Citizenship by investment programmes 'threaten international exchange of information'

Monday, 19 February 2018
Schemes allowing foreigners to obtain residence or citizenship by investment are being misused to circumvent the rules on automatic exchange of financial information, according to the Organisation for Economic Cooperation and Development (OECD).

Such schemes are operated by several jurisdictions, usually requiring the applicant to buy a property in the country for uses as a permanent residence, and to either pay a flat fee to the government or invest significant sums in the local economy.

However, the OECD says they can 'offer a back door to money launderers and tax evaders'. It claims to have received information that citizenship or residence by investment (CBI/RBI) schemes are being used to circumvent the newly established Common Reporting Standard (CRS), under which the tax authorities of various jurisdictions routinely collect information on their tax residents' financial accounts, and pass it to their counterparts in other countries.

The OECD stresses that such schemes do not offer a legitimate way for taxpayers to avoid their financial accounts being reported under CRS. Rather, they provide a means of undermining the due diligence procedures required by CRS, leading to inaccurate or incomplete reporting, especially when not all jurisdictions of tax residence are disclosed to the reporting financial institution. This could happen, it says, where the individual taxpayer tells their bank that they are resident only in their adopted country for tax purposes. They can prove this using official documents obtained through their 'citizenship by investment', whereas in practice they live elsewhere, perhaps in several other jurisdictions.

Two examples are given of possible circumventions of CRS, of which the following is the simplest: Y, a wealthy individual resident in jurisdiction G (presumably Germany), has an account with Bank S in jurisdiction S (presumably Switzerland). Under CRS, Bank S will in 2018 start reporting Y's account information to the Swiss tax authorities, who will pass it on to the German tax authorities. To defeat this, Y applies for Swiss residence under its RBI scheme and buys a house there. He can now use his residence permit and utility bills to prove his Swiss residence, so the due diligence procedures applied by Bank S lead to the conclusion that Y is a Swiss resident, and so it need not report the account to the German authorities.

Clearly such methods are available only to the wealthy few, as such residence permits are not cheap to obtain. In any case, says the OECD, not all such schemes can be used to circumvent the CRS. It considers schemes to be open to abuse if they are offered by either low-tax or no-tax jurisdictions; or jurisdictions that exempt foreign source income or have a special tax regime for foreigners who have obtained residence through RBI or CBI; or jurisdictions that are not receiving CRS information because they are not participating in it or are not exchanging information with particular jurisdictions, or not doing it on a reciprocal basis.

The OECD has released a consultation document on the alleged problem, in order to help it prepare countermeasures. Parties are invited to comment by 19 March 2018.


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