How FIs will have to evidence account holders tax residence



How to determine account holder or controlling persons tax residencies when presented by residence-by-investment certificate


1. The OECD highlights in its consultation to prevent abuse of residence by investment schemes

CBI/RBI schemes do not offer a solution for escaping the legal scope of reporting pursuant to the CRS. These schemes grant a right of citizenship of a jurisdiction or a right to reside in a jurisdiction. They generally do not provide tax residence. n overview of the tax residency rules for all jurisdictions participating in the CRS can be consulted here.

Reporting under the CRS is based on tax residence, not on citizenship or the legal right to reside in a jurisdiction. Even where tax residence can be obtained through some RBI schemes, they do not by themselves affect the tax residence in the original country of residence of the individual. The CRS requires taxpayers to self-certify all their jurisdictions of residence for tax purposes.

Nevertheless, CBI/RBI schemes can potentially be exploited to help underminethe CRS due diligence procedures. This may lead to inaccurate or incomplete reporting under the CRS, in particular when not all jurisdictions of tax residence are disclosed to the reporting Financial Institution. Such a scenario could arise where an individual does not actually reside in the relevant jurisdiction, but claims to be resident for tax purposes only in such jurisdiction and provides his Financial Institution with supporting documentary evidence, e.g. certificate of residence; ID card; passport; utility bill of second house.



Example 1: New Individual Account – Account Holder falsely self-certifies taxresidency and provides a tax residence certificate in support

X is an individual resident in jurisdiction F. In order to circumvent reportingunder the CRS, X applies for “residency status” in jurisdiction M under its RBI program. This status requires X to purchase a property in jurisdiction M worth at least 500,000 Euro or to rent a property for a minimum of 40,000 Euro per year. It allows X to obtain tax residency in jurisdiction M without being taxed on any income that is not sourced in or remitted to jurisdiction M.

X opens a New Account with a Bank B in jurisdiction B and self-certifies to beresident for tax purposes in country M (including by presenting his tax residency certificate to Bank B in the on-boarding process). Although the CRS requires X to include all jurisdictions of residence for tax purposes in his self-certification, he omits to self-certify his tax residence in jurisdiction F. In addition, the AML/KYC documentation provided by X does not show any connection to jurisdiction F.

Bank B will identify X as a resident of country M and report the income and otherinformation about the account to the tax authorities of jurisdiction B that will exchange the CRS information with country M, in compliance with the CRS. However, X is not taxed on the income in jurisdiction M. X continues to be a resident of jurisdiction F but the jurisdiction B does not exchange X's information with jurisdiction F, as a consequence of the outcome of the due diligence procedures applies by Bank B.



Example 2: Pre-Existing Individual Account – use of tax residence certificates orpassports as Documentary Evidence under the residence address test

Y, an individual resident in jurisdiction G has an account with Bank S injurisdiction S. Under the CRS, the Bank S will start reporting Y’s account information to the tax authorities of jurisdiction S in 2018 that will in turn exchange the CRS information with the tax authorities of jurisdiction G.

In order to circumvent reporting under the CRS, Y has in 2016 applied forresidence in jurisdiction S under its RBI scheme. To obtain this status, Y purchased a house in jurisdiction S worth at least 500,000 Euro.

Y has provided his permanent residence permit of jurisdiction S and utility billsrelating to the house in jurisdiction S. As a consequence, and in line with the residence address test for Pre-existing Individual Accounts, the due diligence procedures applied by Bank S lead to the conclusion that Y is a resident of jurisdiction S. As such, there will be no reporting of CRS information about the account held by Y to jurisdiction G.
2. The OECD Mandatory Disclosure Rules for avoiding the CRS barely covers residence by investment schemes. Hall mark E(ii) of an avoidance arrangement is "undermining or exploiting weaknesses in the due diligence procedures used by Financial Institutions to correctly identify all the jurisdictions of tax residence of an Account Holder and/or Controlling Person. Commentary

Sub-paragraph (ii) of this hallmark applies to Arrangements that can be used to avoid accurate and comprehensive reporting of CRS information to the jurisdiction of tax residence of the Account Holder or Controlling Person. This hallmark would, for instance, apply to a person promoting the use of a tax residence certificate as a method of facilitating the avoidance of the CRS.

A number of jurisdictions offer tax incentives to individuals to encourage them to take up tax residence in that jurisdiction. These incentives may involve temporary or permanent exemptions from tax on foreign source income and obtaining such tax residency may only require the resident to have a minimal presence in that jurisdiction. A person who is tax resident in more than one jurisdiction may use such a certificate to not declare the fact that he or she is a tax resident in another jurisdiction. Presenting such a certificate to a Financial Institution as proof of residence in order to undermine the Financial Institution’s due diligence procedures would fall within the specific hallmark in Rule 1.1(e)(ii) as an Arrangement for which it is reasonable to conclude that it has the effect of undermining or exploiting weaknesses in, the due diligence procedures used by Financial Institutions to correctly identify all the jurisdictions of tax residence of an Account Holder and/or Controlling Person.
3. The MDR consulation document highlights the misuse of RbI / CbI residence can avoid the CRS. However,it does not guide stakeholders how to tackle the abuse.

The importance of correctly applying existing CRS due diligence procedures. To a large extent, the circumvention of the CRS through the abuse of CBI/RBIschemes can be prevented by the correct application of the existing CRS due diligence procedures. Important in this regard are:
  1. The requirement to have a real, permanent physical residence address (and not just a PO box or in-care-of address) for the application of the residence address rule and the necessity to confirm the presence of a real, permanent physical residence through appropriate Documentary Evidence
  2. The requirement to instruct Account Holders to include all jurisdictions of tax residence in their self-certification
  3. The rule that Financial Institutions cannot rely on a self-certification or Documentary Evidence if they know, or have reason to know, that such self-certification or Documentary Evidence is unreliable, incorrect or incomplete.
The OECD Model tax convention on tie breaker rules for dual tax residency is usually applied by countries in the following decending priority



However, the above list is ineffective for anyone using a RbI / CbI program, because they will by default have the following in the RbI/ CbI jurisdiction (i) Permannet home, and (iii) habitual abode and (iv) nationality from CbI. Hence the OECD guidance on FI verifying if client has a (i) above, viz. " a real, permanent physical residence address (and not just a PO box or in-care-of address) " is useless.

Hence the OECD guidance on FI verifying if client has a (i) above, viz. " a real, permanent physical residence address (and not just a PO box or in-care-of address) " is useless.

Proposed solution: An FI evidencing tax residency of anyone self-certifying a RbI / CBI residence must be according to the OECD's tax model definition of Center of vital interest.Failing that, account holder must provide a tax clearance certificate from previous tax residence.