The 2019 CBI Index: Fact from fiction - CBI and tax residence

Citizenship by investment and taxation are commonly associated, particularly as there is often an overlap between countries that have adopted citizenship by investment programmes and those that have embraced low-tax regimes. Correlation does not necessarily imply causation, however, and in 2019 the CBI Index was pleased to provide a platform for tax and legal experts to discuss the distinction that exists between citizenship and the duty to pay tax.

The Organisation for Economic Co-operation and Development (OECD) precipitated interest in the topic when, in February 2018, it raised the question of whether investor immigration programmes had the potential to facilitate tax evasion. Specifically, it asked whether an economic citizen or resident could abuse that status to circumvent the Common Reporting Standard (CRS) – a system used by multiple jurisdictions to ensure the correct sharing of tax information. 

Co-rapporteurs Jeppe Kofod and Luděk Niedermayer from the Special Committee on Financial Crimes, Tax Evasion, and Tax Avoidance, reiterated the OECD’s concern in November 2018 and called on EU member states to phase out investor immigration schemes. Their report was adopted by the European Parliament in March 2019.

That same month, global accountancy and tax firm Ernst & Young (EY) produced a report on the subject, titled Tax residency: beyond citizenship. At its core, the report sought to clarify and distinguish between the concepts of citizenship and tax residence, and identified tax residence as the principal factor in determining tax liability.

The status of citizen denotes certain rights and obligations, including the right – but not the obligation – to live and work in one’s jurisdiction of citizenship. Tax residency, on the other hand, confers a different set of rights and obligations, chief among which is the duty to pay tax in a jurisdiction. In almost every country in the world, attaining and maintaining the status of tax resident requires a person to be physically present in that country for at least six months each year, have a permanent home there, or make the country the centre of his or her vital interests.

With respect to the CRS’s purpose to identify tax liability, EY thus notes that “citizenship should not give rise to tax avoidance and evasion opportunities, as the reporting rules are explicit in not using citizenship as a test.”

Smith and Williamson, a British tax advisory firm, wrote a similar report in April which concluded that “Citizenship by Investment does not present a risk to facilitating tax evasion, as citizenship alone is insufficient to secure tax residency of a country.” 

In May, Queen’s Counsel Balraj Bhatia released a formal legal opinion echoing these statements.

Independent insight on the relationship between citizenship by investment and tax is important for all countries operating such programmes, as it improves understanding by individuals, other countries, and international bodies, and ultimately focuses discourse on the win-win outcome that characterises well-run citizenship by investment programmes.