A founder in Austin or Seattle who starts looking seriously at Europe tends to raise the questions in a fixed order. Where should the shares sit. What does the effective rate look like once dividends move. The American tax question comes last, and it usually comes framed the wrong way, as though boarding a plane were the taxable event.
It is not. Nothing in the expatriation regime is triggered by moving. What triggers it is losing the status, and that distinction decides whether the charge arises at all, on what date, and, in one case that surprises people more than any other, whether it arises without anyone handing back a document.
Citizenship is the connecting factor, not residence
The United States taxes its citizens on worldwide income wherever they live. An American who relocates to Lisbon, Amsterdam or Milan remains a United States taxpayer, files the same returns, and reports the same foreign accounts. The move changes the credit and treaty analysis; it severs nothing.
Because the connecting factor is status rather than presence, the exit charge cannot be a departure tax in the ordinary sense. The charge in section 877A of the Internal Revenue Code arises on expatriation, which the statute defines as the renunciation of citizenship or, for a long-term resident, the loss of lawful permanent resident status. The current regime applies to individuals who expatriated on or after 17 June 2008.
Commentary calls this an exit tax and gives the Canadian departure charge the same name, but the mechanisms differ. Canada charges on a change of residence; the United States charges on the end of a legal relationship that absence does not end.
The date the charge attaches, and the day before it
The regime runs on two dates. Section 877A(g)(3) fixes the expatriation date. The deemed sale of worldwide assets under the mark to market rule is measured at fair market value on the day before it, which matters when value is moving quickly around a funding round or a sale.
For a citizen, section 877A(g)(4) fixes the renunciation date as the earliest of four events: renunciation before a diplomatic or consular officer under section 349(a)(5) of the Immigration and Nationality Act; delivery to the Department of State of a signed statement of voluntary relinquishment confirming an expatriating act under paragraphs (1) to (4) of section 349(a); issue of a Certificate of Loss of Nationality by the Department of State; and cancellation by a United States court of a naturalized citizen’s certificate of naturalization.
The first two are conditional, and the condition is easy to miss. The consular act fixes the date only if the Certificate of Loss of Nationality is in fact issued afterwards. Until the Department of State approves, there is no expatriation date to work back from, and the day before it cannot be identified either.
The three tests that make an expatriate a covered expatriate
Expatriating does not by itself produce a tax bill. The mark to market charge falls on a covered expatriate, and an expatriate becomes one by meeting any one of three tests set out in section 877A(g)(1)(A) by reference to section 877(a)(2).
The first is the tax liability test. It looks at average annual net income tax for the five taxable years ending before the expatriation date, and it is indexed. For calendar year 2026 the figure fixed by Revenue Procedure 2025-32 is more than USD 211,000. It is the number most commonly misquoted: the summary page the Internal Revenue Service maintains on expatriation still ends its published series at the 2025 amount, so the current figure has to be taken from the Revenue Procedure itself.
The second is the net worth test, and it is the one founders trip over. Net worth of USD 2,000,000 or more on the expatriation date is enough. That threshold is statutory and it is not indexed: it has stood at the same amount since 2008, and Revenue Procedure 2025-32, which adjusts the income test, leaves it untouched. Anyone quoting an inflation adjusted version of it is inventing a number. A single priced round on paper can clear it.
The third is the certification test. Failure to certify under penalty of perjury on Form 8854 that all federal tax obligations for the five preceding years have been met makes the individual covered regardless of the other two.
Two narrow exceptions in section 877A(g)(1)(B) disapply the income and net worth tests. One covers a dual national from birth who remains a citizen and tax resident of the other country on the expatriation date and has been resident in the United States for no more than 10 of the 15 taxable years ending with the year of expatriation. The other covers renunciation before the age of eighteen and a half, where United States residence has not exceeded 10 taxable years. The certification test continues to apply in both cases.
The exclusion, and how little of it survives allocation
A covered expatriate reduces the gain deemed realized under the mark to market rule by an exclusion amount. For taxable years beginning in 2026 that amount is USD 910,000. The income threshold, by contrast, is set by calendar year. Revenue Procedure 2025-32 uses both formulations deliberately and they are not interchangeable.
