IMF: Demand for Malta’s citizenship and residency schemes may be driven by desire to avoid tax

Malta’s various programmes offering residency and citizenship in exchange for financial investments may be driven by tax avoidance and evasion opportunities, a new working paper by the International Monetary Fund (IMF) has warned.

The report, which examines global Citizenship by Investment (CBI) and Residence by Investment (RBI) schemes, highlights how individuals benefiting from such programmes may declare tax residence in a country where they have only limited physical presence. This can undermine tax collection efforts in their home countries and create negative tax spillovers.

According to the IMF, these schemes, including Malta’s, have become increasingly popular in recent years, with more countries introducing them to attract foreign capital. While proponents argue that these schemes boost investment and Government revenues, the IMF warns they also pose significant risks, particularly if they are not well-regulated.

The IMF’s analysis suggests that individuals may obtain residency or citizenship in low-tax jurisdictions primarily to lower their tax liabilities. Since taxation is typically determined by residence rather than nationality, high-net-worth individuals can shift tax residence to Malta or similar jurisdictions while maintaining their economic activities elsewhere.

The report also notes that residence permits alone do not necessarily establish tax residency, but weak enforcement and minimal physical presence requirements in some countries facilitate tax avoidance. In extreme cases, individuals may exploit these schemes to conceal assets and evade taxes entirely, particularly when financial institutions accept local proof of residence without rigorous verification.

House prices and economic impact

Beyond tax concerns, the IMF finds that CRBI schemes can also contribute to inflation in real estate markets. The report suggests that such programmes may have led to an increase of up to three per cent in house price inflation in their first year of operation. This effect is particularly pronounced in countries that allow real estate purchases as a qualifying investment under their schemes – such as Malta.

While increased investment in property may stimulate economic activity, it also raises concerns about affordability for local residents. The IMF warns that without proper safeguards, these schemes can lead to speculative property bubbles, pricing out ordinary citizens.

Security and governance risks

The report also raises concerns about the governance and security risks associated with CBI and RBI schemes. If background checks are not rigorous enough, there is a risk that such programmes could be exploited by individuals seeking to evade legal scrutiny. The European Parliament has previously criticised Malta’s CBI programme for granting citizenship without requiring a genuine link to the country.

Additionally, the IMF highlights the potential for corruption if these schemes are not properly administered. In some cases, lack of oversight has resulted in passports or residency being granted to individuals without adequate due diligence, raising broader security concerns.

The IMF urges countries offering such schemes to conduct a comprehensive cost-benefit analysis before introducing or continuing them. It stresses the need for greater transparency, rigorous due diligence, and clear regulations to prevent misuse.