In a recently published consultation document entitled “Preventing Abuse of Residence by Investment Schemes to circumvent the CRS”, the Organisation for Economic Co-operation and Development (hereafter “OECD”) was seeking input on how to reduce the risk of using “residence by investment” (“RBI”) schemes in order to avoid the common reporting standard (hereafter “CRS”). A RBI program allows an “individual to obtain a residence right in exchange for a local investment.” Even though the OECD recognizes that there might be legitimate reasons for individuals to apply for such a status, it considers that those schemes “can potentially be exploited to help undermine the CRS due diligence procedures”.
As a reminder, the OECD heavily promoted the exchange of information between tax authorities, which led the EU to adopt a directive in order to enhance the automatic exchange of information between the Member States. This Directive 2014/107/EU has been transposed by Luxembourg on December 24th 2015. In substance, the law obliges financial institutions to determine the tax residency of the account holders and to share relevant information with the tax authorities of their country of residence.
In the framework of RBI schemes, an account holder could use his certificate of residence or other documentary evidence in order to self-certify that he is a tax resident in a certain jurisdiction even though he has no real link to that jurisdiction. This is particularly beneficial if the jurisdiction where he claims to be a tax resident (i) is a jurisdiction that levies no or very low personal income tax, (ii) is a non-participating jurisdiction, in which case the financial institution would not be obliged to exchange information.
For instance, a taxpayer resident in a jurisdiction with a high fiscal burden could use the residency certificate obtained by way of a RBI scheme in order to prevent that his real jurisdiction of residence obtains information on his fortune or revenues.
In order to prevent this type of abuse, the OECD acknowledges that it is important (i) to identify which RBI schemes represent a high risk and (ii) to adapt the existing CRS due diligence procedures accordingly. As a consequence, financial institutions will possibly have to enhance their due diligence procedure when they are dealing with individuals claiming to be resident in one of the jurisdictions identified by the OECD.
It remains to be seen to what extent the Luxembourg RBI scheme, as introduced by the law dated 8th March 2017, will be impacted by the future recommendations of the OECD.
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