Dubai FTZ residence certificate to circumvent CRS does not work



Dubai FTC Residence Certificate does not contain physical residence


missing Pascal photo
Financial Times 6 December 2016.

Pascal Saint-Amans, the top tax official at the OECD, says the residence-by-investment schemes offered by governments such as Malta, Cyprus and some in the Caribbean will not undermine the transparency drive. “We are working on this. It will not survive long.”

Faking a relocation will not work “A lot of people think it’s enough to have the right to live in Dubai. It’s not enough, you have to actually live there. You have to choose somewhere you actually want to be.”

The likely method to close this loophole is described here. The OECD is serious on closing loopholes as described here.
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1. The strategy of an FTZ residence certificate is not a solution for the CRS and will not work
  1. A Dubai FTZ Economic Residence Certificate does not contain physical address address and is therefore useless for CRS due diligence in determining tax residence of Account Holder or Controlling Person of a Passive NFE
  2. Bank is ignoring the CRS anti-avoidance clause of adopting practises to circumvent the CRS. However Ignorantia juris non excusat
  3. Bank is aware of true address of client and must ignore the economic residence certificate
  4. Bank is ignoring AML / KYC procedures to determine address of client
  5. Due to rampant global residence planning to circumvent the CRS, OECD willl likely amend the CRS in 2017 with regard to any previous residence in the past ten years being the 7th indicia of current residence. This indicia could only be cured if by the provision of a tax clearance certificate or equivalent document.
2. CRS residence address test for low-value pre-existing individual accounts

Under $1 million

For low-value pre-existing accounts, a residency address test may be carried out, using documentary evidence on record to determine account holder's residency.

A residence test can be carried out if the Financial Institution has policies and procedures in place to verify residence address based on documentary evidence. The three requirements that must be met are:
  1. FI has in its records a residence address
  2. Such address is current
  3. Such address is based on Documentary Evidence
CRS page 60 par(6) Definition of Terms - The term Documentary Evidence includes a certificate of residence issued by an authorised government body (for example, a government or agency thereof, or a municipality) of the jurisdiction in which the payee claims to be a resident.

The first requirement is the address needs to be on file. CRS commentary page 112 par (10)

The third requirement is that the current residence address in the Reporting Financial Institution’s records is based on Documentary Evidence. This requirement is satisfied if the Reporting Financial Institution’s policies and procedures ensure that the current residence address in its records is the same address, or in the same jurisdiction, as that on the Documentary Evidence (e.g. identity card, driving license, voting card, or certificate of residence).

The third requirement that address is based on Documentary Evidence, is also met if the Reporting Financial Institution’s policies and procedures ensure that where it has government-issued Documentary Evidence but such Documentary Evidence does not contain a recent residence address or does not contain an address at all, the current residence address in the Reporting Financial Institution’s records is the same address, or in the same jurisdiction, as that on recent documentation issued by an authorised government body or a utility company, or on a declaration of the individual Account Holder under penalty of perjury.

Acceptable documentation issued by an authorised government body includes, for example, formal notifications or assessments by a tax administration. Acceptable documentation issued by utility companies relates to supplies linked to a particular property and includes a bill for water, electricity, telephone (landline only), gas, or oil. A declaration of the individual Account Holder under penalty of perjury is acceptable only if:
  • the Reporting Financial Institution has been required to collect it under domestic law for a number of years
  • it contains the Account Holder’s residence address; and
  • it is dated and signed by the individual Account Holder under penalty of perjury.
In such circumstances, the standards of knowledge applicable to Documentary Evidence would also apply to the documentation relied upon by the Reporting Financial Institution (see paragraphs 2-3 of the Commentary on Section VII). Alternatively, a Reporting Financial Institution can meet the third requirement if its policies and procedures ensure that the jurisdiction in the residence address corresponds to the jurisdiction of issuance of government-issued Documentary Evidence.