The exclusion is not applied to the largest position first. Under Notice 2009-85 it is allocated pro rata over every asset carrying built in gain within the mark to market regime, in proportion to each asset’s unrealized gain, and the portion allocated to any asset cannot exceed that asset’s gain. On a balance sheet dominated by founder shares, the practical relief is small.
It is also a single lifetime allowance, available only once and in the unused remainder thereafter, and it applies whether or not the deferral election is made.
The green card that was never handed back
The long-term resident case is where the regime does something people do not expect. A long-term resident is someone who has been a lawful permanent resident for at least 8 taxable years within the 15 year period ending with the year that includes the expatriation date. Green card holders reach that mark quietly.
Loss of that status is defined in section 7701(b)(6). It happens when permanent resident status is revoked or administratively or judicially determined to have been abandoned. It also happens on a cumulative test with nothing migratory about it: the individual begins to be treated as a resident of a foreign country under a double tax treaty with the United States, does not waive the treaty benefits available to residents of that country, and notifies the Internal Revenue Service on Forms 8833 and 8854.
Read that sequence again. A long-term green card holder who moves to the Netherlands, becomes Dutch tax resident, claims the treaty tie-breaker and reports it as required has expatriated for section 877A purposes. The card is still in the drawer. The trigger was a filing position, not a surrendered document, and that is the most consequential point in the regime for people who never held a United States passport.
Pensions, deferred compensation and trusts sit outside the deemed sale
Three categories are carved out of the mark to market charge by section 877A(c) and given their own treatment: deferred compensation items, specified tax deferred accounts, and interests in a nongrantor trust of which the covered expatriate was a beneficiary on the day before expatriation. Where grantor trust rules treat the individual as owner of part of a trust, those assets do come back into the deemed sale.
Deferred compensation splits in two. An eligible item requires a United States payer, or a foreign payer electing to be treated as one, plus notification to the payer and an irrevocable waiver of any treaty right to a reduced withholding rate. The payer then withholds 30 per cent of each taxable payment, and the waiver means that rate cannot be reduced by treaty. Nothing is taxed on expatriation. An ineligible item is treated as received at the present value of the accrued benefit on the day before expatriation, which for a defined contribution plan is the account balance, and no early distribution tax is imposed. Form W-8CE has to reach the payer by the earlier of the day before the first payment after expatriation or 30 days after the expatriation date, and the payer then has 60 days to report the value.
Specified tax deferred accounts are treated as fully distributed on the day before expatriation, again without early distribution tax. Distributions from a nongrantor trust carry 30 per cent withholding on the taxable portion, and the trust recognizes gain on appreciated property distributed.
Deferral is available, and it is not free
A covered expatriate may make an irrevocable election under section 877A(b) to defer payment of the tax attributable to an asset deemed sold. It is made asset by asset, so a founder can defer on illiquid shares while paying on liquid positions.
The conditions are demanding. Adequate security is required: a bond accepted by the Secretary and meeting the requirements of section 6325, or another form of security including a letter of credit. The individual must irrevocably waive, on Form 8854, any treaty right that would block assessment or collection of tax under section 877A, must sign a tax deferral agreement with the Internal Revenue Service, and must appoint a United States agent. If the security later ceases to be adequate, the deferred tax and interest fall due immediately unless cured within 30 days of notice.
Interest runs throughout. Section 877A(b)(7) provides that the last date for payment is determined without regard to the election, so interest accrues at the underpayment rate under section 6621 from the unextended due date of the return for the year including the day before expatriation, compounded daily under section 6622 until payment. Deferral ends on the earlier of the due date for the year the asset is disposed of, by sale, gift, non recognition transaction or otherwise, and the year of death. Separately, failure to file Form 8854 when required can attract a penalty of USD 10,000 under section 6039G.
The European structure is decided before the date, not after
Everything in this regime keys off a single day and a status that ends on it. Once the Certificate of Loss of Nationality issues, or the treaty position is filed, the valuation date is fixed and the planning window has closed.
That is why the European side of the move has to be built first. Where the holding sits, whether the operating company has been reorganized, whether a treaty tie-breaker is being claimed and what it triggers on the American side: these are choices with a deadline, and the deadline is the expatriation date rather than the arrival date. Sequenced the other way, the result is a European structure that is perfectly sound and an American charge that was avoidable in shape if not in principle. The work belongs before the passport is handed over, and for the green card holder before the first Dutch return is filed.