Official: Obtaining Foreign Citizenship Does Not Facilitate Tax Evasion

This was according to a report from a top financial services firm in the UK in April 2019.

It had been a matter of ongoing concern for many years. Recently though, financial services company Smith & Williamson decided to look into the issue. While their primary focus was on Dominica, their findings apply globally, including other common jurisdictions such as Antigua, Barbuda, Cyprus, Grenada, Nevis, St. Lucia, St. Kitts, and Montenegro.

What Did the Report Find?

The report, called Citizenship vs Residency: The Taxation Implications of Citizenship by Investment Programmes, examined the phenomena of registering offshore citizenship and the associated tax consequences of doing so for people who register foreign citizenship. It found no negative impact for the prior tax jurisdiction, nor for the new tax-registered jurisdiction.

Further, it concluded that citizenship by investment presents no risk regarding tax evasion. The main reason being that tax evasion is facilitated by many more factors than merely a change of citizenship. Many further complicated steps are required in the process. Individuals are liable for tax in countries where they are registered as resident, not the nation or jurisdiction of their citizenship. This can be subject to a double taxation treaty.

This is not the first report to reach this conclusion. In March, just one month before the Smith & Williamson's assessment, Ernst & Young’s evidence conclusion was the same. In a near identical word for word summary, they said that " citizenship is a concept distinct from tax residency”. It went on to further state that citizenship cannot and should not facilitate tax evasion or avoidance.

There is No Evidence of Double Taxation Relief for Dual Citizenship

Smith & Williamson specifically examined the notion of whether tax residence of two separate countries granted any kind of benefit to the person registered in both jurisdictions. The answer is clearly “no”. This also applies to other jurisdictions using similar CBI programmes. Typically, those with dual citizenship of such countries are only granted tax credit against the liability in another country. This is not tax avoidance, but a fair distribution system of taxation relief to ensure they are not paying double on their tax liability.

The subject of the report, Dominica, is one of the first countries to offer CBI programmes (citizenship by investment). Since then, many other countries and jurisdictions have followed suit, including those already mentioned above. It’s become a popular means of granting citizenship and controlling strict criteria for doing so.

Explaining the CBI Process

These two reports released in March and April are significant in the ongoing debate over tax avoidance and tax evasion. The research was commissioned by both parties following raising of the issue by OECD. They concluded that citizenship has been used in the past to facilitate tax avoidance and evasion. Now these concerns have been demonstrated as unfounded and the integrity of the CBI system maintained.

What essentially happens is that these jurisdictions offer opportunities for foreigners to acquire citizenship. This process is not easy. CBI requires significant investment from the individual and a number of other strict controls, one of which includes due diligence. In the case of Dominica, these investment funds are funnelled towards ecotourism and environmental issues, but also towards socio-economic programmes for citizens. That country is by no means alone; other jurisdictions that use CBI as a form of investment also direct funds to such infrastructure programmes.

In jurisdictions where citizenship of foreign nationals is possible, only citizenship is granted. It does not confer residence not does it grant tax benefits or other rights. It must be noted again that tax obligations and rights are granted based on residency, not on citizenship. Citizenship alone does not confer tax advantages to the person seeking secondary citizenship.