For US citizens in Iraq, tax compliance is complicated by the absence of a comprehensive income tax treaty or a social security totalization agreement. Double taxation is primarily managed through US domestic provisions like the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). Self-employed individuals and business owners face particularly complex rules, often resulting in tax obligations to both countries.
US filing basics every American abroad must know
US citizens and green-card holders are taxed on worldwide income wherever they live, and usually must file Form 1040 once gross income exceeds the IRS threshold ($15,750 for single filers, $31,500 for married filing jointly, and $23,625 for head of household for 2025), even when no tax is ultimately due. The tools that prevent double taxation are the Foreign Earned Income Exclusion (FEIE, up to $130,000 for 2025 under IRC §911) and the Foreign Tax Credit.
Two reporting rules catch most filers in Iraq: the FBAR (FinCEN Form 114), required when foreign financial accounts exceed $10,000 in aggregate at any point in the year, and Form 8938 (FATCA) for specified foreign assets above the applicable threshold. Both can carry penalties even when no tax is owed. If you are behind, the Streamlined Filing Compliance Procedures are the usual penalty-free path back for non-willful taxpayers.
US tax treaty with Iraq
There is no income tax treaty between the United States and Iraq. Consequently, there are no treaty-based reductions on withholding tax for dividends, interest, or royalties paid from one country to a resident of the other. All double taxation relief for US citizens relies on domestic US law, specifically the Foreign Earned Income Exclusion and the Foreign Tax Credit. The absence of a treaty also means there are no specific articles governing pensions, government service, or residency tie-breakers.
Iraqi Social Security and US Tax
Iraq's main retirement plan is its social security system, governed by the Social Security and Pension Law No. 18 of 2023. It is mandatory for most private-sector workers, including foreigners. Employee contributions are typically 5% of salary, with employers contributing 12% or more.
For US tax purposes, this system is not a 'qualified' pension plan. However, the IRS does not treat a foreign government social security system as a foreign trust, which has several significant consequences:
- Reporting: Foreign social security accounts do not need to be reported on FinCEN Form 114 (FBAR) or IRS Form 8938 (FATCA). Because it is not a foreign trust, it is also exempt from Form 3520 and 3520-A reporting.
- Contributions: Your own contributions are not deductible on your US tax return. Employer contributions to a foreign government social security system are not taxable compensation to the employee.
- Taxation of Earnings and Distributions: Internal fund growth and eventual distributions are subject to complex US tax rules, but avoid the punitive foreign non-grantor trust regime.
Investments, property, and capital gains in Iraq
Investing in Iraq requires careful US tax planning. Capital gains are generally taxed as ordinary income in Iraq (the corporate rate is 15%), and this Iraqi tax may be claimed as a Foreign Tax Credit on a US return. Any Iraqi pooled investment fund or local mutual fund is likely a Passive Foreign Investment Company (PFIC). Owning a PFIC requires annual reporting on Form 8621 and leads to a very unfavorable default tax regime unless specific, timely elections are made.
For those owning a business, an Iraqi Limited Liability Company (LLC) or other corporate form can be classified as a Controlled Foreign Corporation (CFC) if US persons who each own 10% or more collectively own more than 50% (IRC Section 957(a)). CFC ownership triggers complex reporting on Form 5471 and can cause the company's profits to be taxed to the US owner under GILTI or Subpart F rules, even if no money is distributed.
Self-employment and companies in Iraq
Self-employment in Iraq presents a significant US tax challenge due to the lack of a social security totalization agreement between the US and Iraq. A US citizen who is self-employed in Iraq is subject to US self-employment tax on their net earnings. This tax, which is 15.3% on earnings up to the annual social security wage base (with the 2.9% Medicare portion applying to all net earnings above the wage base), is due regardless of whether the income is excluded from US income tax by the Foreign Earned Income Exclusion.
Crucially, you cannot obtain a Certificate of Coverage to claim an exemption from US self-employment tax. This can result in a situation where a self-employed person is legally required to pay into both the US Social Security system (via self-employment tax) and the Iraqi social security system, with no relief for the dual contributions.
Worked examples
Salaried Engineer in Basra (2025)
A US citizen works for an engineering firm in Iraq, earning a salary of $160,000. She can use the Foreign Earned Income Exclusion (FEIE) to exclude up to $130,000 (the 2025 limit) of her salary from US income tax. Her remaining gross income is $30,000, which is further reduced by the standard deduction. (IRC Section 63) She would pay US income tax on this remaining amount at higher marginal rates due to the stacking rule. (IRC Section 911(f)) She may be able to use Foreign Tax Credits from Iraqi taxes paid to reduce or eliminate this remaining US tax.
Self-Employed Security Consultant (2025)
A US citizen works as an independent consultant in Iraq and has net earnings from self-employment of $110,000. He uses the FEIE to exclude all $110,000 from US income tax, resulting in zero US income tax. However, the FEIE does not affect self-employment tax. He must still pay US self-employment tax on his earnings. The tax is calculated as $110,000 * 0.9235 * 0.153, which equals approximately $15,543. This tax is due to the IRS even though his income tax is zero. He cannot get a Certificate of Coverage to avoid this tax.
