Residency and citizenship by investment (RBI and CBI) processes have become a source of capital for member states, as well as a headache: in recent times, these processes have emerged as an avenue for money laundering and tax evasion.

The European Union is at the crossroads of the Golden Visa. Residency and/or citizenship by investment regimes (RBI and CBI, respectively) have become invaluable to European economies, especially in this post-pandemic context. These processes have succeeded in providing many European states with the capital and investment that they lack today.

According to Knight Frank's 2018 "wealth report", 34% of high net worth individuals (HNWI) already have a second nationality. Nearly half of HNWI who do not have a second passport plan to invest to obtain one. The market is booming.

However, recent years have also seen the emergence of several scandals within the EU in connection with the RBI and CBI programs. Golden visas have sometimes been used as a Trojan horse for money laundering and corruption from foreign states. And, faced with this problem, at the crossroads of whether more or fewer golden visas, the Union has been on its guard.

To better understand the problem, nothing better than to go to its root: the current legislation of the CRI and RBI programs.

Current security processes: room for improvement

On paper, it would seem that the European community is shielded from the Trojan horse of corruption and money laundering through golden visas. Criminal background checks are included in the legal framework governing CBI/RBI regimes in the EU. Some even require an affidavit demonstrating good character. And not only that: Member States usually require, more or less explicitly, that applicants prove the origin of invested funds.

Despite this, the accuracy of the checks carried out is questionable. Background checks on applicants, as well as the control and monitoring of due diligence procedures, remain complicated to carry out. Moreover, although such checks are usually carried out by government agencies and the banking sector, some countries rely on the private sector, sometimes operating abroad, to perform these checks. This only adds to the mistrust.

The case of special tax regimes

Although it is difficult to quantify the number of people applying for CBI/RBI regimes due to a tax motivation, several reports have highlighted that the tax incentives offered by CBI/RBI regimes are an important factor driving demand. 

The ways in which CBI/RBI schemes can be exploited to circumvent the CRS have recently been raised by the OECD, which launched a specific consultation ("Preventing abuse of residence by investment schemes to circumvent the CRS") in February 2018. The OECD's initial assessment was that the risk of abuse of CBI/RBI schemes is particularly high when the schemes have one or more of the following characteristics:

• The regime either imposes no physical presence requirement in the jurisdiction in question, or no checks are made to determine physical presence in the jurisdiction. 
• The regime is offered by: jurisdictions with low or no taxation; jurisdictions that exempt foreign source income; jurisdictions with a special tax regime for foreign individuals who have obtained residency through such regimes; and/or jurisdictions that do not receive information from the SIR (Sistema de Interconexión de Registros).
• The absence of mitigating factors such as, for example, the spontaneous exchange of information on persons who have obtained residency/citizenship through a CBI/RBI regime with their original jurisdiction(s) of tax residence; or an indication on tax residency certificates issued that residency was obtained through a CBI/RBI regime. 

Examples

There are several paradigmatic cases in the EU of the problems described above.

In this regard, it could be noted that obtaining a residence permit or nationality in Bulgaria, Estonia or Latvia gives access to a low-level tax regime for personal income. Or that Cyprus, Malta, Portugal and Ireland offer their residents the possibility of benefiting from a non-domiciled tax regime that exempts foreign-source income.

And, in Italy, new residents can apply to pay a flat-rate "substitute tax" of €100,000 on their foreign-source income.

Solutions and conclusion

According to the OECD, the Tax Justice Network argues that the only factor that really reduces risks, unlike the systems discussed above, is that of countries with a comprehensive personal income tax (PIT) regime.

For its part, the aforementioned Knight Frank wealth report underlines the reputational risks of any other tax regime, stressing that the governments that currently manage them should adopt strong regulation and strict criteria, to avoid being exploited for improper purposes.

There is no doubt that the benefits and risks of golden visas are a hot topic in the EU today. RBIs and CBIs are both a source of income and a toothache. And it will depend on regulation, solidarity and common work between states to ensure that the downside does not overshadow the benefits they bring.