Business with golden passports: Tax evasion via purchased citizenship

[Translate to Englisch:] Steueroase

Urged by the Organization for Economic Cooperation and Development (OECD), tax havens now have gone over to inform other countries if their citizens have an account in a low-tax country in order to prevent tax evasion. However, this exchange of information is still regularly circumvented. KU Professor Dr. Dominika Langenmayr, holder of the Chair of Economics, especially Public Finance, and Dr. Lennard Zyska from the University of Hanover have now conducted a study to show how this is done. They investigated so-called citizenship-by-investment programs, in which people acquire citizenship of tax havens.

As part of citizenship-by-investment programs, or CBI programs for short, private individuals acquire citizenship of a country in return for investments in real estate, infrastructure subsidies or in exchange for a fee. "Citizenship of some Caribbean islands such as Dominica or St. Lucia is already available for around 100,000 US dollars", explains Professor Langenmayr. Citizenships acquired in this way are also known as "golden passports". They can be used to simulate tax residency in the CBI country when opening a bank account.

"Private individuals are liable to capital gains tax in the country in which they are resident. In principle, the acquisition of a new citizenship is irrelevant unless the person actually moves to the new home country." However, by faking their residence in the CBI country with their "golden passport", the account opening is not reported to the actual home country, but to the tax authority of the CBI country. "The CBI countries in turn only tax foreign capital income of persons who are also resident in the respective CBI country. In this way, CBI programs offer tax evaders the opportunity to avoid reporting tax information to the tax authorities in their actual home country and thus evade capital gains tax undetected", explains Prof. Langenmayr.

In a recent article published in the Journal of Public Economics, Langenmayr and Zyska suggest improving information exchange agreements between countries to combat this type of tax evasion. They also point out the possibility of marking "golden passports" as such – for example by adding a letter to the passport number. However, Langenmayr and Zyska also point out that not all private individuals who have one of these passports issued have tax evasion in mind. "Many clients come from Russia, China and the Middle East, among other places. They are interested in visa-free travel or are looking for a way to leave their country of origin quickly and safely if the political situation there were to deteriorate", says Langenmayr. In addition, CBI programs were an important source of income for small countries such as St. Kitts. "These different interests must be weighed up in regulation", summarizes Langenmayr.

Dominika Langenmayr, Lennard Zyska: Escaping the exchange of information: Tax evasion via citizenship-by-investment. In: Journal of Public Economics 221 (2023).