Circumvention of the AEoI: New OECD rules against fictional residences

in Financial Services, 04.04.2018

Since the Automatic Exchange of Information (AEoI) was introduced globally, the OECD has been working towards closing any loopholes. Already in March 2018, the OECD accepted the Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures. In parallel, the OECD launched a further initiative called “Preventing abuse of residence by investment schemes to circumvent the CRS”, aimed at fictitious tax residences based on investments.

The purpose of these new rules is to prevent the circumvention of the AEoI by using fictional residences

Under the AEoI, account owners or controlling persons of passive NFEs have to be reported to their relevant tax residences. Accordingly, in order for the AEoI to be effective, it is imperative that the reportable persons are reported to the country where they hold their actual tax residence.

In some countries it has become possible to obtain a residence permit (and thus a tax residence) or even citizenship by investing there. As the AEoI is not based on citizenship, the latter does not pose a risk of circumventing the AEoI, however, a tax residence based on an investment could be used to circumvent the AEoI. However, this would only the case if residency was not actually necessary in order to establish one’s tax residence. If the person in question actually moves to this country, the investment is no longer of any relevance.

Which specific rules are targeted?

According to the consultation document released by the OECD on this initiative, the following rules are being targeted:

  • No physical presence is required to obtain a residence permit or such presence is not controlled.
  • Residence permits are offered by countries that:
    • levy no or only very low taxes,
    • exempt foreign income from taxation,
    • apply special taxation rules to persons who have invested in that country, and/or
    • do not receive any data under the AEoI.

Currently, the OECD is preparing a list of countries that have such rules. Countries stating on their certificate of residence issued for tax purposes that the residence was granted based on investment will not appear on this list.

Impacts of these rules

The rules will have an impact on financial institutions as well as the countries that offer residence permits based on investments.

  • For financial institutions, this will mean that they will have to investigate whether the self-declared tax residence is indeed correct. This could especially apply when a client is resident in a country that offers such residence-by-investment schemes.
  • Countries could be pressured into stating on the certificate of residence that the permit was granted based on investments. For Switzerland, this could mean that it would have to state if it has granted residence based on fiscal interests or possibly, whether a person is taxed on expenditure. This means that the OECD could expect countries to check whether a person has actually taken up residence prior to issuing the certificate of residence.


Every country can, in its own discretion, define the conditions according to which a person will be deemed tax resident and under which tax regime this person will be taxed. In doing so, a country can, for instance, determine that it is only necessary for an individual to reside in the given country for just a few days in order to qualify for a tax residence.

Example: Country X defines that its fiscal residence requires a stay of only a few days. If a person residing in country X also spends many days in country Y, this person could also become subject to unlimited taxation in country Y.

In such cases, we are of the opinion that it is country Y that has to have rules and checks to determine who is subject to unlimited taxation. We think that passing this task on to financial institutions that maintain the accounts would be going too far. Nevertheless, banks must already now ensure that they have documented the effective tax residence for all their clients.

Specifically, countries have the option of directly targeting those who move away. In practice, we have already seen cases where the country of departure has demanded data on the taxpayer emigrating from the country of destination by means of administrative assistance.

Despite all this, it is likely that the OECD initiative will succeed and impose new obligations on both financial institutions and, in particular, countries that issue residence permits based on investments.



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