The EU recently announced plans to probe potential citizenship abuses from investment schemes. The Commission released a comprehensive report regarding residence and citizenship schemes operated by multiple EU member states.
The report from the Commission comes after an OECD announcement that it will work even harder to challenge tax avoidance based on citizenship by investment and similar schemes. The focus indicated by the OECD is on taxpayers who do not want their financial data to be shared with their home country’s tax authority, which should be done via the Common Reporting Standard.
The new report maps out the current practices. It additionally identifies the risks that these investment schemes deliver to the European Union. Specific risks include money laundering, tax evasion, corruption, and security. The schemes’ lack of transparency in operations combined with the lack of cooperation among the various member states only make the risks worse.
Within the European Union, there are three member states that currently operate schemes of the type the Commission is concerned about. Malta, Cyprus, and Bulgaria all have schemes that give investors that country’s nationality via conditions that are less strict than the typical requirements for naturalization. Those three states do not require investors to show any genuine connections to the country or to have proof of physical residence. That would be required for any other type of naturalization.
Why the EU Is Concerned
The European Union has a right to be concerned about the citizenship related to investment schemes in these member countries. After all, becoming a citizen of any EU member state automatically means that the person in question is a citizen of the EU. This means that if a member state grants citizenship to a high-net-worth individual because of an investment, that person will now have access to the EU’s internal market and free movement. They would be able to vote and be elected in the various elections. In fact, it is common for the type of investment scheme under question to be advertised as offering these citizenship benefits.
A main concern of the Commission, as expressed in the report, is that a foreign investor will take advantage of one of the schemes so they can enjoy privileged tax rules.
Investor Residence Schemes Are Also Problematic
The Commission also expressed its concerns regarding investor residence schemes. While these do not grant the same rights as citizenship schemes, they are still a threat to the EU and the member states. Valid residence permits give the right to reside within the member state and to travel freely. There are regulations under EU laws for certain third-country nationals, but the residence permits are not regulated. These are much more common than the citizenship schemes being run in 20 member states.
The Commission’s Plans
Within its report, the Commission indicated that it will be monitoring compliance with the EU laws as a result of both residence and citizenship schemes, then take appropriate actions. The Commission indicated that each member state must ensure that it systematically carries out all of the required security and border checks, complies with the Family Reunification Directive and the Long-term Residence Permit Directive, and assesses funds by investor residence and citizenship applicants based on the anti-money-laundering rules of the EU.
In terms of tax avoidance, the Commission went on to indicate that there are tools available for administrations that choose to cooperate. The commission plans to keep a watchful eye on how member states address the problems of governance and transparency in relation to the schemes. There will also be an expert group from various member states to work to improve the security, governance, and transparency of the schemes.
High-net-worth individuals who plan to use the ability to invest in EU countries as a chance to gain citizenship or even residence should take note and act soon in case the regulations tighten.
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