February 2019 JD Supra
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Financial Institutions and Golden Passports was published by JD Supra on 2/27/19.

On October 16, 2018, the Organization for Economic Cooperation and Development (OECD) issued guidance to Financial Institutions (FIs) regarding what is known as “Golden Passports”.

Many Foreign Jurisdictions offer Golden Passports that can be obtained via Citizenship by Investment (CBI) and Residence by Investment (RBI). They allow foreign individuals to obtain citizenship or temporary or permanent residence rights on the basis of local investments or against a flat fee.  The OECD analyzed over one hundred CBI and RBI arrangements from Jurisdictions that are committed to the Common Reporting Standard (CRS) and concluded that some jurisdictions put the integrity of the CRS at risk because they provide a low personal tax rate on income from foreign financial assets without requiring an Individual to spend a significant amount of time in the jurisdiction offering the arrangement.  

There are legitimate reasons for obtaining a Golden Passport such as:

  • starting a new business in a particular jurisdiction
  • achieving greater mobility due to visa-free travel
  • better education and job opportunities
  • living in a country with political stability

Nonetheless, Golden Passports are perceived by the OECD as vehicles that can potentially misrepresent an Individual’s tax residence jurisdiction and as a result the purpose and obligations that an Individual has under the CRS.

Golden Passports could assist in Circumventing Reporting under the CRS

CBI and RBI arrangements can lend themselves to misuse and undermine CRS due diligence procedures; resulting in inaccurate or incomplete reporting under CRS because all jurisdictions of tax residency could potentially NOT be disclosed to the FI.  Meaning that an Individual does not actually reside in the CBI or RBI jurisdiction but claims to be a resident for tax purposes only in such jurisdiction and provides the FI with supporting documentation issued under the CBI or RBI scheme which can include:

  • a certificate of residence
  • ID card
  • passport

CBI and RBI arrangements that pose the higher risk are ones that:

  • Extend an Individual Taxpayer a personal income tax rate of less than 10% on income generated from offshore financial assets
  • Do not require significant physical presence of at least 90 days in the jurisdiction offering the CBI or the RBI arrangement

The OECD wants to make sure that foreign income is reported to the actual jurisdiction of residence

FIs have responsibilities if the Individual’s Self-Certification or Documentary Evidence is incorrect or unreliable

CRS Section VII addresses Special Due Diligence Rules and the Reliance on Self Certifications and Documentary Evidence as follows: “A Reporting Financial Institution may not rely on a Self-Certification or Documentary Evidence if the Reporting Financial Institution knows or has reason to know that the Self-Certification or Documentary Evidence is incorrect or unreliable”.  

When in Doubt, ask Questions

The OECD is providing guidance to the FIs if there is doubt related to the Account Holder or Controlling Person claiming Residence in a CBI or RBI jurisdiction by having the Relationship Manager of the FI ask Individual Taxpayers:

  • Did you obtain residence rights under an CBI or RBI scheme?
  • Do you hold residence rights in any other jurisdiction(s)?
  • Have you spent more than 90 days in any other jurisdiction(s) during the previous year?
  • In which jurisdiction(s) have you filed personal income tax returns during the previous year?

Don’t be a Victim of your Own Making

There are over 100 jurisdictions have agreements to make annual information exchanges, while currently 28 jurisdictions listed in the OECD’s website have a CBI or RBI arrangement.  The purpose of the CRS is to crack down on offshore jurisdictions that can facilitate tax evasion by automatically exchanging information on non-residents financial offshore accounts.  

If you are a Taxpayer contemplating or already participating in a CBI or RBI, consult a specialized tax representative.