Business Owner with an Iraqi LLC (2025)
A US citizen is the sole owner of an Iraqi LLC that provides logistical services. The company earns a profit of $250,000 and pays the 15% Iraqi corporate tax. The company pays no dividend to the owner. Because the US citizen owns 100% of the foreign corporation, it is a Controlled Foreign Corporation (CFC). The owner must file Form 5471. Under the GILTI rules, a significant portion of the company's net income could be deemed distributed to the owner and taxed as current income on his personal US tax return, even though he received no cash from the company. For example, he might have a GILTI inclusion of $150,000, which he must add to his other income and pay US tax on.
Common mistakes for Americans in Iraq
- Assuming a US-Iraq tax treaty exists, and therefore looking for non-existent treaty benefits or reduced withholding rates.
- Believing the Foreign Earned Income Exclusion (FEIE) eliminates the need to pay US self-employment tax for consultants or sole proprietors.
- Thinking a Certificate of Coverage can be obtained to avoid US self-employment tax. No US-Iraq totalization agreement exists, so this is not possible.
- Failing to file Form 5471 and report GILTI or Subpart F income if the company is a CFC. (IRC Sections 951 and 951A)
- Investing in an Iraqi mutual fund without considering the complex and punitive PFIC tax rules and Form 8621 reporting.
- Forgetting to file a US tax return just because income is below the FEIE threshold. A return is still required to claim the exclusion if total income exceeds the standard filing threshold.
Iraq tax FAQ
Is there a US-Iraq tax treaty?
No. There is no income tax treaty between the United States and Iraq. To avoid double taxation, US citizens must rely on US tax provisions like the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).
Do I have to pay US Social Security tax if I'm self-employed in Iraq?
Yes, most likely. Because there is no totalization agreement between the US and Iraq, a self-employed US citizen in Iraq is subject to the full 15.3% US self-employment tax on their net earnings from self-employment. (IRC Section 1402) You cannot get an exemption and may be required to contribute to both the US and Iraqi social security systems simultaneously.
How is my Iraqi social security pension treated for US tax purposes?
The Iraqi social security system is not considered a 'qualified' plan by the IRS. However, it is not treated as a foreign trust. This means your contributions are not deductible, but employer contributions are not taxable income to you. Furthermore, foreign social security accounts are exempt from FBAR, Form 8938, and Form 3520 reporting.
I own an Iraqi company. What are my US tax obligations?
If you are a US person who owns 10% or more of an Iraqi company, and US persons who each own 10% or more collectively own more than 50% (IRC Section 957(a)), it is a Controlled Foreign Corporation (CFC). This triggers a requirement to file the very complex Form 5471. You may also have to pay US tax on the company's profits currently under the GILTI or Subpart F rules, even if you don't receive any dividends. Professional tax advice is highly recommended.
Can I use the Foreign Earned Income Exclusion (FEIE) in Iraq?
Yes. If you meet the bona fide residence or physical presence test, you can use the FEIE to exclude your foreign earned income (like salary or self-employment income) up to the annual limit. However, the FEIE does not exclude investment income and does not reduce or eliminate US self-employment tax.
What is the difference between the FEIE and the Foreign Tax Credit (FTC)?
The FEIE excludes income from US taxation. The FTC reduces your US tax liability on a dollar-for-dollar basis for foreign income taxes you have paid or accrued. You cannot claim the FTC on income that you have already excluded with the FEIE. Choosing between them depends on your income level, the amount of Iraqi tax you pay, and other personal circumstances.
Do I need to file an FBAR if I live in Iraq?
Yes, if the total, aggregate value of all your foreign financial accounts exceeds $10,000 at any point during the year. This includes bank accounts, brokerage accounts, and often foreign pension accounts. The FBAR is filed separately from your tax return with FinCEN, not the IRS.
Are capital gains from selling property in Iraq taxable in the US?
Yes. The US taxes its citizens on their worldwide income, including capital gains. If you sell an asset in Iraq and realize a gain, it is reportable on your US tax return. Any Iraqi tax paid on that gain can generally be claimed as a Foreign Tax Credit to offset the US tax on that same gain.
Sources and last reviewed
- U.S. Department of the Treasury, Guidance for U.S. Individuals Working in Iraq (verified 2026-06-07)
- U.S. Department of State, 2025 Investment Climate Statements: Iraq (verified 2026-06-07)
- IRS, Controlled Foreign Corporations Definition (verified 2026-06-07)
Last reviewed .
Common services needed by expats in Iraq
Most Americans abroad in Iraq need help with at least one of the following core compliance areas, which frequently interact:
- US expat tax returns, Form 1040 with FEIE, FTC, treaty positions, and any required state returns.
- FBAR reporting, FinCEN Form 114 for foreign financial accounts exceeding $10,000 aggregate at any time during the year.
- Form 8938 (FATCA), IRS disclosure of specified foreign financial assets when thresholds are met.
- Streamlined catch-up filing, For eligible non-willful taxpayers with prior unfiled years.
Related country guides
- US expat tax in United Arab Emirates
- US expat tax in Saudi Arabia
- US expat tax in Qatar
- US expat tax in Kuwait
- US expat tax in Bahrain
- US expat tax in Israel