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We are a family (two sons 7 & 9) from Germany and want to visit my wife's family in Boston next summer. My wife was born in Iran and, as an infant, moved to Germany with her parents. At the age of 12, she became a German citizen with her own German passport. Before that, she didn't have her own passport but was included in her mother's passport.

During the ESTA process, there are important questions:

Have you ever been issued a passport or national identity card for travel by any other country?

I said NO.

Are you now, a citizen or national of any other country?

I said NO.

Have you ever been a citizen or national of any other country?

I said YES: Iran. Country of birth? IRAN

Her ESTA was approved!

However, I'm not clear whether she still needs a tourist visa because she was born in Iran and Iranian law says once an Iranian, always an Iranian citizen.

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    Worst case she would be double citizen (Iranian and German), and any rules for Germans apply to her, meaning she can enter the US according to the rules for Germans. There might be some questions, but if she became German with 12, they should understand that. Note that there is never a guarantee for being allowed to enter the US, for anybody except US citizens, but I think there will be no issues. – Aganju Dec 16 '16 at 13:32
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    @Aganju I think you are missing these new rules: state.gov/r/pa/prs/ps/2016/01/251577.htm – CMaster Dec 16 '16 at 15:22
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    Under US law one has a right of expatriation (from anywhere), so current nationality is determined from the actions and intent of the individual rather than by the laws of other countries. If your wife says she is no longer Iranian and has done nothing (obtain documents, travel as an Iranian) inconsistent with that then the US is extremely unlikely to dispute the assertion. – Dennis Dec 16 '16 at 17:49
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An ESTA is part of the VWP (Visa Waiver Program). With a valid ESTA a visa is not required for visits that comply with VWP requirements, as visiting family does.

whether she still needs a tourist visa because she was born in Iran and Iranian law says once an Iranian, always an Iranian citizen

If USA saw your wife as Iranian they would not have issued her the ESTA. Because USA see her as German, and she has an ESTA, she does not need a visa, though as mentioned in a Comment by @Aganju, entry is determined by CBP at the point where entry is sought and, though largely theoretical, it might be refused, ESTA or visa not withstanding.

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    I have read, but I do not now have time to locate, a US government statement that they will not rely strictly on Iranian law to determine whether someone is a dual citizen of Iran. On the one hand, this is preposterous, because the only thing that actually controls whether one is a citizen of Iran is Iranian law. On the other hand, it seems that this policy is specifically designed for people like tyson's wife. – phoog Dec 16 '16 at 17:19
  • Your concept of "seeing" a person as one nationality or another doesn't really make sense. All nationalities of a person are considered. Iran, Iraq, Syria, Sudan, etc. are all not part of the Visa Waiver Program. For someone to apply for an ESTA they are obviously qualifying based on some other nationality. Yet US law specifically says that nationals of Iran, Iraq, Syria, Sudan, etc. are not eligible for VWP, meaning it is specifically targeted at dual nationals. You can't just choose to consider one nationality and not the other. – user102008 Dec 16 '16 at 23:58
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    @user102008 the US has apparently chosen to "see" people as they "see" themselves with respect to Iranian nationality, at least in the general case. Surely there's some highly placed official who both knows that Iranian nationality law doesn't permit Iranians to lose their nationality and who is okay with the ESTA system accepting travelers who state that they are former Iranian citizens. Whether this situation will last very long is of course another matter. – phoog Dec 17 '16 at 1:12
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Your wife holds German Citizenship, and as such can apply for an ESTA. You've done this (well done for answering the questions truthfully) and it's been approved (as it should be).

German law does not usually allow dual citizenship (except for EU/EEA nationals, and Iran is not in Europe). https://en.wikipedia.org/wiki/German_nationality_law#Dual_citizenship

I'd prepose that your wife gave up any claim for Iranian citizenship when 12 and took German citizenship.

Iranian law says once an Iranian, always an Iranian citizen.

Iranian Law does not supercede International law, including UDHR Article 15 - the right to change citizenship. At least from an US perspective, which is what counts in this context.

The ESTA is sufficient, as your wife is a German citizen.

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This is tricky, as shown by the discussions in the comments.

The question is: which law do the US consider here. And I would say it is a safe bet to say that the "once Iranian always Iranian" law would not be seen as valid by the US IO, since there is no corresponding paperwork. As far as I can see from your description, your wife does not have a dual citizenship. This is the most important question here, since dual citizenship with Iran as one of the two requires a visa. Although I'm sure they'd need some sort of proof of citizenship.

It is another question whether the US consider being part of her mother's passport as having been issued a travel document by Iran, but I'm sure they wouldn't check this far back.

A last caveat: ESTA only means approved to travel to, not necessarily approved to enter the US. I've personally never had this issue, but my former citizenship is from an ex-Soviet country, so it's probably not a hot issue right now when compared to Iran. One never knows, so be prepared, just in case.

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