CBI programs of Caribbean nations brings no undue tax advantage, says Smith & Williamson

The UK based tax advisory firm Smith and Williamson in a report released in April 2019, illustrated the differences between one's citizenship, residency, and tax residency, underlining that second citizenship has little to no effect on a person's tax liability.

The leading tax advisory firm is the second to weigh in on the relationship between citizenship by investment (CBI) and taxation. A similar report was produced by global tax advisors Ernst & Young (EY) published on 12 March 2019.

In it's report the independently-owned firm explored what benefits, if any, could be drawn by becoming not just a citizen, but also a tax resident of any one of three Caribbean jurisdictions offering CBI, concluding that: "This does not create an undue tax advantage and in many cases can result in the individual being exposed to double taxation that cannot be mitigated under the domestic tax credit relief rules of the countries in question."

The report finds citizenship and tax residency distinct, and declares that the CBI programmes of Dominica, St Kitts and Nevis, and St Lucia pose no risk of tax evasion or misreporting under the CRS:

"In conclusion, Smith and Williamson believe that Citizenship by Investment does not present a risk to facilitating tax evasion, as citizenship alone is insufficient to secure tax residency of a country."

EY's report also concluded that: "Citizenship is a concept distinct from tax residency. Citizenship should not give rise to tax avoidance and evasion opportunities, as the reporting rules are explicit in not using citizenship as a test."

Smith & Williamson's work plays an important role in fostering a better understanding of the CBI industry, not least because certain CBI programmes have been heavily criticised by the European Commission, the OECD, and others, based on the erroneous assumption that they afford, as a primary or secondary benefit, tax residency. Smith & Williamson clarifies that this is not the case, and provides a detailed review of the programmes of Dominica, St Kitts and Nevis, and St Lucia to drive the point home.

CBI Programmes Pose No Risk of Tax Evasion or Misreporting

Taxation, says Smith & Williamson, is generally related to a person's tax residency, not citizenship:

"Although an individual can have citizenship rights or residence rights in a number of different countries, usually only countries where an individual is resident for tax purposes can tax the individual's worldwide income and gains."

Whether a person is a tax resident of a country depends on that country's specific rules. In the vast majority of countries, including Caribbean CBI jurisdictions Dominica, St Kitts and Nevis, and St Lucia, tax residency is determined by a person's centre of vital interests or domicile, i.e. the place wherein a person has a permanent intention to reside, as evidenced by past or current habitual residence. It is "very rare" for citizenship alone to determine tax residency, with the most notable exception to this being the United States. "Therefore, merely obtaining citizenship of St Lucia, Dominica, or St Kitts and Nevis is not sufficient to make an individual a tax resident of these jurisdictions."

With regards to reporting under the CRS, Smith & Williamson notes that this too is "based on tax residence and not on citizenship or the right to reside in a jurisdiction," and, consequently, that CBI programmes pose no risk to proper CRS reporting.

Double Taxation Agreements

Smith & Williamson examines Double Taxation Agreements, or DTAs, which are treaties agreed between countries to prevent individuals who are tax resident in more than one jurisdiction being taxed on the same capital twice. DTAs contain "tie-breaker tests" to establish to which country a dual tax resident must pay tax. The United Nations offers a model DTA, under which the tie-breaker tests do "not consider citizenship at all." Rather, they consider the person's permanent home, centre of vital interests, and habitual abode. The OECD model similarly only considers citizenship as a last resort, if an individual has "failed all other tie-breaker."

Conclusion

At a time when CBI is frequently misinterpreted and CBI programmes are subjected to undue criticism, the research conducted by Smith & Williamson affords necessary insight into the meaning of citizenship and its independence from tax residency. Importantly, it affirms that, in providing citizenship and not tax residence, CBI programmes offer no assistance to those who would seek to avoid tax or proper tax reporting.

Smith & Williamson comes to the same conclusions as those recently drawn by EY, adding further weight to calls for a re-evaluation of CBI programmes by those international organisations who have largely based their analysis on a misconception.