Automatic exchange and citizenship by investment programs

Automatic exchange and citizenship by investment programs

16 October 2018 the Organisation of Economic Co-operation and Development (OECD) has published a list of jurisdictions that provide citizenship, residence and special types visas to foreign individuals by investment in its economy, that potentially may be used for avoidance of automatic exchange of information about financial accounts of taxpayers (automatic exchange) at OECD’s opinion.

Obtaining of citizenship or residence by investment (CBI/RBI) of any jurisdiction selected by an individual may be done deliberately only for prevention of transfer of tax information to the authorities of the jurisdiction of this individual’s actual tax residency in the framework of automatic exchange.

Also, the procedure and timeframe of obtaining citizenship or residence under CBI/RBI programs in the majority of countries are simplified in comparison with standard ones, especially in regard of required minimal period of physical presence of the individual in the territory of such country.

Nevertheless, OECD presumes the goodwill of individuals participating in CBI/RBI programs and states that they may primarily pursue legitimate aims like conducting business in a new country, increase of mobility due to visa-free regimes that the new passport enables, better education and job opportunities for children, or the right to live in a country with political stability.

However, the abuse of CBI/RBI programs may take place in practice. In accordance with Common Reporting Standard (CRS) banks and other financial institutions (FIs) must be aware of jurisdiction in which their clients are tax residents. Usually banks and FIs use the information provided by the clients themselves, so that the client who obtained citizenship or residence under CBI/RBI program may inform that it is the country of tax residency, even not being tax resident in this country de facto.

In the same manner, the client who is tax resident in several countries simultaneously may provide to FI the information about only one such country by presenting documentary evidence (passport, other ID document, certificate of residence or visa obtained by participating in CBI/RBI program) for avoiding or minimization of possibility that the information about client’s financial account will be exchanged automatically under CRS.

OECD marks some jurisdictions that represent high risk of avoidance of automatic exchange among all jurisdictions that developed and applied CBI/RBI programs. Jurisdictions of high risk are those that establish personal income tax rate of less than 10 % and do not require physical presence of an individual in its territory for at least 90 days.

OECD supposes that such jurisdictions have the most favorable environment for automatic exchange avoidance: any individual can invest in economy of the jurisdiction (e.g. by acquiring real estate), obtain the permanent residence certificate while living in the territory of this jurisdiction for a short period of time, and paying few taxes for real estate than in his actual tax residency jurisdiction. In such case this individual will be able to submit permanent residency certificate to his bank as an evidence of his tax residency. As a result, the authorities of the country of actual tax residency will not receive the information about mentioned individual’s account via automatic exchange mechanism.

In accordance with Section VII of CRS banks and other FIs are entitled not to take into account the information provided by their clients if there are some sufficient grounds to deem that self-certification (forms, questionnaires) or documentary evidence (passport, ID cards, certificates, other) of client are incorrect or unreliable.

Currently the definition of “sufficient grounds” to suspect that the client provided unreliable information about his citizenship or residency is not detailed. OECD states that FIs must analyze all relevant information, including the results of OECD’s risk analysis (personal income tax rate less than 10 % and less than 90 days of physical presence required to be a citizen or a resident of country), before making a decision of correctness and reliability of such information.

If the results of analysis of all relevant information lead the bank or other FI to conclusion that the information about citizenship or residency of the client is not correct or reliable, then such FI must find out what is the tax residency of account holder or its controlling person in fact for automatic exchange purposes.

OECD has developed several preventive measures that allow FIs to detect whether the client is not actually a tax resident of country in which he obtained CBI/RBI.

Such measures are 4 simple questions that can be asked by the FIs and client’s answers will help FI to make necessary conclusions:

  1. Did the client obtain residence rights under CBI/RBI program?
  2. Does the client hold residence rights in any other jurisdictions?
  3. Has client spent more than 90 days in any other jurisdictions during the previous year?
  4. In which jurisdictions has the client filed personal income tax returns during the previous year?

OECD has analyzed 100 jurisdictions that run CBI/RBI programs and has designed a list of high risk jurisdictions which programs may be used to circumvent automatic exchange:

Antigua and Barbuda Panama
Bahamas Qatar
Bahrain Saint Kitts and Nevis
Barbados Saint Lucia
Cyprus Seychelles
Dominica Turks and Caicos Islands
Grenada United Arab Emirates
Malaysia Vanuatu

Thus, all individuals who are clients of FIs (primarily banks) of states participating in the CRS automatic exchange must take into account that such FIs may ask additional questions, request additional documents and examine them, as well as apply enhanced procedures for citizens and residents of jurisdictions from high risk CBI/RBI programs list.

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