The Lack of Connection Between ‘Tax Residency’ and ‘RBI/CBI’ Programs
In early 2018, the OECD raised concerns about whether Residence by Investment (RBI)/Citizenship by Investment (CBI) programs are being used to circumvent the goals of the Common Reporting Standard. In other words: Do RBI/CBI programs somehow allow people to improperly escape or obfuscate identifying their country or countries of ‘tax residency’?
This OECD concern has been the subject of much commentary, including this recent discussion at ‘Tax Linked’ which includes:
In addition to these sets of rules, the OECD is also currently working on an initiative to handle the use of ‘golden’ visas, residency by investment (RBI) schemes and citizenship by investment (CBI) programs to avoid reporting under its Common Reporting Standard project.
Back in February, the OECD issued a month-long consultation that ‘(1) assesses how these schemes are used in an attempt to circumvent the CRS; (2) identifies the types of schemes that present a high risk of abuse; (3) reminds stakeholders of the importance of correctly applying relevant CRS due diligence procedures in order to help prevent such abuse; and (4) explains next steps the OECD will undertake to further address the issue, assisted by public input.’
The OECD concerns are reflected in the following communications from the OECD and have been expressed as follows:
How CBI and RBI schemes can be exploited to circumvent the CRS
-CBI/RBI schemes do not offer a solution for escaping the legal scope of reporting pursuant to the CRS. These schemes grant a right of citizenship of a jurisdiction or a right to reside in a jurisdiction. They generally do not provide tax residence (an overview of the tax residency rules for all jurisdictions participating in the CRS can be consulted here). Reporting under the CRS is based on tax residence, not on citizenship or the legal right to reside in a jurisdiction. Even where tax residence can be obtained through some RBI schemes, they do not by themselves affect the tax residence in the original country of residence of the individual. The CRS requires taxpayers to self-certify all their jurisdictions of residence for tax purposes.
-Nevertheless, CBI/RBI schemes can potentially be exploited to help undermine the CRS due diligence procedures. This may lead to inaccurate or incomplete reporting under the CRS, in particular when not all jurisdictions of tax residence are disclosed to the reporting Financial Institution. Such a scenario could arise where an individual does not actually reside in the relevant jurisdiction, but claims to be resident for tax purposes only in such jurisdiction and provides his Financial Institution with supporting documentary evidence (e.g. certificate of residence; ID card; passport; utility bill of second house), as illustrated by the below examples:
Later the OECD outlines the specific characteristics of the countries of concern:
High risk RBI/CBI schemes
Not all RBI/CBI schemes present a high risk of being used to circumvent the CRS. Our initial assessment is that the risk of abuse of CBI/RBI schemes is particularly high when the scheme has one or more of the following characteristics:
- The scheme imposes no or limited requirements to be physically present in the jurisdiction in question or no checks are done as to the physical presence in the jurisdiction;
- The scheme is offered by either: (i) low/no tax jurisdictions; (ii) jurisdictions exempting foreign source income; (iii) jurisdictions with a special tax regime for foreign individuals that have obtained residence through such schemes; and/or (iv) jurisdictions not receiving CRS information (either because they are not participating in the CRS, not exchanging information with a particular (set of) jurisdictions or not exchanging on a reciprocal basis); and
- The absence of other mitigating factors. Such measures could, for instance, include:
- The spontaneous exchange of information about individuals that have obtained residence/citizenship through such a CBI/RBI scheme with their original jurisdiction(s) of tax residence; or
- An indication on certificates of tax residence issued that the residence was obtained through a CBI/RBI scheme.
The comments of various stakeholders can be found here:
Citizenship by investment and circumvention of the OECD Common Reporting Standard – Is there a reason for concern?
Because ‘citizenship’ is generally unrelated to ‘tax residence’, it is unlikely that the acquisition of citizenship can (except in certain circumstances of United States citizens) sever tax residency from any country.
Residence by investment and circumvention of the OECD Common Reporting Standard – Is there a reason for concern?
Because the right to reside in a country is often not a sufficient condition for tax residency in that country, the acquisition of residence, neither creates tax residency in the new country, nor severs tax residence in the original country.
Even when RBI does make the person a tax resident of the country of investment, it will NOT sever tax residency in the original country (leading to tax residency in more than one country).
Therefore, the starting point in addressing the OECD’s concerns would be to better explain (1) what is meant by ‘tax residency’ and (2) why the information that is subject to the CRS is being sought.
In a world of global mobility: Be aware of your ‘citizenship portfolio’, your ‘residence portfolio’ and NOW your ‘tax residence portfolio’!
An individual acquiring either citizenship or residence, MUST take the appropriate steps to understand how every citizenship or every residence may or may not impact tax residence. It is the responsibility of the individual to sever tax residency from a country of previous tax residence. Severing tax residency may subject an individual to exit taxes or departure taxes.
Author: John Richardson, JD – Lawyer (Ontario, New York and Massachusetts) – CitizenshipSolutions.ca
