Top UK firm finds Dominica's CBI programme poses no risk to facilitating tax evasion

Dominica is at the forefront of a new report released this month by Smith & Williamson, a UK-based financial services firm. Titled Citizenship vs Residency: The Taxation Implications of Citizenship by Investment Programmes, the report explores the tax consequences of an individual participating in Dominica's Citizenship by Investment Programme. It concludes that there is no negative impact either on Dominica or on jurisdictions that had taxed the individual prior to his becoming an economic citizen.

"Smith & 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 and, subject to an existing double taxation treaty, an individual is only liable to tax in countries where they are tax resident," note the authors.

Smith & Williamson's assessment is comparable to that of international accounting firm Ernst & Young, which, in March 2019, released a similar report stating that "it is clear 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."

Citizenship Alone, Not Tax Residency

Dominica offers one of the world's oldest citizenship by investment (CBI) programmes. Established in 1993, the programme enables foreign applicants to become citizens of Dominica in exchange for an investment and only after passing very stringent due diligence procedures. Funds from the CBI Programme are used to support ecotourism and sponsor socio-economic initiatives on the island, including several climate change resilience building projects, as the Prime Minister Roosevelt Skerrit pledged to make Dominica "the world's first climate resilient nation" following Hurricane Maria's ravages in 2017.

Nothing in Dominica's Constitution, Citizenship Act, or Citizenship by Investment Regulations entitles the applicant to anything but the status of 'citizen.' Significantly, citizenship of Dominica, states Smith & Williamson, "does not equate to residence" and "does not bear on a person's status as a Dominican tax resident." This is central to the report's conclusions because, when it comes to a person's tax liability, "only countries where an individual is resident for tax purposes can tax the individual's worldwide income and gains" and "only the United States, Hungary and Eritrea currently tax individuals based on both residence and citizenship." Because Dominica does not tax individuals by virtue of being citizens, an economic citizen cannot claim he is no longer a tax resident of another country on the basis of his or her new Dominican citizenship.

Concerns as to whether Dominica's Citizenship by Investment Programme can facilitate tax evasion have been raised, most prominently, by the OECD in its assessment of whether citizenship by investment can enable circumvention of the Common Reporting Standard (CRS). Yet, Smith & Williamson suggests these concerns are unnecessary and misplaced since "reporting under the CRS is […] based on tax residence and not on citizenship or the right to reside in a jurisdiction."

No Double Taxation Relief

Finally, Smith & Williamson asks whether tax residence of Dominica, coupled with tax residence of another country, could prove advantageous to the dual tax resident. The answer is a categorical 'no' for anyone who is not a Caribbean dual tax resident, as Dominica only holds double taxation agreements with member states of the Caribbean Community. This means that, in the vast majority of cases, a Dominican tax resident "would only receive a foreign tax credit against their Dominican tax liability for tax already suffered," and there would be nothing to stop the second country of tax residence taxing the Dominican resident. Smith & Williamson illustrates this point by analysing the prospects of a dual UK-Dominican tax resident and Dominican citizen: "Citizenship of Dominica would not have any detrimental impact on UK tax that can be collected and, even if the individual were to also become a tax resident of Dominica, it could expose them to double taxation on their income, which could not be mitigated under the domestic tax laws of the jurisdictions involved."