If the Financial Institution knows or has reason to know that the Documentary Evidence is unreliable, including as a result of a change in circumstances, then that Documentary Evidence cannot be relied upon. Therefore, either the residence address test cannot be used in the first place or, if it is as a result of a change in circumstances, the Financial Institution has until the later of the last day of the reporting period or 90 days to obtain a self-certification and new Documentary Evidence. If this is not obtained then the electronic indicia search must be completed.

Where the indicia search is completed and the only indicia found is a “hold mail” or “in-care-of” address and no other address is found, then special procedures apply (the undocumented account procedures). In the order most appropriate, the Reporting Financial Institution must: complete a paper record search; or obtain Documentary Evidence or a self-certification from the Account Holder. If neither of these procedures successfully establishes the Account Holder’s residence for tax purposes then the Reporting Financial Institution must report the account to the tax authority as an undocumented account.

The basing of residence purely on the residence certificate runs into problems when the bank must find the physical address of the Account Holder. As a Bahamas residence certificate does not contain the address, the bank must determine the address by other documentation such as utility bill.

It is patently clear the Dubai bank is interpreting the CRS to literally apply the residence test on a Dubai Government issued residence certificate, without proof of address, irrespective if they know the client's real residence is outside Dubai. In this case, the Dubai bank will indeed know the Account Holder is not really resident in Dubai because they have assisted in obtaining a FTZ residence certificate for the client with the exclusive purpose of circumventing the CRS. This conflicts directly with the anti-avoidance clauses of CRS page 61 par (A)

3. Effective Implementation A jurisdiction must have rules and administrative procedures in place to ensure effective implementation of, and compliance with, the reporting and due diligence procedures set out above including:
  1. Rules to prevent any Financial Institutions, persons or intermediaries from adopting practices intended to circumvent the reporting and due diligence procedures.
Commentary on Section VII concerning Special Due Diligence Requirements

Paragraph A – Reliance on Self-Certification and Documentary Evidence

CRS Page 149 par (3)

A Reporting Financial Institution has reason to know that a self-certification or Documentary Evidence is unreliable or incorrect if its knowledge of relevant facts or statements contained in the self-certification or other documentation, including the knowledge of the relevant relationship managers, if any (see paragraphs 38-42 and 50 of the CRS Commentary on Section III), is such that a reasonably prudent person in the position of the Reporting Financial Institution would question the claim being made.

A Reporting Financial Institution also has reason to know that a self-certification or Documentary Evidence is unreliable or incorrect if there is information in the documentation or in the Reporting Financial Institution’s account files that conflicts with the person’s claim regarding its status.
4. CRS residence test for high-value pre-existing individual accounts

Over $ 1 million
For high value pre-existing accounts the bank must have all the information on file for an electronic search of indicia. If not, then the bank must do a paper search for indicia. If the only indicia for address found is a care-of or hold-mail, then a relationship manager interrogation must be made to determine residency.

If no address is found, then the account must be reported to authorities as an Undocumented Account.

5. CRS residence adress test for low-value pre-existing Controlling Persons

Under $1 million
Where the account balance is $1,000,000 or less, in order to determine the Controlling Persons of a Passive NFE and establish whether they are Reportable Persons, the Financial Institution may rely on information collected and maintained pursuant to AML/KYC Procedures.
6. CRS residence test for high-value pre-existing Controlling Persons

Over $ 1 million
Where the balance or value of the accounts exceeds $1,000,000 a self-certification with respect to the Controlling Persons must be collected (from either the Account Holder or the Controlling Person(s)). The self-certification can be provided in any form but in order for it to be valid the Standard sets out that it must be signed (or otherwise positively affirmed, i.e. involving some level of active input or confirmation) by the Controlling Person(s) or the Entity Account Holder, be dated, and must include each Controlling Person’s: name; residence address; jurisdiction(s) of residence for tax purposes; TIN(s) and date of birth.

If the self-certification is not obtained the Financial Institution must rely on the indicia search