Nick Shaxson ■ Fake residency: the yawning loophole the OECD must close

Dubai: the race-to-the-bottom specialists

Dubai: the race-to-the-bottom specialists

The OECD’s Common Reporting Standards (CRS) is the big game in town for curbing cross-border financial transparency. As we’ve often noted, it is a good project, with global reach, but with loopholes.

One of the biggest of these loopholes, perhaps — after Loophole USA — is the problem of ‘fake residency’, where countries allow wealthy people from elsewhere to “buy” their way into being residents of that jurisdiction, perhaps in exchange for their investing a certain amount there, or paying a flat fee.

How does this enable people to escape the CRS?

Very simply: the CRS collects information about the beneficial owners of assets, then transmits that information to the owner’s place of residence. If the residence is fake, then the CRS system will require relevant agencies to collect and transmit the relevant beneficial ownership information to Dominica, say, and Dominica will ignore it, and not tax it either. End of story. The information trail goes cold. Banks, which are a core part of the CRS project, willingly collude in this monkey business.

For most of these fake residency schemes, there is a requirement to hand over relatively serious cash. Dominica, with only 70,000 residents, charges $100,000 for individual fake residency, and they only need a relatively small number of applicants to receive revenues that are meaningful for its 70,000 odd residents, many of whom are quite poor fisherfolk and so on. (No matter that the scheme may be cheating the citizens of other developing countries out of tens of billions: that’s not their concern.)

All sorts of places are jumping on this bandwagon. Following the recent decision of St Lucia to dive in, there are now five such places in the Caribbean alone, including St. Kitts and Nevis, Antigua and Barbuda, Grenada and Dominica.

Of course, this is a recipe for a race to the bottom. The next jurisdiction will offer residency for $75,000, and then it’ll be 50,000.

Well, in fact, the race already appears to be scraping the bottom. And it’s that fast-growing purveyor of offshore sleaze, Dubai. Take a look at this.

In short, you can obtain residence visas through three main avenues.

First, buy real estate in one of the United Arab Emirates, worth over a million Dirhams.

Second, get an employment contract there.

Third – and this is the super-sleazy one:

“Incorporation of your own company in the United Arab Emirates. This is the most convenient and efficient option for obtaining business visas in the UAE. It takes only a few weeks to obtain visa and the expenses incurred are relatively low. Moreover, it is not necessary for a company to perform real activity – its business may be purely formal.
. . .

within a few days you are issued a certificate of incorporation of onshore company. Thereupon you and your family members receive residence permit in the UAE.”

Easy as pie. For a couple of thousand dollars, and a couple of visits to Dubai each year, you’re off the hook. We hear that this is a very busy business for Dubai. If the OECD doesn’t tackle this one, quickly, then they will all start doing it.

How could this be closed down? Well, quite simply by putting together a blacklist of such jurisdictions: if a beneficial owner is resident in one of these places, then their previous (non-blacklist) place of residency must be registered.


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Comments • 4

  • Patrick Conheady
    July 13, 2015 - 3:52 am

    I am trying to understand how “fake residency” works under CRS. The way I read it, CRS operates as between each pair of participating jurisdictions and requires reporting of an account in jurisdiction ‘A’ to jurisdiction ‘B’ if the account holder is a resident of jurisdiction B under jurisdiction B’s tax laws, regardless of whether the account holder is also regarded as a resident by another jurisdiction.

    That is, supposing that the account is in Switzerland and the account holder has “real” residency in Australia and “fake” residency in Dominica, and that Switzerland and Australia have agreed to exchange information pursuant to the CRS, then the account will be reported to Australia on the basis of Australia’s standards for residency, not Dominica’s. If the account holder is also a resident of Dominca under Dominica’s tax laws, then the account will be reported to both residence jurisdictions. I refer to the definition of “Reportable Jurisdiction Person” and the references to “residence(s)” (plural) throughout the CRS.

    I have read that the OECD has issued guidance about partnerships which includes a “tie-breaker”, on the basis that partnerships are notorious for being characterised and treated differently in multiple jurisdictions, but I am not aware of any CRS-specific tie-breaker rule for individuals. The references to jurisdiction B’s tax laws incorporates jurisdiction B’s tax treaties — including tie-breaker rules — but I find it hard to imagine a tax treaty under which “fake” residency trumps “real” residency. For example, the tie-breaker in most of Australia’s tax treaties is to ask to which jurisdiction does the taxpayer have the closest ties; buying a business visa in and visiting one jurisdiction four times a year is unlikely to outweigh any “real” residency in the other jurisdiction. The OECD’s commentary on the CRS indicates that a tax treaty or domestic tax law is the only possible source of a tie-breaker; in the event of a tie, under CRS, everybody gets the information.

    Is this not how it works?

    • Nick Shaxson
      July 13, 2015 - 9:13 am

      I think that this is about the financial institutions that transmit information – they report to the relevant jurisdiction, and then the information exchange happens. And they will select the residency jurisdiction their clients tell them to. But I am not up to speed on this: I will ask TJN’s resident experts.

    • Vladimir
      April 26, 2016 - 10:53 am

      Patrik, you are absolutely right. TJN just writes sheer nonsense. that’s it.

  • James
    April 17, 2016 - 11:16 pm

    Any confirmation on what Nick has said? Do you get to pick the jurisdiction of your residency or would the information be shared to both without the clients choice?

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