great deal of affection for America make that choice,” said Richard Weisman, an attorney at Baker & McKenzie in Hong Kong. “The tax cost, complexity and the traps for the unwary are among the considerations.”

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