EU To Probe Potential Abuses Of Citizenship By Investment Schemes

Categories: News

by Ulrika Lomas,, Brussels

28 January 2019

For the first time, the Commission has presented a comprehensive report on investor citizenship and residence schemes operated by a number of EU member states.

It comes following an announcement from the OECD that it intends to increase its work on challenging tax avoidance through citizenship by investment and similar schemes, focusing in particular on taxpayers seeking to avoid their financial data from being exchanged with their home country tax authority under the Common Reporting Standard.

The Commission’s new report maps the existing practices and identifies certain risks such schemes imply for the EU, in particular as regards security, money laundering, tax evasion, and corruption. A lack of transparency in how the schemes are operated and a lack of cooperation among member states further exacerbate these risks, the report finds.

The Commissioner for Migration, Home Affairs, and Citizenship, Dimitris Avramopoulos, said: “Legally residing in the EU and in the Schengen area comes with rights and privileges that should not be abused. Member states must at all times fully respect and apply existing obligatory checks and balances – and national investor residence schemes should not be exempt from that. The work we have done together over the past years in terms of increasing security, strengthening our borders, and closing information gaps should not be jeopardised. We will monitor full compliance with EU law.”

In the EU, three member states – Bulgaria, Cyprus, and Malta – currently operate schemes that grant investors the nationality of these countries under conditions less strict than ordinary naturalization regimes, the Commission said. In these three member states, there is no obligation of physical residence for the individual, or a requirement of other genuine connections with the country before obtaining citizenship.

These schemes are of common EU interest since every person that acquires the nationality of a member state will simultaneously acquire Union citizenship. The decision by one member state to grant citizenship in return for investment, automatically gives rights in relation to other member states, in particular free movement and access to the EU internal market to exercise economic activities as well as a right to vote and be elected in European and local elections. In practice, these schemes are often advertised as a means of acquiring Union citizenship, together with all the rights and privileges associated with it.

The Commission said, among other things, monitoring and reporting is necessary to make sure that individuals do not take advantage of these schemes to benefit from privileged tax rules.

The Commission added that investor residence schemes, while different from citizenship schemes in the rights they grant, pose equally serious security risks to member states and the EU as a whole. A valid residence permit gives a third-country national not only the right to reside in the member state in question, but also to travel freely in the Schengen area. While EU law regulates the entry conditions for certain categories of third-country nationals, the granting of investor residence permits is currently not regulated at EU level and remains a national competence. Currently, 20 member states run such schemes: Bulgaria, the Czech Republic, Estonia, Ireland, Greece, Spain, France, Croatia, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, and the United Kingdom.

The Commission said it will monitor wider issues of compliance with EU law raised by investor citizenship and residence schemes and it will take necessary action as appropriate. For this reason, it said member states need to ensure, in particular, that:

  • All obligatory border and security checks are systematically carried out;
  • The requirements of the Long-Term Residence Permit Directive and the Family Reunification Directive are properly complied with; and
  • Funds paid by investor citizenship and residence applicants are assessed according to the EU anti-money laundering rules.

The Commission noted, in the context of tax avoidance risks, there are tools available in the EU framework for administrative cooperation, in particular for exchange of information.

The Commission said it will monitor steps taken by member states to address issues of transparency and governance in managing these schemes. Further, it will establish a group of experts from member states to improve the transparency, governance, and the security of the schemes. That group will be tasked, in particular, with:

  • Setting up a system of exchange of information and consultation on the numbers of applications received, countries of origin, and on the number of citizenships and residence permits granted/rejected by member states to individuals based on investments; and
  • Developing a common set of security checks for investor citizenship schemes, including specific risk management processes, by the end of 2019.

Finally, concerning third countries setting up similar schemes, the Commission will monitor investor citizenship schemes in candidate countries and potential candidates as part of the EU accession process. It will also monitor the impact of such schemes by EU visa-free countries as part of the visa-suspension mechanism.

Given the OECD’s movement into this area of international policy, the latest announcement appears to signal that the EU is seeking to clean up affairs at home, to enable it to better participate in international efforts to seek wider reform.

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