where is the reference to citizenship?
There isn't, but this is a proposal, not the final law. The real thing would have to define the requirements somehow - because they cannot stop a 'genuine foreigner' flying into Europe on his ICAO PPL/IR.
Typically, this kind of thing would be hung on citizenship, or taxpayer status.
The French already determine the eligibility of foreign license validation (for use in an F-reg) on this kind of stuff (I have some examples).
I don't understand item 5: "the period of acceptance of a licence shall not exceed one year". What does that mean?
It probably means you have to do the checkride every year.
Lets get this in context, it is related to non JAA licence holders flying aircraft that come under EASA jurisdiction i.e. EASA reg aircraft. Nothing to do with N reg!
Whopity, we would hope you are right but it doesn't actually say that. The only clue to "commercial activity" is the word "operator" and that one can be interpreted both ways.
If you have some other document which contains explanatory notes, or any other support for what you say, please post it here. I would be delighted if you were right, of course.