OECD Warns: Residence and Citizenship by Investment Are High-Risk Due Diligence Schemes

AUTHOR: Alexander Yudovich, LL.M.
Head of Russian & CIS Desk, RECHTSANWÄLTE LENNERT PARTNERS AG

Published on April 23, 2019

Over a good cup of coffee with a Zurich banker we recently discussed whether compliance departments should be sceptical about new citizenship or residency through investment.

This question seems to bother a lot of banks, trusts, wealth managements and insurances that we work with on compliance issues for Russian clients.

We have been telling our clients to be very accurate with the residence and citizenship by the investment of their clients in our last year’s article Game over for CRS avoidance! OECD adopts tax disclosure rules for advisors.

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On 16 October 2018 OECD published a list of 21 countries that offer citizenship, residence and special visa types by way of investment.

OECD officially confirmed that such programs should be considered as a threat to automatic information exchange, also referred to as Common Reporting Standard (CRS), stating that financial Institutions need to take into account the outcome of the OECD’s analysis of high-risk CBI/RBI schemes when performing their CRS due diligence obligations.

With this announcement the OECD confirmed that is is possible for taxpayers with additional passports or residence permits to be taxed in jurisdictions with more favourable tax rules and that they provide these documents to banks’ compliance departments, sometimes without actually having legal grounds for not paying taxes in their own country of origin or in the country of their actual tax residency.

Currently, to determine the country where tax relevant information for CRS purposes must be delivered compliance authorities first of all rely on the residency data provided by clients to their financial organizations by way of self-declaration.

This approach is based on the assumption that clients are able to determine their tax residency status and will inform banks independently and honestly about the factual circumstances of their residence, their families’ residence, etc.

As discussed over the coffee and confirmed by the Zurich banker mostly clients do not deliver full information on their and their families’ place of residence.

In showing his or her new passport, new residency permit or tax residence certificate to the bank, a client may even unintentionally mislead the financial organisation as to his or her actual place of tax residency.

As in the case of one of this banker’s clients, who fervently insisted that he had obtained Cypriot tax residency. When the compliance department asked for a confirmation, it turned out that he had not spent enough time there this year to obtain tax residency in Cyprus.

OECD Warns: Residence and Citizenship by Investment Are High-Risk Due Diligence Schemes

AUTHOR: Alexander Yudovich, LL.M.
Head of Russian & CIS Desk, RECHTSANWÄLTE LENNERT PARTNERS AG

Published on April 23, 2019

Over a good cup of coffee with a Zurich banker we recently discussed whether compliance departments should be sceptical about new citizenship or residency through investment.

This question seems to bother a lot of banks, trusts, wealth managements and insurances that we work with on compliance issues for Russian clients.

We have been telling our clients to be very accurate with the residence and citizenship by the investment of their clients in our last year’s article Game over for CRS avoidance! OECD adopts tax disclosure rules for advisors.

→ More information

On 16 October 2018 OECD published a list of 21 countries that offer citizenship, residence and special visa types by way of investment.

OECD officially confirmed that such programs should be considered as a threat to automatic information exchange, also referred to as Common Reporting Standard (CRS), stating that financial Institutions need to take into account the outcome of the OECD’s analysis of high-risk CBI/RBI schemes when performing their CRS due diligence obligations.

With this announcement the OECD confirmed that is is possible for taxpayers with additional passports or residence permits to be taxed in jurisdictions with more favourable tax rules and that they provide these documents to banks’ compliance departments, sometimes without actually having legal grounds for not paying taxes in their own country of origin or in the country of their actual tax residency.

Currently, to determine the country where tax relevant information for CRS purposes must be delivered compliance authorities first of all rely on the residency data provided by clients to their financial organizations by way of self-declaration.

This approach is based on the assumption that clients are able to determine their tax residency status and will inform banks independently and honestly about the factual circumstances of their residence, their families’ residence, etc.

As discussed over the coffee and confirmed by the Zurich banker mostly clients do not deliver full information on their and their families’ place of residence.

In showing his or her new passport, new residency permit or tax residence certificate to the bank, a client may even unintentionally mislead the financial organisation as to his or her actual place of tax residency.

As in the case of one of this banker’s clients, who fervently insisted that he had obtained Cypriot tax residency. When the compliance department asked for a confirmation, it turned out that he had not spent enough time there this year to obtain tax residency in Cyprus.

To qualify as a tax resident in Cyprus, one must spend 60 days in a calendar year on the island, but must not spend more than 183 days in any one other country.

To check a client’s actual tax residency banks should ask him or her for the following information and documents (practice of bank’s compliance departments):

  1. where and for how long he or she has lived during the year and what are the legal grounds for residency,
  2. local phone numbers,
  3. which is the place where most transactions are executed,
  4. statements of bank cards transactions,
  5. electricity and other utility bills,
  6. copy of all passport pages containing stamps of entry into and exit from the territory of the Russian Federation.

 

 

OECD recommends that in case of reasonable suspicion banks should ask clients to provide the following information and documents confirming:

  1. Whether or not the client received citizenship or a residence permit by investment?
  2. Whether or not the client has a right to live in other countries (other passports and residency permits)?
  3. Whether or not the client spent over 90 days in another country / other countries than the country of citizenship or residency permit by an investment during the previous year?
  4. In which countries the client submitted his tax declaration in the previous year?

 

When checking these questions, compliance should know that if the client lost tax residency in the Russian Federation or ceased to be a Russian tax resident, this can hardly be considered an abuse of the above schemes to circumvent reporting under the CRS.

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