Hidden Threat. What problems threaten European passport buyers

On Tuesday, October 16, the Organization for Economic Cooperation and Development (OECD) officially published a list of 21 jurisdictions that grant citizenship, residency or special visas for investments.

Without waiting for the recommendations of the European Commission regarding EU citizenship or residency programs for investments, the OECD, as the main fighter with tax evasion and offshore companies, was forced to admit that the effective result of its ten-year work to create a single reporting standard (CRS – Common Reporting Standard) and, finally, a real-life technical solution for automatic exchange may threaten the presence of individuals of several nationalities or residences. After all, an additional passport or residency allows the taxpayer to become a tax resident in a convenient jurisdiction solely for the purposes of bank compliance and not to pay taxes at home.

The OECD believes that it is the acquisition of citizenship or residency for investments that is the main threat to automatic exchange, since, unlike the procedures for obtaining a second passport or residence permit in the usual manner, this method takes much less time.

The question of the speed and ease of obtaining citizenship or residency for investment is, of course, debatable, since in some cases the state, when naturalizing or obtaining a residence permit in the usual manner, may make more modest demands. What can we say about “awarding” citizenship in a special manner to outstanding individuals whose earnings or welfare may be much higher than those who wish to acquire citizenship or residency under an investment program?

When a foreign passport is appropriate

The OECD recognizes that most often the interested persons pursue legitimate goals, for example, someone wants to start a business in a new state of their permanent residence, someone to expand their capabilities for visa-free travel, to provide the best education to their children. Finally, many want to move to a country with political stability.

Thus, if the person concerned really moves after permanently obtaining citizenship or residency for permanent residence in the state of its issuance, losing, for example, the tax residence of Russia, then, in that case, there is no question of any abuse of speech.

Many will ask the question: is there any obligation to notify the competent authorities about the loss of the status of a Russian tax residency? The answer is no. But it is better to withdraw from the permanent registration at the place of residence in the local unit of the competent internal affairs authority, which will automatically transfer the information to the tax inspectorate in order to remove the departed person from tax accounting.

In a more interesting position are people who obtain the citizenship of an EU member state, allowing them to freely live, work or conduct other economic activities in any country of the European Union. In this case, the situation for banks in terms of determining tax residency becomes more complex, and it is required to track where exactly this person lives.

Some states may indicate in their passports the place of permanent residence, but this does not always correspond to the real state of affairs due to the lack of physical borders within the EU.

Claims in essence

The OECD explicitly states that the main type of abuse of interested parties by their new citizenship or residency is issuing it for a single place of permanent residence, excluding another tax residency, usually in high tax jurisdictions, where they can also live a long time sufficient for them to be recognized by taxpayers with all the ensuing consequences.

The fact is that, according to CRS, in order to reveal the country of tax residence of a client of a bank (or other financial institution) to automatically transfer information about such a client to it, the applicant himself must honestly inform the bank in the form of self-certification whose taxpayer he is.

Thus, providing the new bank with a new passport, a new certificate or certificate of residency, the client, according to the OECD, may mislead the financial institution as to exactly where he should send the tax information he has.

Of particular concern to the OECD are states and jurisdictions that provide interested parties with the opportunity to pay personal income tax or personal income tax at a rate below 10%. For example, in Monaco and the UAE, there is no income tax for individuals at all. There are also claims to states that do not require to remain in their territory for at least 90 days in a calendar year to obtain the status of a local tax resident. A similar regime exists in Cyprus for persons who are 60 days in the calendar year on the island but not staying anywhere else in a particular country for more than 183 days.

How to solve the problem

Most banks already now assess their clients with the presence of permanent addresses, including the legal basis for their identification, as well as the presence of local telephone numbers of the country that the client indicated as tax jurisdiction.

Banks can also take into account the place where a significant number of transactions are performed by their customers, their frequency and the location of the counterparty. Data on actual water or electricity consumption, utility bills may be suitable for assessing the reality of a particular person in a particular place, and in some states, it may be public video tracking devices, such as this is possible in Monaco.

The OECD recommends that banks, in the presence of reasonable suspicion, ask four simple questions:

– Has the client of the bank received citizenship or residency for investments?

– Does the client have the right to reside in other states?

– Did the client live more than 90 days in another country in the previous year?

– in which jurisdiction did the client submit his tax return in the previous year?

In this regard, it is worth noting that, as a rule, people interested in acquiring citizenship for investments seek to achieve legitimate goals, therefore recommendations, of course, can be adopted by a number of banks, primarily in Switzerland.

It is known that, on the advice of a number of well-known Russian lawyers, many foreign banks even check the stamps on the entry and exit from the territory of Russia from Russian citizens in order to calculate their risks for the purposes of automatic exchange. Moreover, the practice includes a request for the provision of previously filed tax returns from individuals.