OECD warns citizenship by investment programs used to circumvent taxes

The Organization for Economic Cooperation and Development has issued a consultation document that warned of the potential abuse of “residence by investment” or “citizenship by investment” schemes. These schemes allow foreign individuals to obtain citizenship or temporary or permanent residence rights in exchange for local investments or against a flat fee.

While investors may be interested in these for legitimate reasons, including greater mobility because of visa-free travel, better education and job opportunities for children, or the right to live in a country with political stability, there is the potential for misuse, the Paris-based organization said.

An OECD disclosure facility that enables the public to share arrangements designed to avoid tax reporting under the common reporting standards produced information indicating that RBI and CBI schemes are used to circumvent CRS reporting.

The now-issued consultation document assesses how the schemes are used to avoid reporting. It identifies the types of schemes that present a high risk of abuse and it reminds stakeholders of correctly applying CRS due diligence procedures to prevent the abuse.

While the schemes generally do not offer a solution to escape the legal scope of CRS reporting, because they do not provide tax residence or affect tax residence in another country, they can potentially be exploited to undermine the CRS due diligence procedures, the document noted.

This scenario could arise, for example, if an individual does not live in the relevant jurisdictions but claims to be a resident there for tax purposes and supports the claim by providing his financial institution with documents such as a certificate of residence, passport or utility bills.

The schemes that are most susceptible, according to the paper, are those in low or no tax jurisdictions and those that do not impose or only have limited requirements to be physically present in the jurisdiction.

The OECD is seeking public input to obtain further evidence on the misuse of CBI/RBI schemes and on effective ways for preventing such abuse.

The consultation closes on March 19. The responses will be taken into account in determining the next steps that will be taken, the OECD said.

Countries with well-established citizenship-by-investment programs include Antigua and Barbuda, Dominica, St. Kitts and Nevis in the Caribbean, as well as Cyprus, Malta, the U.K., and the U.S. among others.