A tumultuous twelve months have not dampened optimism in Liechtenstein, which has remained a busy and vital link in the international financial chain.
Like most financial and offshore centers, Liechtenstein experienced economic turmoil during the course of the last year. 2009 is the first year in a great many that a negative result has been announced by the estate of Liechtenstein. Liechtenstein Government has disclosed a negative income of around CHF181 million in its budget of 2010. Besides the problems in the finance and economic sectors, there was a flood of regulatory developments and changes in 2009, and this trend looks set to continue into 2010. Most important for the finance sector was the new Due Diligence Act that came into force on 1 March 2009. Only a month later, this was followed by the new foundation law which was implemented in the Persons and Companies Act on 1 April 2009. Also forecast is a change to the Criminal Code which will see an increase in the number of crimes which might lead to a money laundering case for falsification of documents and “abuse of the financial market rules”. A new VAT law is scheduled for 1 January 2010 and new VAT rates for 1 January 2011. A new tax law has been proposed by the government and is currently under discussion. The tax law is scheduled for 1 January 2011. Also on this date, a new law for auditors and auditing companies is due which will implement directive 2006/43/EU of the European Union.
What are the most important of these changes? As of the implementation of the Due Diligence Act in March, all persons transacting business or receiving over CHF25 000 in cash are now obliged to follow the Act. Though banks, trust companies, life insurances and other participants of the financial sector remain the key parties addressed by the law, nominee directors, providers of an office or postal address, liquidators, tax advisors and auditors (to name but a few) now come within scope of the Act also. Given that the duties in this law are so strict, it might have been reasonable to make a distinction between banks and other participants – potential participants included – in the finance sector. In any case, if half the energy spent on due diligence matters was diverted to proceeding with the prosecution of criminals, it might be more useful and less complicated for all concerned.
Liechtenstein’s new foundation law basically implements existing practice and recent court decisions into law, a move which betrays something of a mistrust in the trust officers licensed by the jurisdiction itself. A special surveillance for foundations has also been set up, the Foundation Surveillance Authority (FSA).
As has long been the case, an audit and incorporation in the public register are obligatory for common-purpose foundations. Where private foundations may register themselves at the register, they are not compelled to. They could choose an audit but, again, are not compelled to do so; they could implement other means of control, such as a protector or an internal control.
The foundation board must now consist of at least two members. It is advisable for foundation boards to implement an internal control, which could also be made by a protector. Members of a foundation board who make wrong declarations to the public register or the FSA may be punished severely.
The new tax law was introduced to the public around February 2009. It is still in the status of a draft being discussed and it may be refined before going to parliament. Major changes are the famous tax privileges of the domiciliary companies, and the fact that holding companies will cease to exist (with the possibility to opt for keeping them for another five years). There will be some smaller changes concerning income and wealth tax, and a speculation surplus on the taxation of profit deriving from (a transfer/sale/exchange of) real property will be eliminated. The inheritance and gift tax, the coupon tax and the capital tax of legal entities will all be completely eliminated. A privileged taxation on companies merely holding their bankable assets might also be implemented. No distinction will be made according to who owns these companies, therefore there will be no ring-fencing connected with this new privilege.
The new tax law may come into force on 1 January 2011. The new VAT law, coming into force in January 2010, is intended to ease up the administrative burden on the companies involved, especially in the building sector and entities dealing with cars. We will see whether this goal will be met. The new VAT rates will come into effect on 1 January 2011, with the current rate increasing from 7.6 per cent to 8 per cent, still a comparatively low rate in Europe. Liechtenstein has the same VAT system and rates as Switzerland.
As well as these changes to internal law, policy in international law has changed substantially. Liechtenstein has maintained a policy of strict professional secrecy over the last 90 years or more and has never given tax information away. On 12 March 2009, however, the declaration was made that, from this date onwards, Liechtenstein will cooperate in tax matters in line with Organisation of Economic Cooperation and Development (OECD) and international standards, and will aid in the prosecution of those who do not pay or declare their taxes in other states correctly. This statement of intent is known as the ‘Liechtenstein Declaration’.
The development of Liechtenstein’s tax policy started a bit earlier, however. The entering into of a mutual legal aid treaty with the United States in 2002 marked the first time any tax information would be given away. This agreement was followed by an agreement concerning taxation on private interests with the European Union in 2005, where tax information (but only that which concerned this agreement) would be exchanged (but only in cases of abuse or fraud). In 2008, there followed the first tax information exchange agreement (TIEA), which again was concluded with the US, this time including information exchange which did not necessarily have its roots in a criminal case. Since the Liechtenstein Declaration and the grey listing of Liechtenstein on 2 April 2009, ten TIEAs and two double tax treaties with information exchange clauses have been concluded. In the meantime, though, Liechtenstein has been delisted by the OECD and is ‘white’ now. At the moment, Liechtenstein is – according to the Liechtenstein newspapers – in negotiations with Italy and the Nordic States. One particular goal for Liechtenstein is to negotiate a regular double tax treaty after showing that cooperation in tax matters is possible. Negotiations have already begun with many states. With most of these states, information will be exchanged as early as from 1 January 2010, which leaves about two months to implement possible changes. The most favourable agreement has been reached with the United Kingdom (UK), leaving time until 31 March 2015 to become tax compliant. Requests concerning tax fraud may be made for actions after 1 January 2010, however.
Domestic legislation concerning the implementation of TIEAs in Liechtenstein has passed in Parliament with reference only to the US. It is very probable, though, that these domestic laws will be more or less the same. Again, a big exception will be with the UK, where there is a domestic law to come that will force trustees and bankers to encourage their clients to be tax compliant. If the trustees are not tax compliant, they will be fined by Liechtenstein authorities. If they cannot be compliant for reasons beyond their own control, they may appeal to a panel which will be specially implemented by then. All trustees will be controlled by independent auditors on a regular basis, beginning 24 months after the domestic law comes into force, or (roughly) from 2012 onwards. These auditors will have to submit their reports to the panel.
Together with the UK TIEA, a Memorandum of Understanding (MOU) has been signed with English tax authorities. A joint government declaration completes the package. The MOU offers an interesting opportunity for tax disclosure for persons with a connection to Liechtenstein (which started in September 2009 for persons that had a Liechtenstein connection at that time). Other persons may make use of this disclosure procedure from December 2009 onwards, simply by transferring part of their structures to Liechtenstein. In all cases where correct taxation has not yet taken place, a declaration for the preceding ten years has to be made, be it for income tax, gift tax, inheritance tax or other possible taxes. Interest will have to be paid as well, and in most cases a 10 per cent fine is added. There is also the possibility of a composite tax rate of 40 per cent for all possible taxes for a UK tax year, if several taxes (like income tax and inheritance tax, et al) are involved. This disclosure facility might be very interesting for several clients. In our opinion, it is a good opportunity because it leaves a chance that some assets will stay in Europe and not be moved to distant jurisdictions.
Whether all these changes will mark the beginning of a new era which sees an influx of new business into the country cannot be predicted. But as the word ‘change’ is very similar to the word ‘chance’, we remain optimistic in Liechtenstein.
Dr. Markus Wanger and Dr. Vivien Gertsch, Wanger Law and Trust