The Role of Citizenship in Determining Tax Residency - CBI Index

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LONDON, March 12, 2019 /PRNewswire/ -- Leading international tax advisory firm Ernst & Young (EY) released a report today clarifying the difference between tax residency and citizenship – an important distinction to make at a time when citizenship by investment (CBI) programmes are often erroneously characterised as tax residency programmes.

The report (available here) makes three significant conclusions. One: citizenship is a concept separate from tax residency. Two: citizenship – and therefore CBI programmes – does not pose a risk to tax collection efforts, including the CRS. This is because tax reporting rules generally exclude citizenship as a test for whether an individual is responsible for paying tax in a given country. Three: citizenship is not a factor in qualifying a person for tax residency in a number of CBI jurisdictions, namely Cyprus, Malta, Dominica, St Kitts and Nevis, and St Lucia.

Crucially, EY's conclusions resolutely contradict those of intergovernmental bodies that have recently levelled criticism on CBI jurisdictions for enabling tax evasion: "Any tax concerns that might arise around the interaction of citizenship with exchange of information would naturally be addressed through tax provisions rather than restricting citizenship."

Citizenship v. Tax Residency

Citizenship, says EY, "is a concept distinct from tax residency." Historically, citizens resided in their country of citizenship: enjoying that country's services and contributing to their operation by virtue of tax. This led to an association of citizenship and tax residency. However, as early as in the 1923 discussions surrounding the draft OECD Model Tax Convention, it was recognised that "the mere relation of citizenship could no longer be considered a sufficient tie to impose on non-residents by their country of nationality."

Now, countries base tax residency on "the degree of personal socioeconomic links with a country." The OCED Convention provides standard tests, which include having a minimum physical presence, permanent home, close centre of vital interests, or a habitual abode in a country. Citizenship is "rarely used" – and then, only as a last resort.

CBI Programmes and Tax Collection

EY's report documents the common misconception that CBI programmes have the potential to facilitate tax evasion. The confusion stems from the fact that CBI countries can provide tax incentives that "are separate from the CBI programme," but that can be accessed more easily after receipt of citizenship. Indeed, it is noted that programmes do not provide tax residency, a fact unequivocally recognised even by recent CBI detractors the OECD and the European Commission.

The EY report also responds to the concern that CBI programmes may lead to inaccurate CRS reporting – discounting it, however, as undue, because "the reporting rules are explicit in not using citizenship as a test [for tax residency]." In this regard, the CRS Implementation Handbook is quoted as follows: "While a large proportion of the Standard precisely mirrors the FATCA IGA, there are also areas of difference. These differences are due to removal of US specificities (such as the use of citizenship as an indicia of tax residence […]."

Indeed, the report does not list tax as a common rationale for seeking CBI, listing instead political stability, the avoidance of prejudice, visa-free travel or visa-on-arrival access, and lifestyle benefits.

Tax Residency in the CBI Jurisdictions

EY's report provides examples of how, by their own legislation and caselaw, CBI jurisdictions separate tax residency from citizenship. EY observes that, in Europe, citizenship "does not determine tax residency in Cyprus," and that Malta's Ministry of Finance clarified that CBI beneficiaries "are not automatically considered as tax residents in Malta." In the Caribbean CBI jurisdictions, "it is clear that citizenship is not a relevant determinant of [tax] residency."

On the other hand, in the United States, citizenship automatically equates to tax residency. The US also operates a residence by investment (RBI) scheme, the EB-5 Immigrant Investor Visa Programme, which automatically provides tax residency. RBI provides permanent residency rights, which often impose minimum physical presence requirements that can assist in acquiring tax residency. The Caribbean jurisdictions analysed in the EY report – Dominica, St Kitts and Nevis, and St Lucia – do not operate RBI programmes, while Cyprus and Malta do.

Conclusion

EY's report explains the nature of CBI and the benefit that it bestows: citizenship. It critiques the conflation of the concepts of citizenship and tax residence, warning that this may lead to dangerous misconceptions, particularly when these fuel condemnation from powerful intergovernmental organisations. It is with alarm that the CBI Index team has seen such condemnation on the part of the OECD and European Union, and, in light of the EY report, it urges these two entities to conduct a second review of CBI and its connection taxation.

The full EY report can be accessed here.

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