Avoidance of the use of citizenship by investment (CBI) and residency to prevent AEOI (automatic exchange of financial account information) circumstances
The Concern of the Day
On 19 February 2018, the OECD released a consultation document “Preventing abuse of residence by investment schemes to circumvent the CRS”, explaining how citizenship schemes offered by countries can be abused to avoid the automatic exchange of bank account information enlisted by Common Reporting Standard (the CRS).
How does this work? The CRS requires banks and other financial institutions to determine the “Permanent Residence Address” of their account holders by mandatory Self-Certification procedure, so their financial account information from the foreign bank (Reporting Financial Institution) of the Reporting Country from the MLI list will be sent to the Participating Country (where the account holder indicatively resides) so that fiscal authorities can verify that the individual, who has self-certified its foreign bank account, will pay relevant taxes in the country of indicated (self-certified) residence.
Citizenship by investment (CBI) schemes can be abused for this precise purpose, as an individual (account holder in its foreign bank) might acquire one or more of available CBIs in exchange for monetary deposit and will not to migrate to such country of its new citizenship, but only to declare its foreign banks about indicative citizenship.
As an abstract illustration, various citizenships offered by countries who are not participating in the CRS or who have chosen by voluntary secrecy (to send but not to retrieve financial account information under the CRS), comply the highest risk because an individual who is (determined by the Reporting Financial Institution) citizen on one of these countries becomes non-reportable.
Using the U.S. residency scheme to avoid CRS reporting is unlikely because anyone holding a green card would be considered reportable under the U.S. FATCA framework (the U.S.A.’s similar program to the CRS). This doesn’t mean that the U.S.A. poses no risks for avoiding the CRS.
While the U.S. residency scheme is unlikely to be used to avoid the CRS, given that the U.S.A. is not a participating jurisdiction, U.S. banks will not exchange any information pursuant to the CRS. The U.S.A. may still exchange information about non-resident account holders if it has a FATCA-based inter-governmental agreement with the country where the account holder is resident. Since the U.S.A. will not send information to other countries at the beneficial ownership level, any individual could avoid being reported both under the CRS and under FATCA if such beneficiary holds accounts in U.S. banks via its registered entity.
In other words, the U.S.A.’s FATCA represents a major risk to the CRS initiative because of its denial to serve the CRS initiatives or to participate with the internationally recognizable exchange as much information as it receives from them under FATCA-based agreements.
Disclaimer and Important Information
This article is intended to provide a general level overview of tax residency for individuals and should not be used solely to determine or prioterize your tax residency status. Your country(s) of tax residency is based on your own personal circumstances. If after reading this article and accompanying pages of the A&P web-site(s) you are unsure of your tax residency status please contact a professional tax advisor as A&P cannot provide tax advice. You can also find lots more information on how to determine tax residency on the OECD website by using the following link to OECD "Tax | CRS Implementation and assistance | Tax Residency"
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