Citizenship and Wealth Advisors: What Each Needs to Know About the Other to Help Their HNWI Clients

 

Traditionally, the world of wealth management and tax/estate planning using offshore or tax neutral structures (we’ll refer to this as the offshore sector or the wealth preservation industry for short) has been separate from the world of citizenship by investment programs (CIPs). This, despite the two markets’ tendency to overlap in many jurisdictions, namely those in the Caribbean, Malta, and Cyprus.

Wealth preservation in the wider Caribbean, parts of Europe such as Switzerland and the Channel Islands, and the Asian centers of Singapore and Hong Kong, has a much longer pedigree as an established industry than the CIP sector. Considered distinct sectors, it is, perhaps, natural that those dealing with citizenship have not seen a need to follow or understand the wealth preservation business. 

When the proliferation of the offshore sector in the Caribbean took off in earnest in the ’70s and ’80s, it quickly became the subject of greater political, public, and media scrutiny. Toward the end of the millennium, scrutiny had graduated to tangible policy opposition. The CIP sector, on the other hand, has only recently come to know the type of political push-back that the offshore industry has been facing since the OECD launched its 1998 Harmful Tax Competition Report.

But recent proposed – and, in some cases, enacted – changes to the international tax architecture, along with controversies emanating from the CIP sector itself, have caused that industry to face the type of scrutiny that is all too familiar to the offshore sector.  

A golden opportunity born out of predicaments

These policy changes, especially those dealing with economic substance, afford CIP jurisdictions that are also offshore or international financial services centers (IFCs), specific opportunities to marry the two industries in a way that will benefit both themselves and the high net worth individuals (HNWIs) whom they serve.

It is, therefore important that the two sets of advisers understand each other. In this article, I’ll outline the key issues each of the two needs to keep in mind.  

The starting point for any wealth preservation strategy has to be a thorough analysis of the citizenships, residencies, and tax domiciles of the client. Thus, the wealth manager/tax planner or offshore service provider must ascertain this information during their due diligence checks of prospective clients. In today’s world, many people have tax obligations to several jurisdictions. I, myself, for instance, though not a HNWI, have three passports and residency in the UAE. I am not atypical but, rather, part of a rapidly growing constituency of geographically diversified professionals. There is an urgent need for tax planners to understand these issues and to work with CIP service providers for the benefit of their mutual clients.  

Unless the client is an American or a US person for tax purposes, or a citizen of one of the few other countries that have world-wide taxation on income for its citizens (such as Eritrea), an evaluation of the client’s residence and citizenship status has to take place during square one of the wealth planning process. Since Americans/US tax persons are taxed on their worldwide income, whether or not they hold other citizenships or residencies is less consequential as they’ll have obligations to the IRS regardless. 

Tax and residency are inextricably linked and must be treated as such

When seeking citizenship, therefore, CIP service providers cannot and should not simply give their prospective clients options based on price, the client’s own desires for cheapness, or, indeed, the CIP service providers’ own vested interests. The CIP service providers must understand that their clients’ citizenships and residences will affect the basis of the wealth management and tax planning issues that the clients will have to face and, consequently, the strategies employed by tax planners.  

There must be a more holistic approach to advising on citizenship and investment rather than just sales, commissions, and the advisor’s bottom line. In the absence of such, a client may end up choosing a citizenship planning path that leads to fiancial disaster.

To take advantage of zero or low tax rates in offshore jurisdictions, the revenue-generating activities of HNWIs have to be based – with substance – in low tax jurisdictions. In other words, no more shell-games, no more having your cake and eating it too. The Common Reporting Standards (CRS), beneficial ownership registers, and automatic exchange of information mean that HNWIs cannot legally hide assets. Tax advisers, it then follows, should not encourage such conduct on behalf of their clients irrespective of the citizenships or residences that said clients hold. 

As a result of “substance” stipulations, citizenship and residency programs based in tax-neutral jurisdictions, like those in the Caribbean or those which exempt recipients from domestic taxation, will become more attractive. This presents an opportunity for CIP service providers to promote their services and, while not needing to become tax lawyers, they must understand the basics.

Wealth managers; learn the RCBI basics

Wealth managers and tax planners must, on the other hand, have a relatively profound understanding of the RCBI options available to their clients, especially of programs located in low tax jurisdictions. Combined with their knowledge of the tax regimes of these same jurisdictions, wealth managers can truly maximize their clients’ options. 

Wealth planners need to know RCBI-program specifics, such as costs, qualifications, due diligence requirements, processing time, and so on, but most importantly, they must know what tax implications, if any, these programs have for their clients. The wealth preservation planners must also understand the new transparency rules and what clients need to establish within RCBI/low tax jurisdictions in order to take advantage of them for their clients’ maximum benefit especially where tax treaties between the jurisdictions are extant.

Both sets of advisers must first consider how their clients’ countries of citizenship affect each other – e.g. some countries, like Saudi Arabia, India, and Singapore, do not recognize dual citizenships, which may result in the loss of citizenship. Clients from these places may benefit more from a residency program.  

Even where dual citizenships are permissible, the advisers must know how the second passport or residency affects their clients’ primary tax obligations. As referenced earlier, US tax persons cannot avoid the IRS but can nonetheless benefit from RCBI programs if they live abroad and report, though not pay, taxes on foreign sourced income, based on specific rules.

The interface of the new economic substance rules with RCBI programs will determine how much mind and management (human beings as decision-makers, as well as the location where decisions are taken and actual revenue generating activities occur) must be based in a particular jurisdiction and which benefits a citizen and resident granted this status under one of these programs has.  

At the same time, some jurisdictions, based on political pressures, may restrict the rights and privileges that residents who are granted this status through a specific RCBI program have, and advisors should be aware of this. Additionally, since these are specific legal regimes, different taxation issues may apply. Both sets of advisers need to understand this.

The international community has been attacking low tax or offshore jurisdictions since 1998 and they have changed the international taxation infrastructure so as to counter it. This has created an opportunity for these jurisdictions and those that offer CIP and residency programs to work together more closely in order to serve their HNWIs. 

Many low tax jurisdictions also offer CIP and residency programs, and the overlap between the two previously distinct industries is now nearly complete. Both types of jurisdictions and service providers should be able to service HNWIs for the benefit of all concerned.

More from Carlyle Rogers:

• Caribbean CIPs Finally Decide to Push Back Against the EU/OECD Hydra; Will it Work?
• Rogers: EU/OECD’s Real Concern About CIPs Is Tax Competition, Not “Good Governance” – Part 1
• Rogers: EU/OECD’s Real Concern About CIPs Is Tax Competition, Not “Good Governance” – Part 2
• Carlyle Rogers: RCBI-Industry Finds Itself in Crosshairs as OECD Continues War on Tax Competition